BMBF restated the Ramsay approach in a case the taxpayer won, which left the practical question unanswered: when does purposive construction actually defeat a scheme? UBS is the answer: a condition inserted solely to engage a relief, with no commercial function, does not answer the statutory description however literally the words are met.
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Full name: UBS AG v Commissioners for Her Majesty’s Revenue and Customs; DB Group Services (UK) Ltd v Commissioners for Her Majesty’s Revenue and Customs
Citation: [2016] UKSC 13; [2016] 1 WLR 1005
Court: Supreme Court (Lord Reed giving the judgment)
Judgment: 9 March 2016 (unanimous)
Subject: The Ramsay approach; the restricted securities exemption in Chapter 2 of Part 7 ITEPA 2003
Result: HMRC succeeded. The arrangements did not fall within the exemption.
Why This Case Matters
Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 restated the Ramsay approach as ordinary purposive construction, and it did so in a case the taxpayer won. That left a practical question: if there is no special anti-avoidance doctrine, when does purposive construction actually defeat a scheme?
UBS answers it, and it is the modern authority practitioners should cite when the question is how the technique operates on a relief or exemption rather than on a charge.
The Facts
Two banks wished to pay substantial bonuses to employees. Rather than paying cash, which would have attracted income tax and National Insurance in the ordinary way, they delivered the value in shares.
The shares carried restrictions. That mattered because Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 contains a regime for employment-related securities which are “restricted securities”, under which the charge to tax on acquisition can be reduced or deferred by reference to the effect of the restriction on value.
The restrictions attached to the shares were, however, of a particular kind. They were designed to fall within the statutory language while being, in commercial terms, very unlikely ever to bite, conditions tied to contingencies that had no real prospect of occurring and no connection to the business or to the employees’ performance.
HMRC challenged the arrangements. The taxpayers relied on the fact that, read literally, the conditions of the exemption were satisfied.
The Ratio Decidendi
Lord Reed’s framework
Lord Reed reviewed the whole Ramsay line and restated the exercise in two stages, consistent with BMBF:
- Construe the provision purposively to determine the class of facts Parliament intended it to affect.
- Analyse the facts realistically, which may involve considering the overall effect of a number of elements intended to operate together, and ask whether they answer to the statutory description.
What UBS adds is the application of that framework to an exemption whose conditions were, on their face, met. The answer is not that the court disregards the arrangement, but that the arrangement does not fall within the provision properly understood.
Why the restrictions failed
The purpose of the restricted securities regime is to give relief where a restriction genuinely reduces the value of what the employee receives. A restriction that is commercially meaningless does not do that. Reading the provision as extending to such restrictions would divorce the relief from the reason Parliament created it.
Obiter and Limits
- No general anti-avoidance principle. Lord Reed reaffirmed that there is no special judicial doctrine for avoidance cases. The exercise is construction. That reaffirmation matters because HMRC sometimes deploys UBS as though it created a free-standing power to disregard artificial steps.
- Prescriptive language still wins. The judgment does not disturb the principle that where Parliament has legislated in mechanical, prescriptive terms, purposive construction will confirm the mechanism rather than rewrite it. Schemes have succeeded against such codes and continue to.
- The observations on drafting and on the relationship with the GAAR are commentary. The General Anti-Abuse Rule in ss206–215 FA 2013 sits on top of construction and does not displace it.
- “No business or commercial purpose” is doing the work. The Court did not hold that any degree of tax motivation defeats a relief. A restriction with a real commercial function is not caught merely because its tax effect was also considered.
Where It Sits in the Line
- WT Ramsay Ltd v IRC [1982] AC 300: the origin: a pre-ordained, self-cancelling composite produced no loss.
- Furniss v Dawson [1984] AC 474: extension to linear schemes with an inserted step.
- Craven v White [1989] AC 398: the retrenchment: the steps must genuinely be pre-ordained.
- BMBF v Mawson [2004] UKHL 51: the definitive restatement: no special doctrine, just purposive construction and realistic analysis.
- UBS AG [2016] UKSC 13: the technique applied to a relief, where the conditions were literally met.
- RFC 2012 plc [2017] UKSC 45 and Hurstwood Properties [2021] UKSC 16: the same approach applied to earnings and, outside tax, to business rates.
Practitioner Application
When HMRC relies on UBS
- Make HMRC articulate the statutory purpose. The argument only works if HMRC can say what Parliament intended the condition to catch. An assertion that the arrangement is artificial is not a construction argument.
- Evidence the commercial function of the condition. UBS turns on the restriction having no business or commercial purpose. A condition with a real function (retention, performance, regulatory or governance) takes the arrangement outside the reasoning, and contemporaneous board and remuneration committee papers are the evidence.
- Test the drafting for prescriptiveness. Where the provision operates by reference to precisely defined mechanical events, purposive construction confirms the mechanism.
- Separate construction from behaviour. Losing a construction argument does not make a return inaccurate, let alone deliberately so. Under HMRC v Tooth a deliberate inaccuracy requires an intention to mislead, and a taxpayer who disclosed the arrangement and took a considered view should resist the extended time limits and higher penalty bands separately.
- Check whether the enablers regime is engaged where advisers were involved in designing or marketing the arrangement: see our resource on DOTAS, the GAAR and enabler penalties.
When advising on a structure
Frequently Asked Questions
What did UBS AG decide?
That the restricted securities provisions in Chapter 2 of Part 7 ITEPA 2003 were directed at commercially motivated restrictions which genuinely affected the value of the securities to the employee. A restriction devised solely to bring an arrangement within the exemption, with no business or commercial purpose, does not answer the statutory description, even though the words of the provision are literally satisfied.
Does UBS create a general power to disregard artificial steps?
No, and it says so. Lord Reed reaffirmed that there is no special judicial doctrine for avoidance cases: the exercise is purposive construction of the provision combined with a realistic analysis of the facts. HMRC sometimes deploys the case as though it created a free-standing power to strike down artificiality. It does not.
How does UBS differ from BMBF v Mawson?
They are the two halves of the same technique. In BMBF the taxpayer had genuinely incurred capital expenditure on plant for the purposes of its trade, and a circular flow of funds did not change that, so the provision applied and the taxpayer won. In UBS the employees genuinely received securities, but the restriction relied on to obtain the relief was not the kind of restriction the relief was aimed at, so the provision did not apply and HMRC won.
Does any tax motivation now defeat a relief?
No. The reasoning turns on the condition having no business or commercial purpose. A restriction or condition with a real function (retention, performance, regulatory or governance) is not caught merely because its tax effect was also considered. The evidence that matters is contemporaneous: board and remuneration committee papers recording why the condition was chosen.
If we lose on UBS grounds, do penalties follow?
Not automatically, and it should be resisted separately. Losing a point of statutory construction does not make a return inaccurate in the sense required for a deliberate finding. Under HMRC v Tooth [2021] UKSC 17 a deliberate inaccuracy requires knowledge of the error and an intention that HMRC rely on it. A taxpayer who disclosed the arrangement and took a considered view has a strong argument against both the extended time limits and the higher penalty bands.