DTE Financial Services Ltd v Wilson (Inspector of Taxes)

For PAYE purposes, a payment is ordinarily a practical and commercial concept. It means an actual transfer of cash or its equivalent. Where a pre-arranged tax avoidance scheme is used to deliver an employee’s cash bonus, the court may construe the relevant statutory language purposively and assess the composite transaction as a whole.

Genuine intermediate legal steps do not prevent the cash receipt from being a payment of assessable income where those steps merely implement an artificial tax-driven arrangement. The court also stated, obiter, that a tradeable asset under section 203F requires trading arrangements extraneous to the asset itself.

DTE arranged for each of its three director-employees to receive a £40,000 bonus through an offshore settlement. DTE acquired and assigned to each employee a contingent reversionary interest which shortly fell into possession and produced cash.

The Inspector determined that DTE was accountable under PAYE for tax on the bonuses. A Special Commissioner dismissed DTE’s appeal. Hart J then dismissed a further appeal, in a judgment reported at [1999] STC 1061.

DTE appealed to the Court of Appeal. The central issues were whether the cash received under the scheme was a payment of assessable income for PAYE purposes when the transaction was viewed as a whole, and, alternatively, whether the contingent reversionary interest was a tradeable asset under section 203F of the Income and Corporation Taxes Act 1988.

1. Appeal dismissed unanimously. Lord Justice Jonathan Parker, with whom Lord Justice Sedley and Lord Justice Potter agreed, held that DTE was accountable under PAYE for the tax on the directors’ bonuses.

2. The proper approach derived from Ramsay, as clarified in MacNiven v Westmoreland Investments Ltd [2001] UKHL 6, was first to construe the statutory concept in issue and then apply it to the transaction in its proper context. The approach did not treat any step as a sham or create a free-standing anti-avoidance rule.

3. In the PAYE provisions, the concept of payment was practical and commercial. It ordinarily meant an actual transfer of cash or its equivalent, rather than solely the discharge of a legal obligation. The relevant composite transaction comprised DTE’s purchase of the interest, its assignment to the employee, and the trustee’s ensuing cash payment. DTE decided to give a £40,000 bonus and the employee received that amount in cash. The artificial intermediate steps, undertaken solely for tax avoidance, did not alter that conclusion.

4. The cash received was therefore a payment of assessable income within section 203(1) of the Income and Corporation Taxes Act 1988. The alternative analysis under section 203B did not arise. Applying this approach did not introduce uncertainty for employers operating PAYE straightforwardly; it restored the certainty intended by Parliament where complex avoidance arrangements were used.

5. Obiter, the court disagreed with Hart J’s conclusion on section 203F. Trading arrangements under that provision must be extraneous to the asset. The terms on which the contingent reversionary interest itself became cash did not constitute such arrangements. That conclusion did not affect the dismissal of the appeal.

• Court of Appeal (Civil Division): DTE’s appeal was dismissed: [2001] EWCA Civ 455.

• Chancery Division: Hart J dismissed DTE’s appeal from the Special Commissioner: [1999] STC 1061.

• Special Commissioner: Dismissed DTE’s appeal against the Inspector’s PAYE determination.