The judgement in Commissioners for HMRC v Fisher [2023] UKSC 44 was released on 21 November 2023, with Lady Rose giving the unanimous ruling of the court. The decision redefines the limits of the transfer of assets abroad (TOAA) rules. These rules are an income tax anti-avoidance provision, now found in s720, ITA 2007, designed (broadly) to prevent UK resident individuals avoiding income tax by vesting their assets in an offshore structure. In many ways it is as important a decision as that of the House of Lords in Vestey v IRC [1980] AC 1148. As Lady Rose observes (at para 87), if the decision of the Supreme Court creates a gap in the TOAA provisions, the government will need to think carefully about how to fill that gap in a fair, appropriate and workable manner.

Background

The progress of the case up until the decision of the Supreme Court is set out in my article Transfer of assets abroad in TAXline dated February 2022. By way of background, the Fisher family had built up a business specialising in ‘telebetting’, run through Stan James (Abingdon) Limited (SJA). In 2000, SJA sold most of its business to Stan James Gibraltar (SJG) Limited. 

The move to Gibraltar was prompted by the much lower rate of betting duty levied there. Initially, the transfer had been to a branch of SJA and then finally in 2000 to a new company, SJG. Stephen Fisher, his wife Anne, his son Peter and his daughter Dianne were the only shareholders of both companies. However, from 1996, Anne had virtually nothing to do with the business and Dianne resigned as director of SJA, and eventually became the only family director of SJG.

HMRC assessed Stephen, Anne and Peter on the profits of SJG for 2000/01 to 2007/08 under the TOAA provisions, then set out in s739, Income and Corporation Taxes Act 1988 (ICTA 1988). It argued that the shareholders were quasi transferors who had procured the transfer of the SJA business to SJG. As a result, HMRC allocated the income of SJG among the shareholders in proportion to their holdings. Dianne escaped assessment as she was non-UK resident. 

This resulted in the other family shareholders appealing to the First-tier Tribunal (FTT) – in Anne’s case successfully on the basis that the TOAA code was not compatible with European (EU) law. The upshot for Stephen and Peter was that the FTT found several of the assessments raised on them to be defective, while confirming HMRC’s assessment in relation to other years.

The Fishers and HMRC all appealed. At the Upper Tribunal (UT) two judges held that the TOAA rule was not engaged at all and suggested that in any event the motive defence in s741, ICTA 1988 would have applied. The EU defence was considered in relation to Anne and Stephen. 

At the UT level, the tribunal differed with the FTT as to whether some of the assessments were truly defective. The net result was a further round of appeals, this time to the Court of Appeal in July 2021. 

The Court of Appeal reversed the decision of the UT on most key points, but held that the assessments in relation to Anne as a quasi-transferor should be dismissed. The scene was now set for the final round of appeals.

Just how much tax was at stake? 

The tax numbers were very large indeed. In the case of Stephen, the tax charged was £2,175,624, in the case of Anne it was £2,176,113 and in the case of Peter it was £948,706. These amounts, so HMRC claimed, were due irrespective of whether the Fishers received any money from SJG. 

The outcome on appeal

The Supreme Court unanimously allowed the Fishers’ appeals and dismissed those of HMRC. The key issues had to be addressed in the context of a transfer of assets following the sale of the business operated by a UK incorporated company (SJA) owned by the Fisher family, to a company incorporated and resident in Gibraltar (SJG), also owned by the Fishers.

Lady Rose gave the judgement of the court. In doing so she had to address some fundamental points of interpretation. It may seem surprising that they have not been addressed previously, given that the rules were first introduced by the Finance Act 1936. However, this is perhaps understandable given that the rules “have continued to perplex and concern generations of judges faced with the task of construing them” as Lady Rose observed (para 1). She could also have added that taxpayers and their advisers might similarly have felt this way. Lady Rose added that the appeals highlighted the potential breadth of the TOAA code and the difficulty of working out how the rules were intended to operate (para 5). 

Does the person assessed have to be the transferor?

The first question the court had to consider was whether the anti-avoidance provision could only apply to the individual who made the transfer. As explained below, the court held that the provision was limited in this way. Lady Rose observed (at para 5) that the TOAA rules only apply to impose a tax charge on natural persons, and it was accepted by the Fishers and HMRC this meant individuals and not SJA. She concluded that the Fishers were not caught by the TOAA rules, and in doing so had to address the relationship between the person assessed to tax under the TOAA rules and the person who made the transfer of assets abroad.

First, Lady Rose was persuaded that the decision of the House of Lords in Vestey v Inland Revenue Comrs. (Nos1 and 2) [1980] AC 1148 meant the person that had transferred the assets abroad to avoid tax also must be the person with power to enjoy the income of the overseas person. 

Second, she thought a strong pointer towards limiting the scope of the charge to tax to the transferors – as had Lord Wilberforce in the Vestey case – was the penal aspect of the way the tax rules were being applied (at para 58). The Supreme Court found that the introduction of the apportionment provisions in s744, ICTA 1988 was insufficient to remove the same concerns that had caused the House of Lords to find in favour of the taxpayer in Vestey. 

Third, the court did not accept that the harshness and unfairness of HMRC’s interpretation was mollified by the introduction of the benefits charging regime contained in s740, ICTA 1988. In fact, Lady Rose considered that if HMRC’s interpretation was correct, there would be considerable overlap between s739 and s740, ICTA 1988 and it was unclear as to how the two provisions would operate together in practice. She said (at para 59), “to say that it is in HMRC’s discretion whether to tax a non-transferor on the total income or only on the benefit received is to fall into the trap that courts have branded unconstitutional”. 

Fourth, Lady Rose referred to what she called the “spousal extension” in relation to s739, ICTA 1988. She noted that under s739, ICTA 1988, the spouse of the individual was brought within the scope of the TOAA provisions. It meant that when assessing whether an individual had power to enjoy the income of an offshore entity, it was necessary to apply the tests by reference to their married partner, as well as the transferor. Implicitly this means that the charging provisions have a more limited scope than suggested by HMRC and only applied to transferors in the manner suggested by the Fishers. 

For all these reasons Lady Rose concluded that the Fishers could only be subject to a charge to tax under s739, ICTA 1988 if they are properly to be regarded as the transferors of the assets that were sold by SJA to SJG. 

Were the Fishers transferors?

Having decided that the provision should only extend to transferors, the court then had to decide whether, on the facts, the Fishers were transferors. This required the court to consider the concepts of quasi-transferors or if, as shareholders, they procured the transfer. As explained below, the court concluded that the Fishers had not made a transfer. Lady Rose observed (at 63) that there was no doubt that the legal transferor of the assets was SJA and not the Fishers. HMRC argued that because the Fisher family together owned the controlling interest in SJA, they should collectively be treated as the transferors of the assets, bringing them within the charge to tax imposed by s739, ICTA 1988. In effect they were quasi-transferors who procured the transfer of the assets. 

This line of argument can be traced back to the decision of the House of Lords in Congreve v Inland Revenue Comrs. (1946-1948) 30 TC 163. In that case it was suggested that a shareholder could ‘procure’ a transferor company to transfer assets. Mrs Congreve held 65% of the shares in Humphrey & Glasgow (England) that transferred assets to a company called Humglas and this was held to be sufficient for these purposes. The House of Lords subsequently overruled its decision in part as regards that case in Vestey. Lord Wilberforce considered that the Congreve decision should be only considered as applying where the person sought to be charged made or was associated with the transfer in some way. His view was reflected by the decisions of other members of the court. 

Lady Rose disagreed with HMRC and did not think that Congreve provided any support for a construction of the TOAA code that treats the shareholders of a company as the transferors of assets transferred by that company. While having some sympathy for treating controlling shareholders as a transferor where they exercised their controlling interest in a company to procure a transfer made by the company, she did not believe that this could be extended to the collective decision of minority shareholders.

She was unsympathetic to the suggestion that a degree of uncertainty as regards the application of the law was a positive virtue in that it discouraged people from moving assets abroad with a tax avoidance motive. It had been argued by counsel for HMRC that penal provisions work better to achieve an aim if the taxpayers are unable to know whether they would be caught or not. Lady Rose considered this an improper argument and agreed with counsel for the Fishers that the law cannot be left in some unclear state “just to scare people” (at para 76).

The true construction, Lady Rose suggested (at para 86), is that the shareholders of a company, even if they are also the directors, are not quasi-transferors and do not procure the transfer made by the company. At para 77 Lady Rose emphasised that the court was adopting a literal basis of interpretation when she said that, “I would reject the idea that even a ‘controlling’ shareholder in the company is to be treated as procuring the transfer of assets by the company”. In her view, s739 was not intended to apply to transfers by companies. In response to HMRC’s suggestion that this would leave a hole in the legislation, Lady Rose referred to the comments made by Lord Dilhorne in Vestey, that gaps in our tax law can be and usually are speedily filled. On this basis the Fisher’s appeals were all allowed and HMRC’s appeal dismissed.

What type of transfers might still be caught?

HMRC had protested that finding in favour of the Fishers would mean that the TOAA rules could be circumvented by an individual putting assets into a company and then getting the company to transfer the assets abroad. As Lady Rose observed, that would still leave s740, ICTA 1988 in play, and the individual could not escape a charge to tax if they receive a benefit in the form of income or capital (at para 87). In practice, there are other taxing provisions that are likely to apply in such cases before it is necessary to consider the TOAA provisions.

However, the UT made the point at para 63 of its decision that in any event it would be possible to challenge cases under s739, ICTA 1988 where the interposition of the UK company would be regarded as a device and the substance of the transaction would still be a transfer of assets by the individual to the foreign entity. While such an approach might be possible, it is important to appreciate, as confirmed by Lady Rose, that no such argument could be relied upon by HMRC in the case of a company such as SJA that was a bona fide company and had been trading for many years. 

Unless or until HMRC introduces amending legislation (as one might anticipate that it will) this case law development will put even greater emphasis on ensuring that a commercial defence is properly considered and analysed. 

What happens next?

A very helpful Press Summary was issued by the Supreme Court on 21 November. It is to be hoped that HMRC will issue a similar press release setting out how current HMRC enquiries will be dealt with, in the interests of minimising professional costs suffered by taxpayers in cases where the decision is relevant.

Overall assessment

This is a very welcome decision – just as important as the Vestey decision – in that it resets the scope of the TOAA rules at the same time as reasserting the right of the citizen to be taxed by reference to the letter of the law. However, it is important to realise that there is a lack of precision in relation to some aspects of the judgement, based on the lack of clarity of the statutory wording and the ad hoc way that it has evolved over the past 90 years or so. One point that will require clarification is the relationship between s739, ICTA 1988 (now s720, Income Tax Act 2007 (ITA 2007)) and s740, ICTA 1988 (now s731, ITA 2007). That relationship has become even more complex than it was before the decision, and the possibility of overlap has increased.

For this and the other reasons outlined above, HMRC may feel obliged to introduce amending legislation and we may therefore get an even more complex test in an area where simplicity and clarity is so critical. However, one thing is sure. The Fisher decision will not be the end of the dialogue on these points. 

Andrew Cockman, Tax Partner, Streets Chartered Accountants, member of the Tax Faculty’s Private Client Committee (PCC). With thanks to the other PCC members who assisted with this article.