On 9 March 2016, the Supreme Court7 overturned the Court of Appeal decisions in the cases involving similar restricted securities schemes separately operated by Deutsche Bank and UBS.
Deutsche Bank and UBS both operated similar incentive arrangements that purported to avoid income tax and national insurance. Although the details of each scheme differed, the key to the success of each was that the respective employees received shares that were “restricted securities” under ITEPA 2003. If this was the case, and provided the shares could be shown to be at risk of forfeiture and issued by a company that was not “associated” with the respective employer company, the award of shares would not be subject to tax and national insurance.
The Supreme Court held that it was capable of applying a purposive interpretation to the relevant ITEPA rules and that, in doing so, the shares were not “restricted securities”. This was the case even though the ITEPA rules in question were prescriptive. Instead, the employees received awards of shares which should have been taxed under the general earnings provisions in ITEPA.
In particular, in each case the scheme provisions that would forfeit the employee’s shares were held to have no genuine business or commercial purpose (other than tax avoidance). Applying a purposive interpretation of the ITEPA definition of “restricted securities”, the forfeiture provision should therefore be disregarded with the effect that the shares were not “restricted” at all.
This is likely to be an important decision and one which may give HMRC greater confidence in attacking other schemes it views as seeking to exploit the ITEPA rules governing employment- related securities.
The decision can be viewed here.