Upper Tribunal upholds decision to strike out appeal

[2018] UKUT 0396 (TCC)

Upper Tribunal (Tax and Chancery Chamber)

Mr Justice Harry Carr, Judge Greg Sinfield

Decision released 27 November 2018

Procedure – Application to strike out – Whether appeals have a reasonable prospect of success - Construction of ITEPA 2003, s. 225 - Whether FTT wrong to conclude that, on evidence available, appellants had no reasonable prospect of success – No - Appeal dismissed - Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 8.

The First De Sales Ltd Partnership & Ors v R & C Commrs [2018] BTC 531


The appellant partnership and limited liability partnerships (LLPs) had implemented tax avoidance arrangements under which they each entered into a deed of restrictive undertakings with an employee and a third party. Under each deed, the employee agreed to be bound by certain restrictive undertakings as part of entering into a contract of employment and the appellant made significant payments to the third party in accordance with the deed. The schemes were intended to generate losses that could be utilised by individual partners/LLP members to reduce their liability to UK income tax.

HMRC enquired into the appellants’ tax returns and issued closure notices on the basis that the payments were not deductible as the payments were being made primarily for the purposes of the tax arrangements.

The appellants appealed to the FTT. HMRC applied to the FTT to strike out the appeals under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 8(3)(c) on the ground that there was no reasonable prospect of the appellants’ case or part of it, succeeding.

In First de Sales Ltd Partnership [2018] TC 06365, the FTT struck out the appellants’ appeals, ruling that they had no prospect of success. The FTT noted that payments had been made of several hundred million pounds in relation to employees on modest salaries whose duties were primarily administrative, where any potential loss to the appellants’ businesses could only every have been modest and the restrictive undertakings lasted for only six months after the employment ceased. The FTT found that those factors strongly suggested that the payments were not ‘in respect of’ the restricted undertakings and were instead ‘in respect of’ a tax avoidance arrangement.

The appellants appealed to the UT, submitting that the FTT’s decision was wrong because:

(1)it had erred in its construction of ITEPA 2003, s. 225 (payments for restrictive undertakings); and

(2)it had wrongly concluded that, on the evidence available, the appellants had no reasonable prospect of establishing that the payments were deductible in whole or in part.

The UT noted that the FTT had applied the summary of principles set out by the UT in R & C Commrs v Fairford Group plc (in liquidation) [2014] BVC 529 as to how to assess whether a case has no reasonable prospect of success. While the UT found the summary helpful it preferred to apply the more detailed statement of principles in Easyair Ltd (t/a Openair) v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15], which had subsequently been approved by the Court of Appeal in AC Ward & Sons v Caitlin Five Ltd [2009] EWCA Civ 1098.

On the issue of the construction of ITEPA 2003, s. 225, the UT found that the construction of the phrase ‘in respect of’ as it appeared in a predecessor provision to ITEPA 2003, s. 225 had been considered in Vaughan-Neil v IR Commrs (1979) 54 TC 223. The key propositions to be derived from Vaughan-Neil, which the UT found were equally applicable to the construction of the material part of ITEPA 2003, s. 225, were:

(1)Was the payment made ‘in respect of’ or ‘for’ the giving of the restrictive undertaking?

(2)This required the court to consider the ‘real reason’ for the payment.

(3)This question could not be approached as one purely of construction of the deed. The critical question was: ‘What was the reality?’, and not simply, ‘What did the deed say?’

Given the circumstances, the UT accepted HMRC’s submission that ITEPA 2003, s. 225 was concerned with commercial, or ‘real world’, payments.

Even without the benefit of the Vaughan-Neil judgment, the UT would have reached the same conclusion. The payment must be in respect of, or for, the restrictive undertaking. The use of the phrase ‘in respect of’, required a nexus between the payment and the giving of the undertaking. This required the court to have regard to commercial reality, and the real reason for the payment. In the present case, the UT found that was ‘manifestly no nexus between, and no commercial rationale, for the grossly disproportionate payments purportedly attributed to the restrictive undertakings’.

In the UT’s judgment, the FTT had correctly applied the established Ramsay principle of statutory construction in construing s. 225.

Applying the construction of ITEPA 2003, s. 225 that the UT had reached to the facts of the present appeals, it was clear, in the UT’s judgment, that the appeals had to be dismissed. The payments were not in respect of, or for, the giving of, the restrictive undertakings. Any relationship between the commercial value of the undertakings and the amount of the payments was irrelevant to these schemes, which were entered into solely for the purpose of tax avoidance.

In the UT’s judgment, the FTT was correct to reject the appellants’ case for a partial deduction as there had been no evidence relied upon to quantify any such partial deduction.

The appellants’ evidential case was, in the UT’s view, hopeless, based on the evidence before the FTT. The FTT was right to conclude that it was not enough simply to argue that the case should be allowed to go to trial because something might turn up which would have a bearing on the question of construction.

The appellants’ appeal against the FTT’s decision to strike out the appeals was accordingly dismissed.


The UT noted that the tax avoidance scheme used by the taxpayers in this case was as described in WT Ramsay Ltd v IR Commrs Eilbeck (HMIT) v Rawling (1979) 54 TC 101, as a Houdini taxpayer attempting to escape the manacles of tax. However, the UT commented that the key difference was that Houdini always allowed himself a reasonable prospect of escape from the handcuffs in which he was bound, whereas this scheme did not have any reasonable prospect of enabling taxpayers who invested in the scheme to escape.

For commentary on when the FTT can strike out a party’s case, see the Direct Tax Reporter at ¶189-455.

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