In Tower Radio Limited and another v HMRC[1], the taxpayers successfully utilised a scheme which was designed to take advantage of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).


During the periods relevant to this case, no liability to income tax arose under Chapter 2 of Part 7 ITEPA in respect of the acquisition of an "employment-related security" which is a restricted security or a restricted interest in securities. Tax was, however, chargeable if a "chargeable event" occurred to that security. Section 427 ITEPA provides that a "chargeable event" occurs (broadly speaking) when the security ceases to be restricted and is disposed of. Crucially, however, the definition of chargeable event does not cover the liquidation of a company in which employment-related securities are held.

Since the periods relevant to this appeal, anti-avoidance provisions have been inserted into Part 7 ITEPA[2] such that an employer and employee are deemed to have elected the disapplication of Chapter 2 where the main purpose of a transaction is the mitigation of tax or NIC.

The taxpayers, Tower Radio Limited (Tower) and Total Property Support Services Limited (Total), entered into a tax planning structure. Under the structure, employees and officers of the companies were awarded shares in specially-formed subsidiary entities, thereby taking advantage of the rules contained in Part 7 ITEPA. 

In the case of Tower, the intention was to leave the shares in the subsidiary for at least two years during which time the company would invest the money, however, in July 2004 (just three months after the shares had been registered, its accountants warned that there was due to be a change in the law which might jeopardise the efficiency of the structure. By the end of the month the company was put into voluntary liquidation. It distributed the share capital and in 2005 the company was dissolved.

In the case of Total, the assignment of shares took place only one day before the relevant companies were placed into voluntary liquidation. 

For both companies, the shares which were transferred qualified as restricted securities under Part 7 ITEPA. This was achieved by including forfeiture provisions in the articles of association for the subsidiary entities. The structure was designed to operate so that no tax was payable when the shares were transferred or when the company was placed into voluntary liquidation, as such an event did not qualify as a "chargeable event".

HMRC disagreed and issued determinations and decisions accordingly. The taxpayers appealed to the First-tier Tribunal (FTT).

The central issues before the FTT were whether the transactions entered into satisfied the definitions contained in ITEPA and/or whether the Ramsay[3] principle applied, such that certain steps in the transactions ought to be disregarded, or treated as irrelevant.

The FTT concluded that the transactions satisfied the conditions in Chapter 2 Part 7 ITEPA, in that they accepted that at each step the taxpayers had fulfilled the requirements of the provisions with valid forfeiture clauses in the subsidiary company agreements and that the shares constituted "restricted securities". However, in a broad application of the principle, the FTT went on to find that Ramsay applied so as to bring into tax the sums attributable to the shares. Specifically, it concluded that the steps introduced in order to obtain the tax advantage were artificial and should to be disregarded. The taxpayers appealed to the Upper Tribunal (UT).

The UTs decision

The main issue in the appeal was the distinction between "money" and "shares". This distinction was important in determining whether or not the Ramsay principle applied. The UT identified the central issue as being:

"whether construing Part 7 of ITEPA purposively and taking a realistic view of the facts [the taxpayers] acquired "securities"".

In general terms, under the Ramsay principle, a series of elements, or steps, introduced so as to defeat the purpose of legislation may be disregarded if they are found to have been artificial. There are, however, limits to the Ramsey principle and a critical limitation was outlined by Lord Justice Mummery in the case of Mayes[4]: in circumstances where a transaction involves:

         "genuine legal events with real legal effects … the court cannot, as a matter of construction, deprive those events of their fiscal effects under [the Income and Corporation Taxes Act 1988] because they were self-cancelling events that were commercially unreal and were inserted for a tax avoidance purpose in the pre-ordained programme …"

The concept of "purposive construction" only goes so far and cannot interfere with legal events such as the factual transfer of shares. This point was considered recently in the cases of UBS and Deutsche Bank[5] , which involved a structure organised around similar (but not the same) provisions contained in Part 7 ITEPA. In those cases too, HMRC attempted to argue that what was paid over to the employees was "money" within the meaning of section 420(5)(b) ITEPA rather than "shares in any body corporate", within the meaning of section 420(1)(a).

In UBS and Deutsche Bank, the FTT had found that the employees of the banks had received real shares, some of which had been kept for over two years. At disposal, the "redemption money was not pre-ordained, but its amount varied with the fortunes of the … shares held …". There was no guarantee that the sum paid for the shares would translate into the amount paid on redemption.

In the present case, HMRC relied on numerous authorities in which the concept of "payment" was an issue but could point to nothing which assisted in the re-crafting of shares and money. Consequently, the UT found that the taxpayers had been awarded "shares" as a matter of company law and that, as a consequence, no income tax or NICs was payable in respect of them. The UT allowed the taxpayers' appeal.


This case is a timely reminder that the Ramsay principle is not a blunt instrument by which HMRC can beat down all tax planning which it finds objectionable.

The language used in the UT's decision is, in places, surprising. The conclusion, in which the taxpayers are informed that their arguments are correct in law, is prefaced with the words "however unattractive the result may be…". The obvious question which arises is, unattractive to whom? If we are to assume that the function of the tribunals is to declare what the law is, such a preface is somewhat surprising.