DB Group Services (UK) Ltd v HM Revenue and Customs

Tax-avoidance purpose alone does not prevent genuine employment-related securities from falling within Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003. The court must construe the legislation purposively and analyse the transaction realistically. Shares remain securities where their redemption value depends on the performance of underlying assets, rather than being immediately redeemable for a predetermined cash sum. A tax-motivated restriction may qualify under section 423 if there is a genuine possibility of the specified event occurring. For section 429, control is assessed at shareholder level. Pre-ordained co-operation between independent companies does not by itself establish control.

Two appeals concerned bonus schemes operated by UBS AG and DB Group Services (UK) Ltd in 2003/04. Each scheme awarded employees shares subject to restrictions intended to secure the exemptions in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003.

The First-tier Tribunal dismissed both appeals. The Upper Tribunal allowed UBS’s appeal but dismissed DB’s appeal, holding that DB controlled the scheme company for the purposes of section 429. HMRC appealed in the UBS case, while DB appealed in its own case. The central issues were whether the awards were money or securities, whether the shares were restricted securities, whether the section 429 exemption applied, and whether the arrangements failed under the Ramsay principle.

Appeals. HMRC’s appeal in the UBS case was dismissed. DB’s appeal was allowed.

1. The Ramsay principle requires purposive and contextual construction of tax legislation, followed by a realistic analysis of the transaction. It is not a special doctrine which automatically disregards arrangements because they were designed to obtain a tax advantage. Genuine employment-related shares can therefore fall within Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003.
2. The UBS shares were genuine securities, not money. Their redemption value was not predetermined and depended on the value of UBS shares held by the scheme company. The tax motive did not prevent them being restricted securities. The restriction also involved a genuine possibility of forfeiture.
3. Section 423(2)(c) required comparison between the amount receivable on the forced sale and the market value of the shares, calculated without the provision for transfer, reversion or forfeiture. The collateral hedging arrangements were not to be ignored. The UBS shares therefore satisfied the statutory comparison.
4. Section 18 of the Income Tax (Earnings and Pensions) Act 2003 concerned money earnings. The employees received shares or money’s worth, so HMRC’s Rule 1 argument failed.
5. For section 416 of the Income and Corporation Taxes Act 1988, control meant direct or indirect shareholder-level control over the company’s affairs. The issue was fact-sensitive. The Upper Tribunal wrongly treated the First-tier Tribunal’s reference to a necessary degree of compulsion as a legal misdirection and wrongly substituted its own assessment of the facts. Co-ordination between independent companies, even in a pre-ordained scheme, did not establish control.
6. Article 2(15) of the UBS articles was a genuine provision and could not be disregarded as a sham. In DB’s scheme, conversion of C1 shares into C2 shares followed by an immediate transfer for nil consideration amounted to forfeiture. A 2–3 per cent reduction in value was not necessarily de minimis.

The UBS scheme satisfied the relevant Chapter 2 conditions. DB was not shown to control Dark Blue, so the section 429 exemption was available.

• Court of Appeal (Civil Division). HMRC’s appeal against the Upper Tribunal’s decision in the UBS case was dismissed. DB’s appeal against the dismissal of its case was allowed.
• Upper Tribunal (Tax and Chancery Chamber). In a combined decision dated 17 September 2012, reported at [2012] UKUT 320 (TCC) and [2013] STC 68, UBS’s appeal was allowed and DB’s appeal was dismissed.
• First-tier Tribunal. The appeals of both UBS and DB against HMRC’s determinations were dismissed.