The Transfer of Assets Abroad regime and the Fisher case - defining the limits of anti-avoidance rules
The case concerns the application of the Transfer of Assets Abroad provisions, an anti-abuse regime first introduced by Finance Act 1936, albeit one amended several times since. The Transfer of Assets Abroad regime has been the subject of numerous cases but remains an extremely complex and quite unpredictable area of the law. The decision of the Upper Tribunal in Fisher simply goes to show how the Transfer of Assets Abroad regime continues to evolve, even after almost 85 years, and how the courts will often - where possible to do so - seek to interpret the legislation in such a way as to avoid a clearly unfair outcome.
The Transfer of Assets Abroad regime
The Transfer of Assets Abroad regime aims to counteract tax avoidance achieved by means of a “relevant transaction” whereby income becomes payable to a “person abroad” by virtue of a “transfer of assets” (whether or not taken together with one or more “associated operations”).
Where the regime applies, it can operate to treat income arising to the person abroad as belonging for UK tax purposes to any UK resident individual responsible for the original transfer of assets to a non-UK person.
Since 1981, income of a person abroad may also be taxed on a UK resident individual who was not responsible for the original transfer of assets, but only to the extent that such an individual receives benefits out of assets which are “available for the purpose” by virtue of a transfer of assets to a person abroad (again, whether or not taken together with one or more associated operations).
With such a far-reaching anti-abuse regime, there has to be some limits to its application. The most important of these limits is the so called “motive defence”, which breaks down into three separate tests:
- the “no tax avoidance purpose” test, which requires that UK tax avoidance was not the purpose, or one of the purposes, of either the original transfer of assets or any subsequent associated operation;
- the “genuine commercial transactions” test, which requires the relevant transaction to be a genuine commercial transaction effected (i) in the course of a trade or business; (ii) for the purposes of the business; and (iii) on arm’s length terms. If this test is met, the motive defence will be satisfied so long as none of the relevant transactions was “more than incidentally designed” for the purposes of avoiding UK tax; and
- the “EU defence”, which requires the relevant transactions to be “genuine transactions” carried out on arm’s length terms, application to which of the Transfer of Assets Abroad regime would be in contravention of EU freedoms.
In addition to the statutory limitations on the scope of the Transfer of Assets Abroad regime, the courts have also on occasion seen fit to interpret the legislation in such a way that places some sensible limits on its application. The decision of the Upper Tribunal in Fisher is one such occasion.
The facts of the case in Fisher
The case concerned the Fisher family (mother Anne, father Stephen and son Peter – a daughter, Dianne, was also involved in the business but as a non-UK resident she was not a party to the case). Anne, Stephen and Peter Fisher were all UK resident and domiciled (although Anne was an Irish citizen, a fact that was relevant to the application of the EU defence to the case) and were all shareholders and directors of a UK company, Stan James (Abingdon) Limited (SJA), which carried on the family’s betting business.
Towards the end of the 1990s, the high rates of gaming duty in the UK as compared with some other countries meant that SJA, like many other UK betting businesses, had transferred all of their telebetting business abroad, in this case to Gibraltar where the regulatory regime combined with a much lower rate of betting duty made it an attractive jurisdiction. Until 2000, SJA operated its telebetting business through a separate branch established in Gibraltar, but owing to concerns that this might infringe the provisions of the Betting and Gaming Duties Act 1981 – and constitute a criminal offence – the decision was taken to set up a separate company, incorporated in Gibraltar and owned directly by the four family members, to which SJA sold its telebetting business for an arm’s length value. This company was called Stan James Gibraltar Limited (SJG).
HMRC sought to invoke the Transfer of Assets Abroad regime in order to assess Anne, Stephen and Peter to UK income tax on the profits of SJG.
The family made the following arguments (in addition to arguing that certain of the assessments were invalidly raised for technical reasons):
- that the Transfer of Assets Abroad regime applied only where there was actual avoidance of income tax, which was not the case here because the family only paid income tax to the extent they received dividends from either company, and the position as between SJA and SJG was neutral – they still paid income tax to the extent they received dividends from either company;
- that the transfer of assets (namely, the telebetting business) was made by SJA and not by the shareholders, and so they were not responsible for the transfer to SJG and therefore any income arising to SJG as a result of the transfer should not be treated as theirs for UK tax purposes;
- that the motive defence was available to prevent the Transfer of Assets Abroad regime from applying;
- that applying the Transfer of Assets Abroad regime in this situation was in breach of EU law; and
- that only the income from the telebetting business transferred by SJA to SJG should be potentially within the scope of the Transfer of Assets Abroad regime, and not the income from any business lines subsequently developed by SJG.
The decision of the Upper Tribunal
Actual or intended avoidance of income tax necessary for the regime to apply?
The Upper Tribunal agreed with the First Tier Tribunal that actual – or even intended – avoidance of UK income tax was not required in order for the Transfer of Assets Abroad regime to be engaged. While the purpose of Parliament when enacting the legislation was to prevent the avoidance of income tax by means of attributing income arising to persons abroad to UK taxpayers, the purpose of the transferor "was only relevant and fully examined in the context of the motive defence1” (where it is clear that the purpose of avoiding any UK tax – including therefore gaming duty – would potentially prevent the motive defence from applying).
In the First Tier Tribunal, the question whether or not the taxpayers should be treated as “quasi-transferors” (such that the transfer by a UK company – SJA – should be treated as having been made by its shareholders) turned principally on arguments as to practical difficulties with the concept of multiple quasi-transferors. These difficulties arose both in terms of how to determine an appropriate attribution of income as between the multiple quasi-transferors, and the application of the motive defence when each quasi-transferor could have had a different motive, and therefore whether it was possible to give HMRC’s desired effect to the legislation where there were multiple quasi-transferors. The First Tier Tribunal decided in favour of HMRC on this point, but without really examining in much detail in what circumstances an individual should be treated as a “quasi-transferor” in the first place.
The Upper Tribunal, on the other hand, gave considerable thought to the circumstances in which a shareholder in a company which makes a transfer of assets to a person abroad should be treated as a “quasi-transferor”, and ultimately reversed the decision of the First Tier Tribunal on this point.
In doing so, the Upper Tribunal was not creating new law. It was relying on the decisions of the House of Lords in Vestey v Inland Revenue Commissioners2 and the Special Commissioners in IRC v Pratt3 but the quite clear conclusion is nonetheless something that many advisors and commentators might be surprised by.
In short, the Upper Tribunal found that the default position is that for an individual to be liable to income tax as transferor under the Transfer of Assets Abroad regime he or she should be the actual transferor, and only by exception should a transfer by another person be imputed to that individual so as to make him or her a “quasi-transferor”. According to the Upper Tribunal:
Can the actions of SJA be imputed to its shareholders or directors? Normally the answer to that question would be no. It is a fundamental principle of English company law that a company has a separate persona from its shareholders and has separate rights and liabilities….The circumstances in which the court will be prepared to 'pierce the corporate veil' and attribute the acts of a company to its controller (or controllers) are rare. In the absence of express statutory provision, the established circumstances involve fraud or other criminal conduct, or the deliberate setting up of the company in order to circumvent a pre-existing liability…
In the context of tax avoidance, it is well established that the Court has the power to look behind the form of a transaction or series of transactions and consider its substance. In IRC v Pratt  STC 756 at p.793a, Walton J identified the real question as being whether, notwithstanding that the transfer was made by one person, 'was the reality of the matter that somebody else was the real transferor'? We agree that this is the right question.
In short, the Upper Tribunal decided that only in situations of clear and deliberate tax avoidance should a shareholder of a company that makes a transfer of assets to a person abroad be treated as a “quasi-transferor”, and so when a UK company makes a transfer of assets abroad, the starting position is that this should not engage the Transfer of Assets Abroad regime.
Obviously, in more complex asset holding structures – and in particular those structures established by internationally mobile individuals – this aspect of the decision in Fisher may be of limited application, because in such situations it is quite likely that there was an initial transfer directly made by the taxpayer to a non-UK person such that the Transfer of Assets Abroad regime has been engaged. Once the regime is engaged, then absent the motive defence applying to all relevant decisions, income of non-UK structure will potentially become taxable. But it is nonetheless of interest that the Upper Tribunal was so definitive in its finding of how rarely an individual should be treated as a quasi-transferor in most ordinary situations.
Application of the motive defence
The Upper Tribunal also disagreed with the findings of the First Tier Tribunal in relation to the motive defence. As far as the Upper Tribunal was concerned, in a situation where avoiding betting duty was the only way in which the SJA business could survive and continue to operate without risk of criminal sanctions, then the primary purpose of the otherwise genuinely commercial transactions was to save the business, and not to avoid the tax, and as such the motive defence had been satisfied. Again, this was a clear example of the Upper Tribunal seeking to find ways in which to avoid the obviously unfair application of the Transfer of Assets Abroad regime to a genuinely commercial transaction.
The Upper Tribunal also saw fit to depart from the decision of the First Tier Tribunal in relation to the ability of Stephen Fisher (a UK citizen) to rely on the EU defence. This was on the basis that – as Anne Fisher’s husband – in order to avoid the application of the Transfer of Assets Abroad regime he would have been forced to move abroad, thereby forcing Anne to face the almost impossible choice of having to decide whether or not to live in her country of choice (the UK) or to follow her husband to his new jurisdiction of residence, thereby restricting her freedom of movement as an Irish citizen to choose whether to live in the UK. The Upper Tribunal did not, however, go so far as to apply the same principle to Anne and Stephen’s independent adult son, Peter.
Extent of the income attributed to the transferred assets
Finally, the Upper Tribunal agreed with the First Tier Tribunal that the development of new businesses by SJG were “associated operations” of the original transfer of the telebetting business to SJG. Therefore the income from those businesses derived from the same original transfer and was within the scope of the regime (albeit that it was noted that this might not have been the case if SJG had borrowed money from another source, rather than using profits from the telebetting business, to establish the new businesses – an interesting comment that lends support to the decision in Rialas v HMRC4).
In some ways the decision of the Upper Tribunal is obvious and unsurprising, and it would have been a perverse outcome for the Transfer of Assets Abroad regime to apply to this situation given that no income tax had been, or could have been, avoided.
However in many ways it is surprising, because the Upper Tribunal saw fit to make clear that there should be limits imposed on the application of the Transfer of Assets Abroad regime to otherwise commercial transactions carried on by trading businesses and chose to apply the legislation in such a way as to make those limits clear (and not only by deciding that the motive defence applied to the relevant transactions).
It could readily be seen how, if the circumstances had been different and the motives of the Fisher family less “pure”, a different conclusion could have been reached – most obviously on the question of the motive defence, but also on the question of when an individual can be treated as a quasi-transferor. But nonetheless the decision remains another – and a welcome – example of how the courts will apply a common sense approach to what remains a complicated and uncertain regime; a regime which, even almost 85 years after its original enactment, continues to reveal its secrets.
1 See para 55 of the judgment of the Upper Tribunal
2 1980 A.C. 1148
3  STC 756
4  UKFTT 520