Key Tax Cases - Summer Round Up
As published in Winslows Digital Tax Magazine, The Wize. To subscribe for free, please click here >
Despite the pandemic and the summer break, the UK courts and tribunals have released several interesting decisions in recent weeks. Four decisions are of particular interest.
The first two turn on the interpretation of tax clauses in share purchase agreements (“SPA’s”). They are a useful reminder of the importance of good drafting, particularly when it comes to tax.
Dodika v United Luck Group Holdings Ltd  EWHC 2101.
This case concerned the notice procedure required to bring a claim under an SPA Tax Covenant.
The High Court had to decide whether buyers had validly given notice of a tax covenant claim in respect of a transfer pricing issue under investigation by the Slovenian tax authorities. It found that the notice given by the buyers did not comply with the relevant provisions of the SPA.
Although the notice gave reasonable detail of the nature of the claim, it failed to give reasonable detail ‘of the matter which gave rise to such Claim’ as required by the SPA. The court construed the phrase as referring to the ‘factual basis’; the facts established during the tax investigation, which may result in a tax liability. Simply disclosing the existence of the investigation was not sufficient.
As the buyers had no reasonable prospect of succeeding in trial, the court issued a summary judgment to allow the escrow funds to be released to the sellers.
Axa SA v Genworth Financial International Holdings LLC and others  EWHC 2024.
This case also concerned a claim under an SPA, this time, in respect of losses resulting from the mis-selling of payment protection insurance.
The main issue was the interpretation of the tax gross-up clause, which applied on the receipt of a payment under the SPA. The High Court had to decide the interpretation of the phrase ‘subject to Taxation in the hands of the receiving party’. The court rejected the notion that a theoretical tax liability, on the basis of the jurisdiction’s headline rate, should apply. It found that ‘subject to Taxation’ in this context meant ‘actually taxed’. The gross-up should therefore compensate the recipient only to the extent that the payment was subject to an enforceable obligation to pay tax.
The court noted that if the parties had wished the gross-up to apply ‘upfront’ under the SPA, before any tax was actually due, this should have been expressed in ‘clear and distinct terms’.
In HMRC v Kickabout Productions Ltd  UKUT 216, the issue was whether Mr Hawksbee, a radio broadcaster, was an employee of Talksport for the purposes of the IR35 legislation.
Whilst the implementation of the last raft of IR35 measures was postponed until April 2021 due to COVID-19, this case is another reminder of the difficulties in establishing whether a contractor is actually an employee.
Kickabout Productions (“KPL”) was a personal service company established by Mr Hawksbee to provide his services as the radio broadcaster of a daily three-hour show for Talksport. The UT had to decide whether the payments made by Talksport to KPL were liable to PAYE and NICs because they fell within IR 35 legislation. This depended on whether a hypothetical contract between Mr Hawksbee and Talksport would have been an employment contract.
On the basis that Talksport was not obliged to provide KPL with any work, the FTT had found that there was no mutuality of obligation so that the hypothetical contract between Mr Hawksbee and Talksport would not have been an employment contract. The UT found however that Talksport had engaged KPL to provide the services of Mr Hawksbee as the presenter of a three-hour radio at set times for a period of two years. This constituted ‘a binding commitment by Talksport to provide at least some work’ so that mutuality of obligations was established.
Given that Talksport did have control over the performance of his work by Mr Hawksbee and that other factors ‘were consistent’ with employment, the UT found that Mr Hawksbee would have been an employee under the hypothetical contract.
Finally, the last case in our selection, J Charman v HMRC  UKUT 253, dealt with two important issues; when is an employment-related share option granted, if exercise is contingent on continued employment; and what is the treatment of shares received on an exchange.
Mr Charman was born in the UK but he had moved to Bermuda, having joined Axis Specialty Ltd (“ASL”). He had been awarded share options over ASL shares in 2001, which were to vest in three equal tranches conditional on his continued employment with the company. As part of a subsequent initial public offering, Mr Charman’s original shares were exchanged for shares in Axis Capital (and his options became options over Axis Capital shares).
In March 2008, when Mr Charman exercised the options, ITEPA 2003 Part 7 only applied to earnings of an individual who was both resident and ordinarily resident in the UK in the relevant year. It was accepted that Mr Charman had ceased to be UK resident in November 2003 and that the options had vested in three equal tranches in October 2002, 2003 and 2004.
The first issue was therefore whether Mr Charman had acquired the securities when the share option had originally been granted in 2001, so that all the shares were taxable, or when each tranche had become exercisable, so that the third tranche escaped UK tax. The UT found that the exercise of the option had been subject to a condition precedent, continued employment, but not the grant itself. It added that the contractual rights created by the 2001 documents had been ‘right(s) to acquire securities’. Mr Charman had acquired the securities, for tax purposes, in 2001.
The second issue was whether he had acquired his interest in the restricted shares ‘as a director or employee’ for the purposes of ITEPA 2003 s 423 (as in force at that time) with the result that they would be subject to income tax under ITEPA 2003 Part 7 Chapter 2 when the contractual restrictions were lifted. Agreeing with the FTT, the UT rejected Mr Charman’s argument that the share for share exchange had changed the source of the income arising to Mr Charman for tax purposes. The holding still arose from his employment, taking into account ‘all the relevant facts’, including the circumstances in which Mr Charman had acquired the original shares.
To discuss any tax issues arising from these cases and how they might impact your clients, contact Winslows.