[2009] UKFTT 238 (TC)

								TC00187	

Appeal number SC/3184/2008

Income tax – Transaction in securities – Contribution by Company to QUEST – Sale by controlling shareholder of shares to QUEST – Notice under ICTAs.703 to counteract tax advantage – Served after enactment of ITA 2007 – Alternative notice under ITA 2007, s.698 – Which notice effective – Whether tax advantage – Whether tax advantage a main object – Appeal dismissed

FIRST-TIER TRIBUNAL
TAX CHAMBER

	NIGEL P GROGAN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

			TRIBUNAL: 	THEODORE WALLACE (Judge)
					IAN MENZIES-CONACHER, ACIB, CTA, FCA	

Sitting in public in London on 13-15 July 2009

Andrew Thornhill QC and David Yates, instructed by Haslers, for the Appellant

Andrew Westwood, instructed by the Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal against a notice issued by the Board of HM Revenue and Customs on 31 July 2007 under section 703(3) of the Income and Corporation Taxes Act 1988 (“ICTA”) to counteract a tax advantage obtained on the sale of 15,750 ordinary shares in Nigel Grogan Ltd to Nigel Grogan Trustees Ltd in the year 2003-04 and a later alternative notice under section 698 of the Income Tax Act 2007 (“the 2007 Act”).  Nigel Grogan Trustees were the trustees of a Qualifying Employee Share Ownership Trust (“QUEST”) within section 67 of the Finance Act 1989.
Validity of Section 703(3) notice

2.	The initial appeal was against the section 703(3) Notice.  At the outset of the hearing Mr Thornhill raised the submission that the notice should have been served under the 2007 Act rather than under ICTA which was effectively repealed for income tax purposes from 6 April 2007.  He said that the transitional provisions in Schedule 2, paragraph 129 of the 2007 Act did not apply to a notice served after 5 April 2007 in respect of a prior year.  He said that it was still open to the Revenue to serve a notice under the 2007 Act, being within the six year time limit; if this was done, the Appellant would appeal immediately and the hearing could proceed.

3.	Mr Westwood submitted that the notice under section 703(3) was valid.  He said that under section 1034(1)(a) the 2007 Act has effect for income tax purposes for the tax year 2007-08 and after, however, under Schedule 2, paragraph 129(1) of the 2007 Act the provisions in Part 17, Chapter 1 of ICTA apply for adjustments affecting years before 2007-08.  He relied on the words in paragraph 129(1) “Despite anything in this Act” and “continues to apply”.

4.	Mr Thornhill rejoined that this interpretation would make paragraph 129(2) otiose for periods before 2007-08.  He said that the 2007 Act took over for income tax purposes for 2007-08.  It was not possible to serve a section 703(3) in relation to income tax notice after 5 April 2007 because the power to serve such a notice was spent.  He said that paragraph 129(1), including the closing words, covered a situation when a notice under section 703(3) was served before 6 April 2007.

5.	On the last day of the hearing, the Revenue served a counteraction notice under section 698 of the 2007 Act without prejudice to the submission that the notice under section 703(3) was valid.  Thereupon the Appellant  appealed against that notice and we directed that the appeals be consolidated.  The notices are thus alternative.  It is still necessary to decide which was correct.	

6.	Under section 1034(1) of the 2007 Act, that Act came into force and has effect “for income tax purposes, for the tax year 2007-08 and subsequent tax years.”  By subsections (2) and (3), subsection (1) is subject to certain provisions in relation to shares issued before 6 April 2007; none of those are relevant to the present issue.
7.	The 2007 Act is however subject to the transitional provisions and savings in Schedule 2.
8.	Schedule 1 of the 2007 Act contains amendments to the preceding legislation including ICTA; paragraphs 153 to 161 amend Part 17 of ICTA.  Most relevantly for this appeal, the amendments have the effect that section 703(3) is confined to corporation tax advantages and no longer applies to income tax advantages which are covered by Part 13, Chapter 1 of the 2007 Act in sections 682 onwards.
9.	It is clear that, apart from the transitional provisions in Schedule 2, from 6 April 2007 counteraction of an income tax advantage is only possible by a counteraction notice under section 698 of the 2007 Act because the amendments to section 703 limiting it to corporation tax came into force on that date.
10.	Paragraph 129 of Schedule 2 provides as follows:
“(1)	Despite anything in this Act, Chapter 1 of Part 17 of ICTA … continues to apply so far as required for the purposes of notices under section 703(3) of that Act requiring adjustments to be made affecting tax years before the tax year 2007-08; and a counteraction notice under Chapter 1 of Part 13 … may not require such an adjustment to be made.
(2)	Subject to that, Chapter 1 of Part 13 applies – 
(a)	whether or not the transaction or transactions, in consequence of which, or of the combined effect of which, the tax advantage has been or will be obtained, occur on or after 6 April 2007, and
(b)	whether or not the tax year to which that advantage relates (‘the tax advantage year’) is a year before the tax year 2007-08,
but see section 698(5) (under which no assessments may be made as a result of a counteraction notice later than 6 years after the tax advantage year).
(3)	This paragraph is to be interpreted as if it were part of Chapter 1 of Part 13.”
11.	It is a statement of the obvious that no transitional provisions were needed for tax advantages obtained after 5 April 2007.  The 2007 Act will apply.  The wording of paragraph 129(2)(a) is curious since the 2007 Act obviously applies if the transactions occur on or after 6 April 2007.  It appears that paragraph 129(2)(a) is an obtuse way of saying “notwithstanding that the transactions occur before 6 April 2007”.  Paragraph 129(2)(b) makes it clear that the tax advantage year may be before 2007-08.
12.	Paragraph 129(2) is subject to paragraph 129(1) which provides that ICTA “continues to apply so far as required for the purposes of notices under section 703(3) … requiring adjustments … affecting tax years before the tax year 2007-08.”  The final sentence of paragraph 129(1) applies to “such an adjustment”.  Essentially the issue is whether “such an adjustment” refers to any adjustment affecting tax years before the tax year 2007-08 or whether it refers to an adjustment under a notice under section 703(3) served before 6 April 2007 and thus necessarily affecting years before 2007-08.  Put another way, are the words “served before 6 April 2007” to be read in before “under section 703(3)”?
13.	There is no doubt that paragraph 129 envisages both the possibility of the 2007 Act applying to a tax advantage year before 2007-08 and also ICTA continuing to apply for the purposes of section 703(3) notices affecting tax years before 2007-08.
14.	The continued application of ICTA is not unqualified but is “so far as required for the purposes of notices under section 703(3)” affecting the relevant years.  Notices under section 703(3) are central to the application of Chapter 1 of Part 17 being the mechanism specifying the adjustment by which the tax advantage is counteracted.  
15.	The transitional provisions are clearly intended to avoid any gap between ICTA ceasing to apply and the 2007 Act taking effect.
16.	Paragraph 129(1) ensured that notices already served affecting tax years before 2007-08 continued to be effective in spite of the amendments in the 2007 Act.  The second half of paragraph 129(1) not only makes it clear that a counteraction notice under the 2007 Act is not needed in such a case but provides that a counteraction notice “may not require” an adjustment affecting tax years before 2007-08.
17.	Paragraph 129(2)(a) has the effect that transactions straddling 6 April 2007 are covered by the 2007 Act if not covered by ICTA.  Paragraph 129(2)(b) would apply if there is a dispute as to the year in which the tax advantage was obtained, which was one of the issues in IRC v Parker [1966] AC 141; 43 TC 396.
18.	There is no need for transitional provisions in relation to transactions wholly in 2007-08 and later years since these are covered by the 2007 Act in any event.
19.	With respect to transactions wholly in years before 2007-08 it would be surprising if the 2007 Act took effect retrospectively.  Although neither counsel suggested that there are any differences of substance between the 2007 Act and ICTA, there are differences in wording and it is impossible to be certain that none are significant.  Mr Westwood’s interpretation avoids any possibility of retrospection.
20.	Simon’s Taxes (1988) states this at D9.101, citing para 129,
“ITA 2007 Pt 13 Ch 1 takes effect from 6 April 2007 but applies whether or not the relevant transaction in securities took place after 5 April 2007 or whether the year to which the advantage relates is a year before 6 April 2007.”

This is clearly based on paragraph 129(2) and makes no reference to paragraph 129(1) and to the reference to a counteraction notice which could only arise once the 2007 Act came into force on 6 April 2009.  Mr Westwood did not provide any answer to the submission of Mr Thornhill that Mr Westwood’s interpretation made paragraph 129(2) otiose for periods before 6 April 2009.  On Mr Thornhill’s interpretation the last sentence of paragraph 129(1) simply makes it clear that when ICTA continues to apply a notice under the 2007 Act cannot be issued.  It avoids two notices requiring the same adjustment. 
21.	Paragraph 129(2) is subject to subparagraph (1). If no notice was served before 6 April 2007, subparagraph (1) does not apply and subparagraph (2) takes effect. On balance we prefer Mr Thornhill’s interpretation. Our conclusion is that, since no notices under section 703(3) were served before 6 April 2007, paragraph 129(1) did not apply and the original notice was not valid.  It follows that the notice under section 698 of the 2007 Act served on 15 July 2009 took effect.
The Notice
22.	The notice referred to the sale of 15,750 ordinary shares in Nigel Grogan Ltd (“the Company”) to Nigel Grogan Trustees Ltd for £630,000 and specified an assessment to income tax of £157,500 being the tax which the Appellant would have been liable to pay in the year ended 5 April 2004 if the sum had been received as a qualifying distribution.  The actual notice of assessment of 31 July 2007 showed the tax due as £99,570.80.  This was after credit for the previous assessment or self-assessment which treated the sale as giving rise to capital gains tax of £57,929.20. 
The evidence
23.	There was an agreed statement of facts not in dispute.  The Appellant and Steve Phillips, previously a director in the company, produced statements and were cross-examined.  There  was a bundle to which the Articles of the Company and a letter dated 7 November 1991 containing an offer by 3i to invest in the Company were added.
24.	The following paragraphs set out the facts not in dispute taken from the agreed statement and from other evidence which was not challenged.  
25.	The Appellant was at all material times a director and majority shareholder in the Company which was incorporated on 9 August 1991.  At the relevant time the Company had an issued share capital of £85,715; this comprised 70,477 ordinary shares of £1 held by the Appellant and 15,238 “A” ordinary shares held by 3i.  Thus the Appellant held 82.2 per cent of the shares and 3i held the other 17.8 per cent.  A further 8,523 ordinary shares originally held by Robert-Barrington Ward and his wife had been bought back.  64,762 redeemable preference shares originally held by 3i were redeemed in 1996. The Appellant was sole director of the Company from 12 February 2003.
26.	Initially the business of the Company was to operate a Volkswagen dealership in Chelmsford.  This was carried on at 112 Parkway, Chelmsford (“the Parkway”), the freehold of which was owned by the Company.
27.	In the 1990s the Company expanded so that it also operated an Audi dealership in Chelmsford as well as a further Volkswagen dealership in Colchester.  These other dealerships were operated from leased premises.  
28.	Volkswagen required dealers to have third party capital and had entered into an agreement with 3i to provide this.  As part of the arrangements Volkswagen provided a development loan and the Parkway was bought.  The Appellant agreed to provide 3i with regular information. The consent of 3i was required for various transactions, including the acquisition of shares by the Company or any subsidiary.
29.	In 2001 the Company purchased Mr Barrington-Evans’ shares which were cancelled leaving the Appellant and 3i as the only shareholders.
30.	In October 2002 EC Regulation 1400/2002 provided for block exemption in the motor industry from competition rules. Manufacturers were able to create “market areas” assigned to large dealer groups at the expense of smaller dealers.  At the same time manufacture approved after sales services could be provided separately from sales.  
31.	On 4 February 2003 the Company sold the Volkswagen business to Lindbrook Ltd.  Under the agreement Lindbrook acquired the business and assets of the dealership together with a transfer of the relevant staff.  Lindbrook  was also assigned the lease of the Volkswagen Colchester site and was granted a 12 month lease from the Company over the Parkway.  The purchase consideration paid by Lindbrook amounted to £1,355,146 (exclusive of VAT) less customer deposits of £35,408.
32.	In March 2003 Haslers made a power point presentation to the Company for establishing a QUEST.  Haslers had been introduced in 2002 by Mr Grogan’s solicitor and became the Company’s auditors.
33.	A slide headed “Overview of Tax Implications”, referred to CGT on disposal by shareholders with taper relief and full corporation tax relief for contributions by the Company to the QUEST.  A slide headed “Tax Example” was directed solely to the position of the shareholder, giving an effective tax rate for a 40 per cent shareholder of 9.46 per cent on a capital gain of £562,500 with 75 per cent taper relief and annual exemption. Another slide assumed a valuation of £3.75 million and sale of 15 per cent of the shares. A slide headed “Company Sale Scenario” provided for the appointment of shares to qualifying employees immediately prior to sale using a points system recognising salary levels and length of service with Schedule E tax and insurance contributions on the value of share awards.  The slides were clearly based on the positions of the Company and the Appellant.
34.	In a letter to 3i dated 9 April 2003, the Appellant wrote that Audi had indicated that the Company would not as had been hoped be the market area operator for Essex.  The Audi contract was to expire in October.  Options were to lease the Parkway facilities at Chelmsford, to set up Steve Phillips as an approved service agent under the new block exemption rules on the site and a straight sale of the Parkway site.  He wrote that sale “from my point of view gives rise to tax issues as well as denying me an income opportunity.”
35.	On 9 June 2003 Marshall Architecture submitted a detailed planning application for the Parkway to Chelmsford Borough Council.  An earlier letter in February to the Council referred to office, retail and residential uses.  A letter from Jackson Criss, surveyors, dated 19 December 2002 had suggested a mixed office (possibly retail to the ground floor) plus residential scheme as the best way forward.  Planning consent was given on 7 November 2003.
36.	Between July and October 2003 the Appellant made numerous enquiries of motor manufacturers, including Audi, in relation to the possibility of operating an after sales only service centre from the Parkway.
37.	On 5 September 2003 Hodgson Automotive Ltd (“Hodgson”) made a formal offer to the Company to acquire the Audi Dealership at Chelmsford for £450,000.  Under clause 1.13 the Company was to provide a covenant not to sell, service or supply parts for Audis within a 15 mile radius for 3 years.  Clause 1.15 “Timing” was “So as to accommodate all parties to facilitate the seamless transaction of Audi franchise agreement on 30 January 2004.”  Audi had extended the  Company’s dealership franchise in September.  Hodgson were to take an 8 year underlease of the premises, which were not the same as the Parkway.  No agreement was signed at that stage.  The Company was still trying to win the Essex market area franchise for Audi.
38.	On 6 November 2003 Haslers wrote three letters, two being addressed to the Appellant.  The first started as follows,
“It was a pleasure to meet you again and have some further discussions as to how our QUEST proposals may be adopted by your Company.
As you will appreciate from our discussions, we present QUEST to clients on the basis of being a long-term share incentive plan for employees.  The plan delivers benefits to employees in the event that the company is sold and I attach a separate advisory letter that explains in detail how that aspect of QUEST would operate.”
The letter then stated that the full corporation tax deduction for contributions by the Company to the QUEST only applied for the present accounting period to 30 December 2003, after which less favourable rules came into play.  This followed amendments in the Finance Act 2003.
39.	The advisory letter referred to the objective “both to incentive existing employees and provide additional inducement to terms of attracting new employees.”  It stated that the QUEST would be funded by contributions from the Company to acquire new shares or buy from existing shareholders within 9 months.  At paragraph 3 the letter stated,
“The present shareholders and their families are excluded from being beneficiaries under the QUEST”.  
The letter said that appointments of shares or cash to employees would be taxable; shares should be transferred to employees before a third party sale to avoid claw-back of corporation tax.
40.	The third letter was addressed to the directors; the Appellant was in fact the sole director. It set out the terms on which Haslers would establish the QUEST including advice as to the appropriate level of contribution, preparing a QUEST trust deed, providing all ancillary paperwork and dealing with Revenue enquiries.  It provided that if enquiries could not be resolved, Haslers would contest an appeal before the Commissioners.  Fees were covered by clause 4.2 and 4.3.
“Fees will arise based on 30% of the tax saving (TS) achieved.  The hypothetical tax payable (HTP) will be determined by assuming that all proceeds received from any disposal of shares represent dividend income declared from profits on which corporation tax is charged.  The HTP is the total of the higher rate tax payable on the dividend plus the corporation tax payable by the Company on the profits funding the dividend.  The actual tax payable (ATP) will be the tax actually paid as a result of the share disposals (i.e. the capital gains tax or s.703 income tax).
The tax saving achieved is defined as follows:
	TS =  HTP – ATP”
At clause 4.9 it was provided
 “we cannot guarantee that tax savings will arise …  If no tax savings are achieved, then our fees would be refunded completely.”  
An accompanying fee illustration assuming a QUEST contribution of £630,000 and stamp duty of £3,150 showed HTP as £275,625 and ATP as £66,150 giving Tax Saving of £209,475.
41.	Minutes of a directors meeting on 7 November at which the Appellant and two Haslers’ staff were present recorded that it was decided to implement a QUEST and obtain the consent of 3i.
42.	A memorandum to staff dated 17 November informed them of the decision to establish a QUEST and invited nominations for the employee director of the trust Company.
43.	On 25 November a meeting was held at 3i’s offices at which the Appellant and his advisers from Haslers met with representatives of 3i, namely Eamon Nolan and Fiona Gibson.  The meeting was organised in order to present the QUEST proposal to the 3i representatives who were responsible for supervising 3i’s shareholding in the company.  Eamon Nolan confirmed that his initial reaction was that 3i would not veto the QUEST proposal provided that the shares made available to employees through the QUEST came from the Appellant’s shareholding.  3i’s representatives indicated that they wished to retain 3i’s shareholding in the Company and were not prepared to make a disposal to the QUEST or to agree to a new issue of shares to the QUEST.  Eamon Nolan agreed to give further consideration to the proposals and subject to the identification of any other issues that might be relevant, 3i would confirm their agreement as required under the Articles to a reduction of the Appellant’s shareholding by way of the proposed disposal to the QUEST.
44.	On 9 December the Company’s surveyor sent heads of terms to Cadston Homes Ltd for a proposed sale of the Parkway site for £3.1 million for completion on 26 March 2004.
45.	On 18 December Nigel Grogan Trustees Ltd was incorporated. The Appellant’s secretary was appointed as the employee director.
46.	On 19 December 3i wrote consenting to the establishment and funding of the QUEST conditional upon written confirmation “that the amount of £116,322.26 received by 3i plc will be formally declared as a special dividend”.
47.	A meeting at Haslers also on 19 December at which the Appellant was present noted that an on account payment had already been made to 3i.  It was agreed that Parkway be valued at £2.5 million since the offer of £3.1 million for the Parkway had fallen through and it was by no means certain that a second offer at that level would complete.  The Appellant stated that he had not yet decided whether to sell the property or develop it and was taking further professional advice.
48.	On 19 December an extraordinary general meeting of the Company was held, consent to short notice having been received from the Appellant and 3i.  The meeting passed a resolution to create the Nigel Grogan Limited Employee Share Ownership Trust and approve the terms of the trust deed.  The resolution also authorised the directors to sign the trust deed on behalf of the Company subject to 3i’s consent.
49.	Also on 19 December a meeting of the board of the Company (comprised solely of the Appellant) was held.  The minute of the meeting noted, amongst other things, that there was produced to the meeting a resolution in writing signed by the Appellant adopting amendments to the objects of the Company.  A written resolution in identical terms had also been approved by 3i plc (although this is not referred to in the minute).  It was also noted that a letter from 3i had been received consenting to the proposals necessary to establish the QUEST.  The meeting then considered the making of a contribution to the QUEST.  The director had received advice from Haslers to the effect that the Company was valued at £3,375,000. Management accounts and projections confirmed that the contribution should be fully relieved for corporation tax and that the contribution would not put any strain on the company’s financial position.  Based on the valuation which was accepted by the meeting, the board resolved that the Company would make a contribution to the proposed QUEST amounting to £633,150 which would finance the acquisition of 15,750 Ordinary £1 shares in the Company at £40 a share (£630,000) and Stamp Duty thereon of £3,150.
50.	On 22 December the Company and Nigel Grogan Trustees Ltd (“the Trust Company”) entered into a deed of trust establishing the QUEST.  In order to be a beneficiary a person had to have been an employee or director of the Company or of a subsidiary for at least 5 years, see clause 1.5 and 1.12. The Appellant and persons connected with him were excluded from benefit under clause 2.7.  Under clause 2.6 there were ultimate trusts for beneficiaries in existence after 20 years, with a default trust for charity.
51.	The Trust Company resolved to offer £40 per share to the Appellant for 15,750 shares.  The agreement for the sale by the Appellant to the Trust Company was executed on 23 December, the consideration being £630,000.
52.	The audited accounts of the Company for the year to 30 December 2003 showed a balance on the profit and loss account of £1,375,633 after payment of dividends of £174,551 which included an A ordinary interim dividend of £159,551.  Debtors included an interest free loan of £679,203 to the Appellant.  A payment of £633,150 to acquire investments was shown, representing the QUEST contribution.  The average number of employees was shown as 28.  The comparative profit and loss account for the two months to 30 December 2002 showed a loss on ordinary activities of £134,766. The two month period was because on 11 November 2003 the Company had filed a form to shorten its accounting reference date from 31 October 2003 to 30 December 2002 resulting in a two month period from 1 November to December 2002.
53.	A statement of the Appellant’s loan account as director for the year showed debit entries in February and April 2003 for payments to Andrew Montlake totalling £454,514, accounting for the bulk of the loan of £679,203; Mr Montlake was the Appellant’s solicitor and the payments were in connection with the purchase of a house.  A statement to April 2005 showed a credit of £630,000 in January 2004 from sale of shares to QUEST. 
54.	Between 21 and 23 January 2004 there were a series of e-mails between the Appellant and Kevin Walter, managing director of Hodgson, concerning the proposed sale of the Audi dealership business.  At this stage it was proposed that the Company would assign its lease of the Audi Chelmsford premises of which the Company was the original tenant.  The Appellant was pressing for a personal guarantee from Mr Walter to cover any default by Hodgson in relation to the covenants under the lease.  Mr Walter stated,
“I am so pleased that we have shaken hands not only on the consideration, but more recently on the formula for buying stock.”
However he refused to provide a personal guarantee.  The Appellant responded,
“I would be better off trading in some form from the site and then I am at least in charge of the risk.”
On 23 January Mr Walter e-mailed that he assumed the deal was off.
55.	On 30 January 2004, the Company disposed of the Audi dealership business to Hodgson.  Under the agreement Hodgson took an assignment of the lease of the Audi Chelmsford premises.  The consideration paid amounted to £450,000 on completion and £160,000 payable by 32 quarterly instalments plus whatever the value of the stock was agreed to be.  There was no evidence as to any personal guarantee being provided by Mr Walter.
56.	A series of abortive attempts were made by the Company to sell the Parkway site.  A draft contract was prepared in March 2005 for a sale to McCarthy & Stone (Developments) Ltd.  A draft contract for a sale to Taylor Woodrow Developments Ltd was prepared in October 2005, earlier negotiations having come to nothing; however this deal fell through.
57.	On 27 July 2005, following a meeting on 29 June, the Appellant wrote to 3i concerning another possible sale of the Parkway for £2.35 million, on which exchange of contracts was expected within a month.  He wrote,
“As we discussed at length, we expect to continue trading in some revised form post the Parkway Sale and do not seek to redeem or buyback your shares.”
58.	On 27 March 2006 3i wrote regarding a proposed sale to Aquila and agreed to sell 3i’s shares for £200,000 if the sale went through.  This did not go through.  In November 2006 3i agreed to a buyback of its shares for £100,000 at the same time as a sale of the Parkway site.
59.	On 12 April 2007 a contract was signed for the sale of the Parkway site to Swan Housing Association Ltd for £2.8 million.  On the following day the Company bought back the “A” ordinary shares of 3i for £100,000.
60.	Early in 2006 the Appellant had entered into a 6 month consultancy agreement with Hyde Sails Ltd, an established manufacturer of sails.
61.	On 3 March 2008 the Company acquired 149,160 of the 226,000 ordinary shares in Hyde Sails Ltd for a total consideration of £1,707,349.  
The Appellant’s evidence
62.	In his Statutory Declaration the Appellant referred to a letter by Haslers of 14 July 2006 as showing that if his intention had been solely to draw funds from the Company a dividend would have been financially more beneficial than selling shares to the QUEST.
63.	In his statement dated 27 May 2009 the Appellant stated that following the sale of the Volkswagen franchise to Lindbrook Ltd with a 12 month lease of the Parkway Site he began to consider both its development potential and its use as an after-sales only site for servicing a premium motor brand.  He made multiple enquiries as to an after-sales centre to operate from the Parkway and obtained planning permission for a mixed residential and commercial use.
64.	He stated that in November 2003 the options for the Parkway site were (1) to use it for an after-sale business; (2) for the Company to develop it; (3) to sell to a third party developer and (4) to enter into some form of joint venture with a developer.
65.	He stated that following the sale of the Volkswagen franchise the Company was still a contender for winning the Audi market area for Essex, the other main contender being Hodgson.  Although Audi ultimately gave preference to Hodgson this was only on the basis that Hodgson could buy the franchise from the Company.  Audi had extended the Company’s franchise in September 2003.  He stated that the ultimate sale of the Audi business to Hodgson was far from certain until it was concluded.
66.	He stated that he asked Haslers to advise on suitable incentive arrangements for the Company’s employees and in March 2003 Haslers presented proposals for a QUEST.  These attracted him because such scheme could operate as a long-term incentive plan over a period potentially lasting 20 years.  He stated that he did not aim to award shares to employees in 2003 but wished to be seen as having made the gesture that a significant holding had been irrevocably allocated to employees and would be appropriated by the trust at some future point.  The shares had significant asset backing in the Chelmsford freehold and the employees would receive the value at some future point.  The QUEST provided the type of structured incentive scheme that he had been seeking.  Haslers explained to him that the QUEST legislation was being withdrawn with effect from 31 December 2003; they explained that the contribution would be deductible for corporation tax.
67.	He stated that, although Heads of Agreement had been signed with Hodgson and planning permission had been obtained for Parkway, matters were still in a state of flux in December 2003 and that at that stage it was more likely than not that he would not sell to Hodgson.  He was absolutely sure that the Company would continue in business in the long term and the business would be assisted by the QUEST in incentivising its employees.
68.	He stated that the dividends totalling £159,557 paid to 3i in 2003 included a special element of £116,322 which related not to the creation of the QUEST but to the significant increase in his loan account balance which had arisen earlier in the year.
69.	He stated that he saw the development and sale of the Parkway as a means of paying off 3i, so liberating the Company to engage fully in its next business venture which as at 2004 was likely to be in a service only centre for premium cars.
70.	He stated that after a long drawn out process the Parkway was eventually sold on 12 April 2007 for £2.8 million and the 3i shares were bought back on 13 April 2007.
71.	He stated that Haslers had said that the fee structure for the QUEST was not negotiable as all their clients using the scheme had been charged on the same basis.  He had never instructed Haslers on a personal basis to achieve person tax savings.  Any savings that may have arisen were purely a by-product of the work Haslers did for the Company in establishing the QUEST scheme and establishing an entitlement for the Company to obtain the statutory corporation tax deduction.  If he had been motivated by tax avoidance and had no intention of having employees it would have been far simpler to liquidate the Company after the sale of the Audi franchise.  This would potentially have been far more profitable.  Liquidation would have given the capital gains treatment which HMRC sought to deny and would have removed the director’s loan account.
72.	He told the Tribunal that 3i had been imposed on the Company by Volkswagen.  There were twice yearly meetings with 3i but its strategy changed from time to time.  By the time of the QUEST, 3i was not interested in a further equity stake but was interested in the value of the Parkway.  His understanding was that 3i could have vetoed the QUEST.
73.	He said that payments of £130,000 and £324,514 shown on his director’s loan account in February and April 2003 were for a deposit and completion on a house which cost £1.3 million.  The house was worth £1.75 million.  He could have sold other assets to repay the director’s loan or could have remortgaged the property.
74.	Cross-examined, Mr Grogan accepted that about two-thirds of the Company’s employees went to Lindbrook in February 2003 and that the Heads of Agreement with Hodgson envisaged the transfer of employees to Hodgson but said that the  number transferred depended on what was sold : it was possible that the Company would keep the after-sales business.  He said that Audi’s position was flexible and liable to alter right up to the sale to Hodgson.  He agreed that after that sale his secretary was the only employee left.
75.	He said that the Company sought planning permission for Parkway to establish the maximum use value for dense mixed use with a view to see what interest there was then in a sale.  Once permission was obtained, the only interested purchaser was Cadston Homes.  He hoped to sell the site and lease back a commercial unit on the ground floor for a motor based use.  No purchaser was interested in a mixed development along those lines.  The premises at Montrose Road, Chelmsford, where the Audi after-sales work was carried out, went to Hodgson on a sublease.
76.	He told Mr Westwood that in 2003 he was looking at other opportunities rather than ceasing business but did not pursue any of the after-sale franchises to a positive conclusion.
77.	He said that he had looked on previous occasions at giving shares to staff however  Mr Barrington-Evans had been reluctant to part with any of his shares.  He accepted that nothing was done when Mr Barrington-Evans left until he was introduced to Haslers having fallen out with the previous accountants over fees.  He said that Haslers seemed to suggest a clever points-based scheme to allocate shares.
78.	Asked about Haslers’ QUEST presentation with an overview of tax implications, he said that he was not an accountant and not mainly interested in tax although saving corporation tax was attractive as a businessman.  He said that he was not very good at looking at his personal affairs.  He was not remotely interested in the personal tax implications.  He said that it was “absolute rubbish” that he was interested in the 9.46 per cent effective tax rate on a capital gain.
79.	Mr Grogan said that he did not remember reading Haslers’ letter of 6 November 2003 about fees; they churned out a lot of paper.  He believed that there were prior discussions as to fee.  He denied that it was implausible that he did not pay much attention to the formula for fees, saying that he was a busy businessman.  He said that an employee share trust seemed a good investment in the people of the business.  He accepted that the details of how the tax saving was achieved were set out very clearly but said that tax saving was not the point of the scheme for him.  In answer to the suggestion that personal tax considerations were very important to him and were the real reason for the QUEST, he said, “I could not disagree with you more”.  He accepted that Haslers’ fees were quantifiable by reference to tax saving.
80.	He said that he did not think that 3i was specifically aware of the payments for the house on the loan account.  The money received by him from the QUEST was paid straight to the Company.
81.	Asked about his statement that if motivated by tax avoidance it would have been easier to liquidate, he said that although that would have involved the sale of Parkway it looked then as though a sale could be easily achieved.  
82.	Mr Grogan said that the size of the contribution to the QUEST was because he wanted about 20 per cent of the Company to be for employees; he also felt that the QUEST stake should be about the same size as that of 3i.  He denied that the size of his director’s loan account was a relevant factor.  He said that, although the shares were not independently valued, the Inland Revenue never queried the price.
83.	Re-examined, he said that in September 2003 Audi had terminated all dealer contracts but were inviting pitches to renew.  Audi extended the Company’s contract and, if the deal with Hodgson had not gone through, there was no reason to believe that the Company’s contract would not have been continued.  If the Audi dealership went, the other options were on the after-sales side which was an exciting opportunity.  Other franchises were possible including for BMW and Jaguar.  He was prepared to look at any opportunity.  He was only 45 years old and had no plans to cease business.  He did not seriously consider liquidation: mathematically the money was not available and it would not have given him enough money to retire.  He regarded himself and the Company as indistinguishable.
84.	He said that Haslers had explained that the QUEST could be disadvantageous from a personal point of view since it involved giving away 18 per cent of the Company and the QUEST shares could not be used to benefit him.  The valuation of £40 per share seemed conservative to him.
85.	He said that the two directors who joined the Company following the Hyde Sails acquisition were hugely motivated by the potential profit on a disposal.
86.	Steve Phillips, who was a director in the Company until the sale of the Volkswagen franchise to Lindbrook, stated that the prospect of setting up a service only business was given serious consideration up to the time of his departure.  He did not recall any detailed conversation subsequently.  He had to sign a 2 or 3 year tie with Lindbrook.  He stated that the prospect of having shares or options was raised when he was a director.  He was not cross-examined.
Submissions
87.	Both parties submitted skeleton arguments.
88.	Mr Westwood submitted that the real reason for establishing the QUEST and for the sale of the Appellant’s shares to the QUEST was to obtain favourable income tax treatment rather than to provide incentives.  The QUEST was no more than a cloak. There had been ample time to put a QUEST in place since Mr Barrington-Evans’ shares had been bought back in 2001.  At the time when the QUEST was established negotiations for the Audi franchise were at an advanced stage, with the remaining employees other than the Appellant’s secretary going to Hodgson.  Apart from formal notification to employees as required under statute there had been no consultation with employees.  The reality should be contrasted with the Appellant’s evidence.
89.	He submitted that even if the Appellant did not have a tax advantage as his main object, he did not come within the escape clause if this was Haslers’ main object.  He cited Goff J in Addy v Inland Revenue Commissioners [1975] STC 601 at page 610b-g and Lloyd v Revenue and Customs Commissioners [2008] STC (SCD) 681.  The presentation by Haslers had focussed on the tax advantage.
90.	He said that the Appellant’s vehement denial of the importance to him of the personal tax implications was implausible and inherently unlikely, particularly in the light of Haslers’ presentation which did not emphasise the importance of employee incentives.  The Appellant’s evidence as to the engagement letter setting out the fee structure was surprising.  He had changed auditors because of a fee dispute. That letter showed that a tax advantage was a main object.
91.	Mr Thornhill said that before this Tribunal it was not open to him to argue that the sum which could have been received as a dividend was received from the QUEST trustees rather than from the Company.  Although in Anysz v Inland Revenue Commissioners [1978] STC 296 Browne-Wilkinson J accepted at pages 318-9 that the notional receipt had to be from the same person, in Inland Revenue Commissioners v Wiggins [1979] STC 244 Walton J held at page 262 that the identity of the payer was irrelevant.
92.	He submitted however that the comparison in the present case between a simple dividend and the actual receipt was not valid because it ignored the QUEST which had acquired the shares and essentially amounted to a submission that the QUEST was a nullity.  There was not the necessary contrast posited by Lord Wilberforce in Inland Revenue Commissioners v Parker [1966] AC 141 at page 178.  The Revenue were not comparing like with like.  The existence of the QUEST could not be ignored on any alternative analysis; genuine third party rights were involved.
93.	As to Addy he said that the taxpayers in that case were passive operators.  The comments of Goff J should be viewed in the light of that.  Here the Appellant had asked for advice on employee incentive schemes; other possible structures were considered and he decided that the QUEST was what he wanted.  His advisers had quite properly put the tax consequences before him.  Most features were intrinsic in a QUEST.  It was wrong to infer from the fee basis that the Appellant’s main object was not a QUEST.  The Tribunal should consider the subjective intention of the person obtaining the tax advantage looking at the overall transactions, see Inland Revenue Commissioners v Brebner [1967] AC 18.
94.	He said that the critical question was whether the Appellant really wanted a QUEST.  The fact is that at the end of the day there is a genuine QUEST in place on course to achieve a substantial profit for employees of the Company’s subsidiary, Hyde Sails Ltd.
95.	He said that in giving up part of his shareholding the Appellant lost the potential for future gain although he obtained a fair price.  In response to the contention that the QUEST was just a cloak, he said that the obvious course to obtain the maximum value would have been to liquidate.  He said that on the evidence the Appellant did want a QUEST to incentivise future employees and possibly present employees.  Once the QUEST was established, the Appellant was the only source from whom the shares could be purchased since 3i would not sell its shares or agree to a new issue.  As to the director’s loan, the Appellant’s evidence was that he would have had no difficulty in paying it off in other ways, including a remortgage.
96.	He said that Parliament wanted to encourage sales to a QUEST and could not have envisaged a charge under section 703.
Discussion
97.	Although during the hearing, the parties concentrated on ICTA, in view of our earlier conclusions our decision is based on the 2007 Act.  Section 683 provides,
“(1)	In this Chapter ‘income tax advantage’ means – 
(a)	…
(b)	…
(c)	the avoidance or reduction of a charge to income tax or an assessment to income tax, or
(d)	the avoidance of a possible assessment to income tax.

(2)	For the purposes of subsection (1)(c) or (d) it does not matter whether the avoidance or reduction is effected – 

(a)	by receipts accruing in such a way that the recipient does not pay or bear income tax on them, or 
(b)	by a deduction in calculating profits or gains.

(4)	…”

98.	In Parker [1966] AC 141 Lord Wilberforce said at page 178 referring to section 28 of the Finance Act 1960, the equivalent earlier legislation,,
“… there must be a contrast as regards ‘the receipts’ between the actual case where those accrue in a non-taxable way with a possible accruer in a taxable way, and unless this contrast exists the existence of the advantage is not established.”
99.	In Inland Revenue Commissioners v Cleary (1967) 44 TC 399 the House of Lords rejected the submission that it was necessary to compare like with like.  Viscount Dilhorne said at page 423,
“The definition does not require the contrast of like with like … and to give it such an interpretation would narrow the scope of the section considerably.”
100.	In both Parker and Cleary the receipt was from the company which could have paid the sums by way of dividend.  Here the receipt was from the trustee company rather than from the Company.  In Wiggins [1979] STC 244 as here the receipt was from a third party but Walton J decided that “the identity of the paymaster is irrelevant.”  That decision is binding on us as Mr Thornhill recognised; however he reserved the right to argue the point at a higher level.
101.	Although a contrast of like with like is not required when deciding whether a tax advantage is obtained, that does not mean that the similarity or otherwise of the actual and possible receipts is irrelevant when applying the escape clause in section 685 of the 2007 Act.  That applies when a taxpayer,
“(1)	… shows that the transaction or transactions meet Conditions A and B.
(2)	Condition A is that the transaction of transactions are effected – 
(a)	for genuine commercial reasons, or
(b)	in the ordinary course of making or managing investments.

(3)	Condition C is that enabling income tax advantages to be obtained is not the main object or one of the main objects of the transaction or, as the case may be, any of the transactions.”

102.	The question whether one of the main objects is to obtain a tax advantage is subjective, see per Lord Upjohn in Inland Revenue Commissioners v Brebner [1967] AC 18 at page 30.  In that case the House looked at the transactions as a whole, see Lord Pearce at page 27.  Neither counsel suggested that section 685(3) affects this.
103.	Although in the Revenue’s counter-statement it was contended that the transactions were not carried out for bona fide commercial reasons and Mr Westwood maintained this in his skeleton argument, there was no suggestion by Mr Westwood that, leaving aside the object of the transactions,  the establishment of the QUEST and the sale of the Appellant’s shares to the QUEST were not genuine transactions or that the price paid for the shares was not commercial.
104.	In effect the submission that the transactions were not carried out for bona fide or genuine commercial reasons was on the footing that the main object was to obtain a tax advantage.  It was in this sense that we understand Mr Westwood’s submission that the QUEST was no more than a cloak.
105.	On the facts of this case, if the Appellant succeeds in satisfying us that none of the transactions had as their main object or one of their main objects to enable a tax advantage to be obtained on the basis that the object was to provide incentives, he also succeeds on the genuine commercial reasons issue within section 685(2).
106.	The immediate transaction was of course the sale by the Appellant of his shares.  The enabling transactions were the formation of the QUEST and the contribution by the Company to the QUEST.  The relevant tax advantage was the receipt by the Appellant of £630,000 as capital so that he did not pay income tax on it.  It was not the deduction of the Company’s contribution for corporation tax purposes.
107.	Brebner established that it is necessary to consider the intention of those in control of the Company, here the Appellant.  We do not accept the submission of Mr Westwood that it is necessary to consider the intentions of the advisers separately from those of the Appellant.  The observation of Goff J in Addy at page 610f-g does no more than make the point that the intention of the advisers was relevant to that of the appellants.  We do not consider that the intention of the advisers can override that of the Appellant.  This was not a case where the Appellant left everything to advisers or was not personally involved in the transactions.
108.	If the Appellant establishes that the object of the transactions was to provide incentives for employees and that they did not have tax advantages as a main object it is irrelevant what was the intention of Haslers.
109.	We accept, however, the submission of Mr Westwood that the Appellant’s evidence as to his intentions must be considered in the light of the facts.  Those facts include what he was told by Haslers.
110.	Mr Westwood did not challenge the evidence of the Appellant (paragraph 66 above) that he asked Haslers to advise on suitable incentive arrangements although he did cross-examine the Appellant on the fact that nothing was done between Mr Barrington-Evans’ departure in 2001 and 2003, see paragraph 77.
111.	We note that the power point presentation by Haslers in March 2003 was clearly based on the position both of the Company and of the Appellant.  There was no suggestion of an issue of shares by the Company or of the sale being by 3i rather than the Appellant.
112.	Although the background had altered by November 2003, in that Heads of Agreement had been signed for sale of the Audi franchise, the final QUEST transactions were essentially unchanged from the presentation in March, albeit with different figures.
113.	The escape clause has to be considered at the time when the transactions were carried out in December.  It does not appear, however, that there was any change in the objectives of the Appellant from 7 November 2003 when it was decided to go forward to the implementation of the transactions.
114.	At the time when the transactions were carried out negotiations to finalise a sale of the Audi franchise were at an advanced stage.  Apart from the e-mails in late January 2004, there is nothing in the contemporary documents to suggest that the sale would not go forward; those e-mails indicate that the problem as to a personal guarantee was only raised at a late stage.  It is to be noted that the employee director for the QUEST was the only employee of the Company other than the Appellant who was not being transferred to Hodgson.
115.	The payment of a contribution of £633,150 to the QUEST and the sale of a substantial proportion of the Appellant’s holding to the QUEST were, to put it at the lowest, surprising given the impending sale of the Audi franchise and the fact that new employees could not benefit for 5 years.  Indeed it was envisaged that any employees would only benefit on the sale of the Company because of the need to finance their Schedule E liability on allocation of the shares.
116.	The Appellant produced no satisfactory evidence of his commitment to employee incentives.  He did not come across to us as an apostle of employee share ownership.  There was no suggestion that Mr Barrington-Evans did not pay for his shares.  Mr Phillips did not receive any shares when Mr Barrington-Evans left.	
117.	Although Mr Thornhill said that the Appellant was the only source for the QUEST shares because 3i would not sell or agree to a new issue, there is nothing in the presentation by Haslers or their November letters to suggest that a purchase from 3i was being considered.  The only indication that this was ever considered is in the notes of the meeting with 3i on 25 November.
118.	At the relevant time the Appellant had a substantial interest free loan account with the Company which would have given rise to a liability to corporation tax under section 419 of ICTA unless repaid within 9 months of the end of the accounting period.  Although the Appellant said in his evidence in chief that he could have liquidated the Company which would have removed the loan account, he later said that he did not seriously consider liquidation because the money was not available and it would not have given him enough money to retire.
119.	We do not accept the Appellant’s evidence that he was not remotely interested in the personal tax implications.  It does not make sense that he was concerned with tax issues from his point of view on a sale of Parkway (see paragraph 34) but was uninterested in the tax implications of the QUEST proposal in spite of what he was told by Haslers.  If he had no interest in his own tax position, it was extraordinary that he did not query Haslers basing their fees on his tax saving particularly in view of the size of those fees as compared with their audit fees of £19,000 for the year 2003. It should be remembered that the Company left the previous auditors because of their fees.
120.	A further factor was that the formula for calculating the tax saving on which Haslers’ fees were based actually referred to section 703 income tax.  This was not a case where the section 703 notice could have come as an unexpected bolt from the blue.  Haslers were clearly aware of the risk and we can only assume that they pointed it out to the Appellant.  The paperwork for the QUEST was generated by Haslers and clearly must have had section 703 in mind.
121.	The strongest pointer in support of the Appellant’s evidence that he was motivated by a wish to incentivise employees rather than by a tax advantage is the overall effect on his financial position.
122.	Although the Appellant received £630,000 for his shares and qualified for full taper relief on the capital gain, after the sale he held 15,750 fewer shares which represented 63.8 per cent of the shares in issue compared with 82.2 per cent before the sale.  Furthermore, the Company’s assets were reduced by the contribution of £633,150 to the QUEST less the corporation tax relief on the contribution and Haslers’ fees.  The Appellant therefore had 18.4 per cent less of the Company, the assets of which were substantially diminished.
123.	If the QUEST had not been set up but the Appellant had been paid a dividend of £630,000, the Appellant would have been liable to £157,500 income tax; however, although the Company would not have obtained the corporation tax relief for the QUEST contribution, the Appellant would still have owned 82.2 per cent of the shares.
124.	On any view the Appellant’s overall financial position taking account of the value of his holding in the Company would have been better if he had received the £630,000 as a dividend than it was receiving the same sum on sale of 18.4 per cent of his shares to the QUEST.
125.	We have considerable difficulty in understanding the figures to which we have referred at paragraph 40 above.  However those were the figures put forward by Haslers to the Appellant.  They showed a tax saving of £209,475.  They made no reference to the fall in the value of the Appellant’s holding.
126.	Haslers’ letter to the Revenue of 14 July 2006 gave the value of the Appellant’s pre-transaction 82 per cent stake as £2.3 million and his post-transaction shareholding of 63.8 per cent as worth £1.9 million, whereas the proceeds of his shares after capital gains tax were £572,071, so that his financial position was  diminished by some £330,000.  The Revenue replied on 1 August 2006 that this was not relevant to the main object issue.
127.	We do not understand why it was said not to be so relevant.  In our view it clearly was potentially a relevant factor in deciding what was the object of the Appellant in effecting the transactions.  The question which we have to decide is what weight to attach to the effect of the transactions on the Appellant’s overall financial position.
128.	We have nevertheless come to the conclusion that, when considering the transactions in question, the Appellant did not really consider the net effect on his overall position, which was not set out in Haslers’ letters of 6 November 2003.  If the net effect on the Appellant’s overall position had been an important factor in the transactions, it is very surprising that this was not mentioned in correspondence until July 2006 given that the correspondence as to section 703 started in September 2005.  What is inescapable is the fact that the saving in tax of a share sale to the QUEST as compared to the tax on a dividend was set out by Haslers coupled with the tax relief on the QUEST contribution.
129.	The Appellant has not satisfied us on the balance of probabilities that the escape clause applies.
130.	The appeal is dismissed.

THEODORE WALLACE
TRIBUNAL JUDGE
RELEASE DATE: 14 September 2009