In the recent case of Cyclops Electronics v HMRC (Cyclops), the First-tier Tribunal (FTT) applied the Supreme Court’s recent judgment in UBS v HMRC (UBS) to defeat a tax arrangement involving restricted securities. The reasoning behind the Cyclops judgment is best understood by comparing it to the UBS case, where UBS decided to award discretionary bonuses to certain employees by paying for redeemable shares in a special purpose offshore company. The shares carried certain restrictions which were intended to enable them to benefit from certain exemptions from income tax. In Cyclops, the employee received loan notes instead of shares but the underlying rationale was the same as in the UBS case: to pay the employee with restricted securities and so secure the exemption.
Ultimately, the Supreme Court held in the UBS case that the restrictions required by the legislation in order to benefit from the exemptions were “limited to provisions having a business or commercial purpose, and not to commercially irrelevant conditions whose only purpose is the obtaining of the exemption”.
In the UBS case, the restriction placed on the shares was a forced sale of the shares by the employee if the FTSE 100 rose by a specified amount during a three-week period. This was held to be completely arbitrary and to have neither a business nor a commercial purpose. It was therefore disregarded by the Supreme Court, meaning the exemption was not available.
In Cyclops, the restriction placed on the loan notes was total forfeiture if the holder died within one year of the note being created. In line with UBS, the FTT held that there was no business or commercial purpose behind the restrictions and so the employee should be taxed as if he had received cash equal to the value of the loan notes.
This was a lead case and there are many related cases which all raise the same issue, so there is a reasonable prospect of it being appealed by the taxpayer.
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