EDI Services Ltd & Ors v Revenue & Customs [2006] UKSPC SPC00539 (26 April 2006)

                                                                                     SPC00539
NATIONAL INSURANCE CONTRIBUTIONS - Secondary Class 1 Contributions payable by employer -  whether transfers of gold Napoleon coins invariably followed by the immediate sale of the coins for cash were to be disregarded as earnings, as constituting “payments in kind” -  how Ramsay principles were to be applied following the decisions in MacNiven v. Westmoreland Investments Ltd and Barclays Finance Limited v. Mawson - whether similar transfers after April 1995 were transfers of assets for which “trading arrangements” existed - Appeal dismissed

THE SPECIAL COMMISSIONERS

EDI SERVICES LIMITED
EDI INTERNATIONAL LIMITED
H&M SERVICES LIMITED
	H&M (UK) LIMITED	Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioners:  STEPHEN OLIVER QC
						                  HOWARD M NOWLAN

Sitting in public in London on 20, 21, 22 and 23 March 2006

David Ewart and Oliver Connolly, counsel, for the Appellants 

The Hon. Launcelot Henderson QC and David Rees, counsel, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

INTRODUCTION

1.   This was a long delayed appeal relating to whether certain transfers of gold Napoleon coins transferred, as bonuses, by EDI Services Limited (“EDI”) in 1994 and by EDI and the other Appellants after April 1995 to one or both of the Appellants’ directors, constituted earnings for the purposes of the Appellants’ liability to pay secondary Class 1 National Insurance Contributions in respect of them.   

2.    Since no significant difference exists between the facts of the cases raised in the four different appeals we will generally refer below to this appeal as if EDI was the only appellant. We should also mention that we were told that a considerable number of other cases, involving quite independent companies, may be affected by this decision. EDI’s appeal has been designated by the Presiding Special Commissioner as the “lead case” in pursuance of Regulation 7A of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.   
3.    The appeal relating to the transfers made in 1994 raised the issue of whether the transfers were to be disregarded as earnings by virtue of being  “payments in kind”, so escaping liability for National Insurance Contributions (“NICs”).
4.     A similar point had arisen  in the case of NMB Holdings Ltd v. Secretary of State for Social Security, 73 TC 85 (“NMB”) where the transfers had been of platinum sponge rather than gold Napoleon coins. In that case the Secretary of State had decided on the basis of an Inquiry by Dr. Nuala Brice that the Ramsay principles applied and that the transactions involving the transfer of the sponge to directors and employees as bonuses, followed by the invariable and virtually immediate sale of the sponge by the recipients to the trader from whom NMB had acquired it were to be regarded as payments of cash and not transfers in kind. Accordingly NMB was liable for secondary NICs. That decision was confirmed on appeal to the High Court by Langley J.   
5.    The first point for us to decide in relation to the 1994 transfers in this case is whether the decisions of the House of Lords in MacNiven (HM Inspector of Taxes) v. Westmoreland Investments Ltd [2003] 1 AC 311, [2001] STC 237, and 73 TC 1, (“MacNiven”) and Barclays Finance Ltd v. Mawson [2005] 1 AC 684 and [2005] STC 1 (“Mawson”) affect the way in which the Ramsay principles, as established by the House of Lords in Ramsay (W.T.) Limited v. I.R.C. [1984] AC 300 and 54 TC 101 (“Ramsay”), should be applied by us, in contrast to the way in which they were applied in the NMB case before those decisions. The second issue for us is whether there were material differences in the facts in this case from those in NMB. It was the Appellants’ contention that notwithstanding that Lord Hoffmann had observed in MacNiven that Langley J’s decision in NMB was undoubtedly right, nevertheless it was asserted by the Appellants that Lord Hoffmann had implied that it was right for the wrong reason and this meant that we should approach the application of the Ramsay principles in a different manner. The Appellants also contended that the facts in this case were materially different from those in NMB which should lead us to reach a different decision. 
6.    Further bonuses were delivered to the directors of all Appellants in 1995 and 1996 after National Insurance law had been amended so as to exclude from the concept of “payments in kind” transfers of assets in respect of which “trading arrangements” existed. Further bonuses had also been delivered in 1995 in the NMB case and the Secretary of State had decided and Langley J. had confirmed that on the facts of that case there were relevant trading arrangements in place so that even if their Ramsay analysis was wrong, in 1995 there would anyway have been liability for secondary NICs in respect of the transfer of the sponge in that case. The point for us in this case was whether the facts in this case differed sufficiently to lead us to the reverse conclusion. 
THE LEGAL POINTS IN OUTLINE
7.   We will summarise the evidence and the facts before referring in detail to the relevant legal provisions and then to the contentions of the parties. In order to make the points in dispute more readily understandable however we will state in outline the legal points in contention.  
8.    Primary and secondary Class 1 NICs are due when employers pay “earnings” to employees. Primary contributions (which cease to be payable once earnings exceed a cap) are payable by the employees though collected from the employer who may deduct them from emoluments paid to the employees. Secondary contributions (which are un-capped) are payable entirely by the employer and are not deductible from emoluments or recoverable from employees in any other way.
9.   Whilst “earnings” are defined extremely broadly, and would include all payments and transfers involved in this case, there are further provisions that state that certain matters are to be disregarded in calculating earnings. One such provision states that “any payment in kind or by way of the provision of board or lodging or of services or other facilities” shall be disregarded. This exclusion is then qualified in that there is a list of specified assets whose transfer is not to be disregarded as a “payment in kind”.      
10.   This case is thus one of the many cases where a scheme has been devised and implemented with a view to enabling companies to save secondary (and in a few cases but not in those before us, primary) NICs by delivering bonuses in such a way that they constitute “payments in kind” whilst not being transfers of the various assets covered by one of the qualifications to the direction to disregard payments in kind. 
THE EVIDENCE AND THE FACTS
11.   Evidence was given before us by Julie McDonald, the Financial Controller of the Appellant companies in 1994 to 1996, by Mr. Robert Davies, the principal director of the Appellant companies, and by Mr. John Temple, founder and principal director of Gold Investments Limited (“GIL”).
12.     Most of the facts were not in dispute. 
13.  The structure of the four companies was that Mr. Davies, and his wife, Julia Davies owned 50% each of the shares in EDI and H&M Services Limited.   Both were the only directors of the two companies. EDI and H&M Services Limited respectively owned a wholly owned subsidiary, EDI (International) Limited and H & M (UK) Limited.  Mr. and Mrs. Davies were also the directors of the former but for some reason that is of no significance to this appeal, only Mr. Davies was a director of the latter subsidiary. 
14.  Mr. Davies was the managing director of the four companies. He had a background in the computer industry, his speciality being marketing rather than technical. His wife worked full time in the business, being primarily responsible for administration.    
15.   Nothing turned on why there was a structure of holding company and subsidiary. Equally nothing turned on the distinction between the two separate groups though we were told that the focus of EDI (International) Limited was the manufacture and supply of mainframe computer software to large companies world-wide. H & M (UK) Limited by contrast was licensed to sell mainframe computer software produced by an independent German company ( H & M GmbH).  
16.   At the material times the various companies were successful.  The turnover of all four was in the region of £1 million and the profit approximately 40 to 50% of that.  Mr. and Mrs. Davies received relatively small basic salaries, and the pattern was for much of the profit to be distributed as bonus by the various companies to Mr. and Mrs. Davies. It was not in dispute that during the period when many companies had sought to avoid liability to NICs in respect of bonuses by delivering bonuses in the form of transfers of gilts the Appellants had delivered bonuses in that form.    
17.    In 1994 Mr. Paul Knights, an accountant for a local accountancy firm, Knights Lowe, which acted as accountants and auditor for all the companies, discussed with Mr. Davies the opportunity of meeting with Mr. Kevin Thorne, a senior tax specialist at Grant Thornton, in order to discuss ways for the companies to minimise their exposure to employer’s NICs. Subsequently both Mr Thorne and Mr. Knights attended a meeting with Mr. Davies at Mr. Davies’ office, when Mr. Thorne suggested a method for mitigating employer’s NICs by the companies purchasing gold coins, and then transferring them to their employees by way of bonus.   
18.    On 27 September 1994 Mr Thorne of Grant Thornton wrote two letters to Mr. Davies. One was a short covering letter confirming that Grant Thornton would charge £3,000 plus VAT for advising on the scheme and asking Mr. Davies to sign a confidentiality commitment. The other, doubtless a standard form letter, described the proposed arrangements. 
19.    The longer letter described how it was believed that if the employing company purchased gold coins that no longer ranked as legal tender (for instance 20F French “Napoleons”) and transferred them to employees prior to indicating to them any monetary entitlement to bonus, then such a bonus, while generally still constituting pensionable earnings, should not attract NIC liability.  The letter confirmed how legal advice had been obtained that the coins were not capable of being sold on an Exchange, so that their character as “payments in kind” for NIC purposes would not be forfeited by falling within one of the carve-outs from the “payment in kind” exemption. It also contained some paragraphs indicating how the Finance Act 1994 had arguably rendered it necessary to account for PAYE tax on transferring the coins because of a new rule concerning the transfer of assets for which trading arrangements existed, that applied for income tax and PAYE purposes as distinct from NIC purposes.  It was suggested that these new rules might not apply to the transfers for PAYE purposes, but to save disputes, potential interest cost and penalties, it was probably better to account for PAYE tax, and provide in the documentation with the employee that the employee would reimburse the company in cash for the 40% income tax. 
20.    The letter proceeded to describe the coins proposed and at this point it will be clearest to amplify the description in the letter, and incorporate some of the other evidence that we were given. 
21.   The required characteristics of the coins were that they should not be legal tender, should not be capable of being traded on a recognized Investment Exchange “an Exchange”, should be located outside the EU so that the purchase of the coins (in the expectation that they would remain outside the EU) would not attract VAT, and they should have a readily ascertainable value. We were told that the value of gold Napoleons closely tracked the value of gold, though the coins usually enjoyed a slight premium on account of their rarity. The premium fluctuated from time to time and was also influenced by the quality of the coins. The price of gold bullion itself was fixed twice daily, and the price quoted in US dollars. Accordingly the value of the Napoleons would depend on the most recent fix of the gold price, the US $/£ sterling exchange rate, and to a minor extent possibly on movements in the premium attaching to the particular coins. 
22.     The Grant Thornton letter went on to explain that clients should recognise that whilst a profit might be made between the sterling price that the company would pay for the Napoleons, and the price that employees might receive if they sold them immediately after receiving a bonus in the form of the transfer of the coins, there was more likely to be a loss.  This was of course because the dealers who sold and were prepared to purchase the coins would take a turn, and possibly charge a commission as well, and generally these dealing costs would exceed any possible upwards movement in value. Thus experience had so far suggested that the result could range from a ½% profit to a 3% loss. 
23.    The Grant Thornton letter then described how Grant Thornton had “agreed procedures” with GIL, an independent bullion dealer, to enable Grant Thornton client companies to acquire the relevant coins. The letter made it clear that GIL would be prepared, on receiving full payment in cash, to transfer the required quantity of coins to an employer company to match the company’s projected bonus payments. The price paid would leave GIL making a modest turn on the transaction. Once the coins had been transferred to employees, the employees would be free to deal with the coins as they wished, but it was indicated that GIL would be ready to purchase them at their then prevailing value. 
24.     Mr. Davies was reluctant for EDI to pay a company such as GIL, which he had not previously heard of, a sum in excess of £400,000 which was the figure intended to be distributed as bonus. Whilst the Grant Thornton letter did not contain the following detail, discussions about credit risk of GIL, and whether EDI’s payment could be made to any other entity would have revealed the following information. 
25.    The owner of the stock of gold coins that were used for the NIC avoidance transactions was in fact Prudential-Bache (Futures) Limited (“Pru-Bache”). The coins themselves were held in parcels of 50 in the Zurich vaults of Credit Suisse, and at all times Credit Suisse thought that it was holding them to the order of Pru-Bache. In other words Credit Suisse was never told of any transient changes of ownership. Pru-Bache itself could not sell coins to a member of the public or anyone other than a dealer, which is why when a Grant Thornton client required a particular quantity of coins for NIC avoidance purposes, GIL, a dealer, would buy the coins off Pru-Bache and immediately sell them, for immediate payment, to the client company.   Following the transfer of the coins to employees and directors, if the employees or directors sought to sell the coins to GIL at the then prevailing price, GIL would have indicated its general readiness to buy them on those terms, and on buying them would immediately sell them back to Pru-Bache.
26.    Whilst  this detail appeared to us to have no bearing on the points in dispute, it was the feature that Pru-Bache was involved in the circling of the coins that enabled Mr. Davies to negotiate a slight variation to the normal arrangements, so enabling EDI to make its  payment on the purchase of the coins to Pru-Bache, paying only the commission to GIL. Both parties to the appeal accepted that the ownership of the coins nevertheless passed round the chain indicated in the previous paragraph.    Insofar as GIL made a further element of profit by way of a dealing turn on top of its commission, Pru-Bache would account for this to GIL.  
27.    The next passages of the Grant Thornton letter to which we should refer are the critical passages that summarised the procedure on the implementation of schemes.   The letter read as follows:-
“The procedure takes a minimum of 4 working days as follows:
On day 1 approximate sums of money are sent by the company (the employer company that is) by CHAPS to cover the purchase of the coins and GIL’s charges. Subsequently on day 1 an order is placed on the company’s behalf with GIL for specified quantities of allocated gold coins held in Switzerland, directly by the company. The company will be posted a purchase confirmation. 
On day 2 the company votes bonus(es) in the form of specific coins.  GIL will notify early on day 2 the actual type of coin obtained and other relevant details. After the directors and shareholders meetings and execution of the Deeds of Transfer the company informs GIL by fax (and then post) of the change in ownership and requests GIL to transfer the gold coins from the company’s account to that of the specified individuals. The individuals are then free to deal with the coins as they wish. 
On day 4, if the recipients have given instructions by 4.30pm on day 2 for the sale of their gold coins, the sale proceeds will be remitted to their personal bank account through the CHAPS system by GIL. GIL will deduct their bank’s CHAPS fee of £18 + VAT from the remittance”.
28.   The final passage of the Grant Thornton letter to which we should refer is the final paragraph which indicates that if the transactions “are to complete this week” some of the steps must be taken “today”. Needless to say therefore, the Grant Thornton letter provided standard form documentation which only needed to be typed out on appropriate paper. That documentation included drafts of all the required board minutes and shareholder resolutions, and letters to be despatched, including two that we will quote below, being the letter informing directors that the companies had resolved to deliver bonuses to them in the form of transfers of gold coins, and that enabling the recipients of bonuses to instruct GIL to purchase, or arrange a purchase of, the coins held by the recipients of bonus. 
29.    Clearly Mr. Davies decided immediately that EDI only, in 1994, would implement the arrangements, because various steps were implemented as follows, the first on the day on which the Grant Thornton letter had been faxed to Mr. Davies. 
On 27 September 1994 EDI resolved to purchase the coins and purchased them.
On 28 September EDI voted the bonuses to Mr. and Mrs. Davies. We will refer below to the terms of the letter that informed the recipient director of the voting of the bonus in the form of the transfer of the coins. 
On 29 September the bonuses were offered and accepted; the coins were transferred; and the request was sent by the directors to GIL to purchase the coins.
On 3 October, GIL confirmed the sale. 
30.     It is unnecessary to quote the terms of the various standard form documents that were used to implement the first of the steps above. We will however give the full text of the letter by which EDI notified the directors of the award of bonuses. There were of course two letters, one signed by Mr. Davies on behalf of EDI awarding his wife a bonus, and an identical one signed by Mrs. Davies to her husband.  Mr. Davies’s letter to his wife read as follows:-

                                                                                          “ 29 September 1994
“Dear Julia,
BONUSES FOR THE YEARS ENDED 31.3.94. AND 31.3.95
The company has decided to award you the following bonuses in French 20F gold pieces in recognition of your contribution the company’s activities:-
31.3.94  1750 French 20F Gold pieces 1852-1915, package numbers 1144 to 1178 inclusive
31.3.95  2500 French 20F Gold pieces 1852-1915, package numbers 1229 to1278 inclusive
The actual coins awarded to you are listed in the attached Deeds of Transfer and are physically located in Switzerland. They are yours to keep or sell at your discretion.
Would you please confirm acceptance of the bonus by signing and returning to us the enclosed letter. We will then jointly execute the attached Deeds. Once this has been done we shall immediately notify our supplier, Gold Investments Limited, of the change of legal ownership of these coins. 
You will then be free to deal with your coins as you see fit. The alternatives available to you include:-
1.  Retention of the coins (you will need to check storage and insurance charges with our dealer, Gold Investments Limited, but we believe that these are in the region of 2% per annum).
2.  Delivery of the coins (this is likely to give rise to a VAT charge and/or Swiss sales taxes).
3.  You may obtain a price from any coin dealer, and sell as you see fit.
4.  Transfer the coins to the custody of other brokers/bankers followed by any of the above options. 
The market value of the coins is largely related to their gold content. You should remember that gold is a volatile investment and the price can go down as well as up. 
We believe that we are required to operate PAYE in respect of this award and we shall therefore require you to reimburse the PAYE to us. This should be done as soon as possible and in any event within seven days.
Yours sincerely,
Robert Davies, Director.”
31.   Before commenting on the content of that letter and summarising other evidence, we will now quote the short letter that each recipient of bonus wrote to GIL on the same day, 29 September:-
“Dear Mr. Temple,
I have been informed by EDI Services Limited that I have been awarded 4250 French 20F gold pieces by way of a bonus.  I understand that the company has already notified you of this and that you will have adjusted your records accordingly. I have decided that I wish to sell all my coins (package numbers 1144 to 1178 inclusive, and package numbers 1229 to 1278 inclusive) and shall be glad if you [will] please deal with this immediately on my behalf.   The proceeds of the sale should be remitted to my bank as follows:
[Bank details]
Yours sincerely,  Julia Davies.”
32.    We will now summarise the remainder of the evidence, some of which was in dispute, and will then make some observations on the two letters just quoted.  
33.    It was admitted at all times that these transactions were entirely designed to avoid employers’ secondary NICs. 
34.     The delivery of bonuses by the transfer of gold coins was effected on a number of occasions by the Appellant companies. In September 1994 bonuses were delivered to both directors by EDI alone. In November 1995 and February 1996 were delivered by all four Appellant companies.  In November 1996 bonuses were delivered by three of the companies, but not by EDI International Limited. Save for the irrelevant difference that Mr. Davies sought to reduce the role, and fees, of Grant Thornton by taking virtually identical documentation from GIL itself on the later occasions, the only other change was that it was apparently thought advisable on later occasions for there to be a one day gap between receipt of bonuses and the despatch of instructions to GIL requesting GIL to acquire or arrange the sale of the coins.  
35.   The longest interval between the coins being transferred to the directors and the directors requesting GIL to buy them or arrange a sale was 4 days (in February 1996 and November 1996). Both of those periods covered a weekend. In September 1994 the decision to sell was notified to GIL at 12.10pm on the same day as the transfer to the directors and in November 1995 the interval was one day. 
36.   Although the letter notifying recipients of bonuses made no reference to the fact that GIL was itself ready to purchase coins delivered as bonus, and indeed it referred to the possibility of the recipient selling the coins through any dealer, it is clear that the recipients always knew that GIL had indicated its willingness to buy the coins off recipients. 

37.    Julie McDonald indicated in her evidence that on the various occasions when one or more of the companies was to acquire coins she was either asked by Mr. Davies to telephone other coin and gold dealers to ascertain prices, or on some occasions she might have done this of her own initiative. She referred to ringing “three, four or five dealers”.  We were not told the outcome of these various enquiries and written records of them had been destroyed when the companies had moved premises, but we can infer that the enquiries never produced more favourable terms of sale than those available on selling to GIL, firstly from the fact that on every occasion coins were sold back to GIL and not to any different dealer, and secondly from the information summarised in the following paragraph. Indeed on the basis of the information in the following two paragraphs we conclude, without remotely doubting that Julie McDonald made the various enquiries that she referred to, that, whether she or Mr. Davies appreciated this at the time, she was either undertaking an exercise to detract from the impression that the coins would only ever be sold back to GIL, or she was wasting her time. She might have established, to her and Mr. Davies’ satisfaction that if GIL had failed for some reason to buy back the coins there would have been other ways of selling them, but that seems to us to be the only practical thing that would have been deduced from the various phone enquiries, window dressing apart. 
38.    At one point when the evidence was being given we were under the mistaken impression, largely derived from the remarks made by Julie McDonald, that the gold Napoleons held in Switzerland could have been sold to any gold or bullion dealer.    Mr. Temple’s evidence indicated however that there was a distinction to be drawn in that most dealers had withdrawn from the market in gold coins held outside the EU and were only dealing in coins already held in the UK. During the course of Mr. Temple’s evidence it appeared at one time that the reality might have been that there were virtually no dealers available to purchase the coins other than GIL in that Mr. Temple said that there was only one bank, other than GIL, that would have been ready to acquire the coins. Subsequently Mr. Temple said that Spinks or Baird would have quoted a price for them. We did not explore what that price might have been however, but we did understand that either of those dealers would either have had to budget for paying a tax or duty on importation if they were to bring the coins on shore, or arrange for the coins to be held through a foreign depository. 
39.   Whilst other dealers might have been prepared to acquire the coins, we nevertheless find that if recipients of the coins wished to sell the coins immediately, there was no realistic alternative to the sale of the coins back to GIL. The finest margins had been negotiated with GIL, and at least in relation to the one sale and purchase where the margins were described to us, most of the margin was taken on the original sale to the Appellant companies, and only a very small margin indeed on the buy back. And on at least one occasion, Mr. Davies managed in advance of implementing any of the steps to reduce the overall turn and commission proposed by GIL. We infer that this meant that other dealers, wishing to take more ordinary margins on dealing, and dealing without a known purchaser, would have been bound to quote less attractive prices. Perhaps more significantly still, GIL knew the full circumstances of the transactions and without enquiries would remit the funds immediately to directors selling their coins. Any other dealer would have needed to make a number of enquiries before completing a transaction at all. After all, the custodian of the coins, Credit Suisse, would only have been able to confirm that the coins were held so far as it was concerned by Pru-Bache. Thus confirmations would doubtless have been required that the purported sellers of coins had acquired them from EDI, and that EDI had bought them from GIL, and GIL from Pru-Bache. We were told that these enquiries might be completed quite quickly or might take a week or more. Beyond that unless the independent purchaser ascertained from those enquiries that it had a ready purchaser for the coins in Pru-Bache, an independent dealer would doubtless offer a materially lower price if it was going to have to hold the coins for a period or seek other buyers in the market. 
40.     In view of the information given to us and recorded in paragraphs 38 and 39, we conclude that the indication in the letter addressed to directors when awarded bonuses that they could be sold through any dealer amounted to window dressing.   We also conclude, as mentioned in paragraph 37 above, that enquiries made with other dealers were pointless, and were thus made either to improve the appearance of the transactions, or were made in ignorance.
41.     We turn now to the different questions of whether there was any reality to the other suggestions in the letter informing directors of their award of bonuses that they might keep their coins either by bringing them on-shore, or by continuing to hold them through Credit Suisse or some other Swiss or non EU depository. 
42.     If coins were to be brought to the UK, the letter informed recipients that that might involve liability to VAT and/or Swiss transfer taxes. No mention was made of the duty on importation which was also a potential feature of bringing the platinum sponge in the NMB case on shore. We ourselves have no idea of the total costs of bringing the coins on shore, and no idea how the total price would compare with that of purchasing gold already in the UK. More significantly we infer that the recipients of the bonuses in this case had no better idea of the answers to these questions either, and certainly the letter did nothing beyond mentioning that importing the coins involved various costs which almost certainly rendered this course a non-option. 
43.     The other possibility canvassed by the bonus letter was that the coins could be held through an off shore custodian. The letter indicated that this would involve fees of approximately 2% a year. Again we do not know whether there are equivalent costs in depositing gold for safe keeping in the UK, but we doubt whether any recipients had any better information about this, or indeed knew the full implications of having the gold held indefinitely by Credit Suisse.
44.     In his evidence Mr. Davies indicated that he gave serious thought to holding his coins rather than selling them back to GIL.  He indicated that he had read an article on a flight to Belgium that indicated that gold might be a good investment. It was also, he said, part of his motivation in asking Julie McDonald to ascertain the price of gold just before embarking on the whole exercise that he should be better informed about movements in the gold price. He indicated to us that he seriously considered the possibility of retaining the gold on the September 1994 occasion when he was first awarded gold coins, but he decided to sell to GIL when the value quoted for his coins fell by £2000 in the period between their being acquired by EDI and being transferred to him.  He said that as a businessman that sort of loss was unacceptable and he therefore resolved to sell the coins. 
45.     It was not clear, nor do we think particularly relevant, whether the loss of £2000 just mentioned was in part dealing costs. It rather appeared that some or most of it was. That however is secondary to the far more obvious point that no-one, particularly an astute businessman, can possibly judge the trend in gold prices by looking at the gold fixes over a two day period. We were shown tables indicating the twice daily prices fixed around the dates when the Appellants delivered bonuses in the form of gold Napoleons and these tables did nothing other than illustrate what was quite obvious anyway, namely that the prices moved marginally up and down daily, and over a period of a few weeks remained fairly stable. Indeed on one of the later occasions when bonus awards in gold coins were delivered to Mr. Davies, the price actually went up in the very short period when the coins belonged either to EDI or Mr. Davies personally. So on that occasion he can hardly have been panicked into selling by unsustainable losses. 
46.     Mr. Davies impressed us generally as an honest witness but we found his two suggestions that he seriously contemplated holding the gold indefinitely and that he was then panicked into selling by an unsustainable price fall to be an example of self-delusion. We are very ready to believe that Mr. Davies could have disciplined himself into addressing the various options open to him sensibly and formally in the interests of playing his part in the scheme properly, rather as directors passing board minutes in other types of tax scheme, but Mr. Davies failed to convince us as to the two points mentioned at the beginning of this paragraph. Indeed we credit Mr. Davies with the experience of an astute businessman and can only suppose that he would have regarded the one day loss of less than a half of one per cent (much of it presumably derived from dealing costs) to be a completely irrelevant indicator of the wisdom of holding gold indefinitely, or indeed for any period. 
47.     We were led to understand by Mr. Temple that his company, GIL, had dealt with schemes for about 500 client companies. It was not material to clarify whether all these clients were clients of or introduced by Grant Thornton. Mr. Temple certainly confirmed that his company dealt with schemes introduced by other very major firms of accountants. On the basis that one client, EDI, effected the schemes on four different occasions, and that doubtless many more employees received bonuses than the two directors alone in the EDI cases where the schemes were implemented by larger companies, we infer that coins were held transiently by several thousands of directors and employees during the period of a few years when gold French and Swiss coins were used for NIC avoidance purposes. With this in mind we asked Mr. Temple whether on the majority of occasions the coins were sold back to GIL virtually immediately, rather as he contemplated. He confirmed that this was so. When we asked whether the vast majority were sold back, he confirmed this as well. When we finally asked whether there was one single instance when the coins had not been bought back, virtually immediately, as envisaged, he confirmed that there had been no occasion when the coins had not been bought back. 
48.    In the light of all the evidence, and in particular the obvious inference to be drawn from the facts recorded in the previous paragraph, we have no hesitation in concluding that the paragraphs of the letter in which recipients of bonus were notified of the various ostensible choices open to them on receiving their gold Napoleon coins  were mere window dressing. In reality there was no alternative to the immediate sale of the coins back to GIL. Seemingly several thousand directors and employees agreed with this analysis, and seemingly not a single recipient of bonus awards came to any different conclusion within the very short periods of time for which the coins were held. 
THE RELEVANT LEGAL PROVISIONS
49.    Save where we refer to replacement provisions in our actual decision, all the following references are of course to the law and Regulations, as they were in force in 1994, and where appropriate, 1995.
50.     Under s.1 Social Security Contributions and Benefits Act 1992, primary Class 1 contributions were payable by employed earners, and secondary Class 1 contributions by employers and other persons paying earnings.
51.   S.3(1) of the Act defined “earnings” to include “any remuneration or profit derived from an employment”.  As we said in paragraph 9 above, this definition was wide enough to apply to the bonuses delivered in the present case.  S.3(2) deals with calculation of earnings and we need not quote it. 
52.       S.3(3) then provided that;
“Regulations made for the purposes of subsection (2) above may prescribe that payments of a particular class or description made or falling to be made to or by a person shall, to such extent as may be prescribed, be disregarded or, as the case may be, be deducted from the amount of that person’s earnings”.     
53.    Before turning to the Regulations we quote paragraph 3 of Schedule 1 to the Act which deals with the “Method of paying Class 1 contributions”.   It provided that:-
“3  (1).   Where earnings are paid to an employed earner and in respect of that payment liability arises for primary and secondary Class 1 contributions, the secondary contributor [essentially “the employer”] shall (except in prescribed circumstances) as well as being liable for his own secondary contribution, be liable in the first instance to pay also the earner’s primary contribution, on behalf of and to the exclusion of the earner; and for the purposes of this Act and the Administration Act contributions paid by the secondary contributor on behalf of the earner shall be taken to be contributions paid by the earner. 
(2)   Notwithstanding any contract to the contrary, no secondary contributor shall be entitled-
(a) to make, from earnings paid by him, any deduction in respect of his own or any other person’s secondary Class 1 contributions, or
(b) otherwise to recover such contributions from any earner to whom he pays earnings. 
(3)   A secondary contributor shall be entitled, subject to and in accordance with regulations to recover from an earner the amount of any primary Class 1 contribution paid or to be paid by him on behalf of the earner; and notwithstanding anything in any enactment, regulations under this sub-paragraph shall provide for recovery to be made by deduction from the earner’s earnings, and for it not to be made in any other way.”
54.  Regulation 19 of the Social Security (Contributions) Regulations 1979 (SI 1979/591) provided for certain payments to be excluded from an employed earner’s earnings, and is the Regulation contemplated by the sub-section that we quoted in paragraph 52 above.   It provides, insofar as is relevant to this appeal that:-
“19  (1)   For the purposes of earnings-related contributions, there shall be excluded from the computation of a person’s earnings in respect of any employed earner’s employment any payment insofar as it is-
……………….
(d) subject to paragraph (5) of this regulation, any payment in kind or by way of the provision of board or lodging or of services or other facilities;
……………….
(5)  Payments under paragraph (1) (d) of this regulation shall not include any payment by way of the conferment of any beneficial interest in-
(a) any asset falling within Schedule 1A to these Regulations”
55.    Schedule 1A to the Regulations contained a list of the assets just referred to, in other words assets whose transfer was to be taken into account and not disregarded in calculating earnings. The list included numerous readily marketable assets and some that were not so readily marketable. For instance it included “shares and stock in the share capital of a company”, “debentures”, “loan stocks”, “warrants” etc and many other assets none of which are immediately relevant to this appeal. 
56.    It was common ground that in September 1994 none of the assets then listed in Schedule 1A applied to the gold Napoleon coins transferred to Mr. and Mrs. Davies.  As we have already noted however, the Finance Act 1994 had introduced a provision for the purposes of income tax and PAYE that applied PAYE on the transfer of any asset for which trading arrangements existed. That provision was absent from the NIC Regulations in September 1994 but a new paragraph 9C had been inserted into Schedule 1A by the time the first bonuses were delivered in 1995. This provided that a further asset to be treated as one whose transfer was to be taken into account as earnings, rather than one to be disregarded as a “payment in kind”, was:-
“9C.    Any other asset, including any voucher, for which trading arrangements exist and any voucher capable of being exchanged for such an asset”.
“Trading arrangements” were then defined by paragraph 19, inserted into the same Schedule, to have;-
“the meaning assigned to it in section 203K(2)(a) of the Income and Corporation Taxes Act 1988 (“ICTA 1988”),
this of course being the provision introduced for PAYE purposes in the previous year.    The relevant section of ICTA 1988 defined “trading arrangements” for “an asset” as:-
“arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset”.
Finally section 203K(3) provided that:-
“(3)   For the purposes of subsection (2) above-
………….
(b) an amount is similar to an expense incurred if it is greater than, equal to or not substantially less than that expense”.
57.    We should now refer to an earlier regulation, namely Regulation 18. This dealt with valuation and in particular it contained various fairly obvious rules for valuing those assets itemised by the various paragraphs of Schedule 1A whose transfer was to be taken into account, as earnings. No paragraph in Regulation 18 is in point in relation to the 1994 transfers of coins, but by 1995 a matching provision had been inserted to deal with the 9C addition made to Schedule 1A.  In 1995 paragraph 18(9) provided as follows:-
“(9)   The amount of earnings which is comprised in any payment by way of the conferment of a beneficial interest in any asset, including any voucher, falling within paragraph 9C of Schedule 1A to these Regulations and which falls to be taken into account in the computation of a person’s earnings shall, for the purpose of earnings-related contributions, be calculated or estimated by reference to the amount obtainable under the trading arrangements in question as if that amount were obtained on the day on which the beneficial interest was conferred.”
THE CONTENTIONS ON BEHALF OF THE APPELLANTS
58.    The following contentions were advanced on behalf of the Appellants.  We deal first with the contentions that applied to all transfers, and we ignore initially the points relating to “trading arrangements” that are only of relevance to the transfers made in and after 1995.
59.    We have already referred in paragraphs 4 and 5 above to the NMB case and to the feature that on substantially similar facts to those in this case, the Secretary of State had concluded in reliance of the inquiry by Dr. Nuala Brice, and Langley J. had concluded, that the correct application of the Ramsay principle was to collapse together the various steps and to treat the directors and employees as having received their bonuses in cash. We have also referred to the fact that in paragraph 68 of MacNiven, Lord Hoffmann had made a significant reference to that decision. To quote the reference in full, he said the following, the opening sentence referring of course to the funding of the interest payment in the Macniven case itself:-
“What the Crown finds objectionable is the circularity of the cash flow combined with the fact that the transaction took place entirely for tax purposes. And I accept that for the purposes of some concepts used in tax legislation, these two features would stamp the transaction as something different from that contemplated by the legislature. For example, I have no doubt that Langley J was right when he recently decided in NMB Holdings Ltd v. Secretary of State for Social Security (unreported) 14 July 2000 that a payment of bonuses to directors in the form of platinum sponge held in a bank, accompanied by arrangements under which they could immediately sell it for cash to the bank, was not a “payment in kind” which fell to be disregarded for the purpose of National Insurance Contribution. In commercial terms the directors were paid in money. It is obvious that such a transaction was not what the Social Security (Contributions) Regulations 1979 (SI 1979/591) contemplated as a payment in kind. But there can be equally little doubt that the bonuses were “paid” and, in the absence of some contrary context, I can see no reason not to treat them as paid when the directors were credited with platinum sponge and the employer’s obligation to pay them was discharged.”
60.    The contentions that the Appellants advanced in relation to the application of the Ramsay principle were as follows. They first contended that the principle had been significantly modified and curtailed by the decisions of the House of Lords in the MacNiven and Mawson cases, particularly the former.  In its earliest form it was not credible to regard the Ramsay principle as a mere aid to interpretation. Where the conditions for the application of the Ramsay and Furniss principles were satisfied, the rule was effectively a tax avoidance rule that enabled transactions to be modified for the purposes of ascertaining their tax consequences. In MacNiven and Mawson, it was observed that such an approach was constitutionally wrong, and that the principle should be re-cast as an aid to interpretation. As re-cast, the principle means that tax legislation is certainly not to be applied in a purely literal manner. Statutory provisions are to be interpreted purposively, and applied to the facts found on a realistic legal analysis.
61.    Proceeding from this proposition, the Appellants referred to the passage just quoted from Lord Hoffmann’s speech in MacNiven, and pointed to the last sentence in particular and said that it was clear that Lord Hoffmann’s approach was not to collapse the steps together and treat the directors as having received cash. Rather his approach was to look to a purposive construction of the expression “payment in kind” and address whether what occurred in NMB constituted what Parliament had in mind in referring to a “payment in kind”. Clearly it was not. However because the NMB case itself had been decided by collapsing the steps and just treating the directors as having received cash, it followed that in Lord Hoffmann’s view, and on the Appellants’ contention, the decisions in NMB were right for the wrong reason. We should therefore approach this case by accepting that the bonuses were delivered in gold coins, not in cash, and the question for us was whether we should then hold that the payment arrangements in this case were those that Parliament contemplated, on a purposive basis, as “payments in kind”.    
62.    The last step in the argument was that the critical distinction between what occurred in the NMB case and what occurred in this case was that in this case there were no arrangements under which the transfer of the gold coins was accompanied, to quote the critical words of Lord Hoffmann, “by arrangements under which they [the directors] could immediately sell [them] for cash to [GIL].” Considerable stress was then placed on the alleged greater flexibility in this case in that gold could more readily be retained as an investment, and that Mr. Davies both considered retaining the coins, and he arranged for Julie McDonald to make enquiries with other dealers for the purpose of selling the gold, and possibly watching the price movement. 
63.     An alternative contention advanced by the Appellants, again proceeding from the proposition that we should not treat the directors as having simply received cash, was that in interpreting the expression “payment in kind” in a purposive manner we should conclude that the reason for excluding “payments in kind” from “earnings” in respect of which NICs were payable was that NICs could not be deducted at source from transfers of gold, as distinct from cash payments. This was not directly relevant in relation to secondary NICs because they were the liability of the employer alone and could not be deducted from earnings or recovered in any other way from the earner. However it was perfectly possible that coins could be delivered as bonuses to employees whose level of salary left the delivery of the coins at the level at which  primary NICs were still due. In this situation, deduction from earnings was then a relevant consideration, and it was because any transfer of gold could theoretically involve primary NIC liability that we should conclude that this was Parliament’s purpose in excluding “payments in kind” from liability to NICs. Whether we should then conclude that Lord Hoffmann glanced too cursorily at the NMB decision and failed to note Parliament’s proper purpose, or whether the distinction would again lie in alleged differences in the status of “arrangements” and something that fell short of “arrangements” would be for us to decide. 
64.   A further contention on behalf of the Appellants was that the focus of Regulation 19(1)(d) was on the nature of the payment made by the employer, in other words the transfer of gold coins, so that as in the Mawson case the feature that the directors chose to sell the gold should be regarded as “a happenstance”, in just the way that the guarantee, funding and security arrangements in Mawson (see paragraph 42) “were happenstances”. The feature that had led Lord Hoffmann to the contrary conclusion when making his comments on NMB in MacNiven was the critical existence of the sale arrangements which were absent in this case. 
65.   The Appellants advanced further arguments in relation to all the transfers in and after 1995, when the “trading arrangements” provisions had been introduced.  Here it was contended that in order for there to be “trading arrangements” the arrangements must be for the purpose of enabling the employee to obtain an amount similar to the expense incurred by the employer in providing the asset. The amount obtained by Mr. and Mrs. Davies for their gold coins was said to be the arm’s length price which GIL would have paid anyone for the same coins. There were thus said to be no arrangements as existed in NMB.
THE CONTENTIONS ON BEHALF OF THE RESPONDENTS
66.    The first contention on behalf of the Respondents was that on a true construction of Regulation 19(1)(d), a payment is only a “payment in kind” if it is the intention of the parties that the subject matter of the payment will be retained and enjoyed in specie by the recipient. The common intention of the parties was that Mr. and Mrs. Davies would sell their coins straight back to GIL in a very short time frame and receive the cash proceeds into their personal bank accounts. On these facts there was thus not a payment in kind. This argument did not depend on establishing that the payment was to be characterised as a payment in money. It was enough that it was not a payment in kind within the meaning, that is the purposive meaning, of the Regulation. Moreover the phrase should be read in the context of the full terms of Regulation 19(1)(d), with its reference also to “the provision of board or lodging or of services or other facilities”, rather than just in isolation. 
67.    Alternatively on a realistic view of the facts, and applying the Ramsay principle, as explained in Mawson, the payments to each of the recipients should be characterised as payments of money. The various steps were steps in a composite transaction. The scheme was devised by Grant Thornton as a composite whole and the sole objective of the scheme was to enable the companies to pay bonuses in money while avoiding the liability to Class 1 NICs that this would normally entail. On each occasion when the scheme was implemented there was no practical likelihood that the steps would not take place within the space of a few days. Accordingly the steps involving the purchase, transfer and resale of the gold coins were inserted into the composite transaction with no commercial purpose and should therefore be disregarded.
68.   As regards the points material to “trading arrangements” relevant to all the transfers other than those in September 1994, the Respondents contended that there were clearly trading arrangements. The Grant Thornton letter made it clear from the start that GIL would be prepared to purchase the coins from recipients, and the draft documentation contained the draft of a letter instructing GIL to repurchase the coins. That arrangements for repurchase of the coins by GIL were in place was said to be an irresistible inference to be drawn from GIL’s involvement in the scheme, and their willingness to repurchase the coins on each occasion without question and without delay. All that the recipients of bonus had to do was to sign the standard form letter of instructions, that had been drafted either by Grant Thornton or on later occasions by GIL itself, and fax it to GIL. 
69.   It was then contended that the arrangements satisfied all of the requirements to constitute “trading arrangements”. Their purpose was plainly to enable Mr. and Mrs. Davies to obtain an amount similar to (i.e. not significantly less than) the expense incurred by the company in providing them with the coins. Since no commission was charged by GIL on the re-purchase of coins and the finest margin was taken, and the sale was always contemplated to be virtually immediate, the arrangements were designed to ensure that there was the smallest possible disparity between the employer’s cost and the proceeds received by directors. Comparing the purchase prices per coin and the repurchase prices on the four occasions on which schemes were implemented the prices were as follows:-
Sept 94               £48.80 (purchase)   £48.57 (re purchase)
Nov 95                £46.96                    £46.94
Feb 96                 £50.44                    £49.97
Nov 96                £42.35  (approx)     £42.09
It was pointed out that the largest difference was 47p, in February 1996, but even that amounted to less than 1% of the purchase price. 
70.     It was accordingly contended for these reasons and for those already given in the NMB case that there were “trading arrangements” in the present cases.
OUR DECISION
Our conclusion on the facts.
71.   We will first give our findings of fact on the critical issue of whether there were arrangements with GIL, in just the way that there were arrangements with the two banks for the sale of the platinum sponge in the NMB case. Our conclusions on the facts will not altogether govern the conclusions that we reach on the later points but they are key elements in each of the later questions. 
72.   As will have been evident from the conclusions that we summarised in paragraph 48 above, we now record that we have no doubt but that in every sense there were arrangements for all of the transactions to be implemented in the way that was envisaged, and for GIL to be a party to those arrangements, and for GIL to re-purchase coins that had initially been sold by it to the employer companies. 
73.   The initial letter from Grant Thornton made it clear that all the steps were seen as a composite transaction. The draft documentation paved the way for every step to be implemented in a pre-ordained sequence, and there was never a material departure from the envisaged procedure.   

74   It would be wrong for this appeal to be influenced by facts in other related appeals, and by the supposition that literally thousands of directors and employees have received bonuses in the form of gold coins made available through the Pru-Bache/GIL chain without one single recipient having ever done anything other than sell the coins back to GIL. However we still consider that if there had been exceptions to that pattern then the evidence given by Mr. Davies and Julie McDonald on the two critical issues of flexibility and choice might have been more compelling. As it is we found the evidence that there was ever a serious possibility of the coins being sold to dealers other than GIL and the evidence that there was a real possibility of the coins being retained absolutely unconvincing. We do not doubt that the various participants were mindful that they had theoretical choices to make and that they might play their parts in the scheme more convincingly if they forced themselves to address the possibilities that were theoretically open to them, but we cannot believe that there was ever in reality a choice open to the recipients. We have already summarised why we consider the other options to have been non-options, and really to have been presented as mere window-dressing. Indeed we think that there is some considerable significance to the fact that the letter (variously drafted by Grant Thornton in conjunction with GIL, or by GIL on its own) which informed the directors of the decision to vote them bonuses failed to make any mention of the one course (selling to GIL) that was immediately adopted, but instead addressed three to four alternatives open to recipients, all of which were in some respect unsatisfactory, and not one of which was ever adopted. The reality is that this letter was trying to deflect attention from the intended next step (for which the draft instruction letter and fax had already been drafted) and focus attention instead on the window-dressing. In our view it failed. 
75.   We accept that gold bullion is held as an investment, and at times can be a very attractive investment. By contrast the platinum sponge featured in the NMB case is much  less readily held as an investment by individuals. Indeed of the three things that we know about platinum sponge, two of them suggest that it is unsuitable to be so held, the third simply being that whatever it is, it is not “sponge”. The two significant factors are that platinum sponge is unstable, and needs to be kept in a controlled environment, and the main demand for it comes from industry for various commercial applications. Whilst we accept that these points mean that it is much more likely that gold could plausibly be held as an investment by individuals, and is indeed doubtless regularly so held by wealthy individuals, nevertheless on the facts of this case we are wholly unconvinced that anyone ever intended to hold the gold Napoleon coins as an investment. This means that so far as this case is concerned, the Appellants are in no better position than if the employer had purchased, and transferred, platinum sponge.  We will deal below with the issue of whose intentions we consider to be of any significance. 
The three possible approaches to applying the law to the facts of this case.
76.    The approach advocated by the Appellants is that, interpreted purposively, there was a “payment in kind”, because that exemption is intended to accommodate the difficulties or impossibility of deducting NICs at source from anything but cash payments. The companies’ transfers themselves were not of cash, so that NICs could not have been deducted at source. Proceeding from this, and applying the Ramsay principle after MacNiven and Mawson, there is no occasion to collapse the steps together and treat the bonuses as having been provided in cash. 
77.   There are two different approaches that we could follow on the Respondents’ contentions. One is to address the facts and describe them, for instance, as “a mechanism designed to deliver cash”, and then to decide whether on a purposive construction of the phrase “payment in kind” a mechanism designed to deliver cash is or is not what Parliament had in mind when exempting “payments in kind” from liability to NICs. 
78.    The other approach is the more traditional Ramsay approach that was adopted in the NMB case which was to collapse the steps and conclude on the facts that the employer companies should be treated as having delivered cash bonuses. This then means that there is no particular point of interpretation to be addressed on the meaning of “payments in kind” because cash payments are clearly not payments in kind. Following MacNiven and Mawson, we should only collapse the steps and disregard the intermediate steps if the statute contains some indication that the facts should be analysed in a rather broad manner.  
The differences between the Respondents’ two approaches.
79.    There is a common thread to the two approaches.   It is naturally the existence of the arrangements, and the near inevitability that the gold would always be sold back to GIL that enables one to describe the steps as a “mechanism to deliver cash” under the first approach and it is those same facts that could justify disregarding the intermediate steps under the second approach. We immediately accept that if a significant number of recipients of bonuses retained their gold coins, and only the majority sold, then it would be untenable to describe the steps as a “mechanism to deliver cash” and the case for collapsing the steps and disregarding the purchase and sale of gold on the second approach would also drop away. 
80.   There are however differences between the two approaches, apart from the different legal tests that we should apply to each. One point is that if one single recipient of gold, out of thousands, confounded the expectations of Grant Thornton, GIL and the employer company and retained his coins, then on the first approach it might very well be appropriate to say that there had still been a mechanism designed to deliver cash, and on the first approach, depending on the purposive construction to be given to the phrase “payment in kind”, there might still be liability to NICs. The result would be just as if an employee, on receiving a simple cash bonus, had spent the net cash on buying gold. From the deliverer’s perspective, there could well still have been a mechanism designed to deliver cash. By contrast it would seem that if this example was to be tested under the second approach, by looking to the end result and disregarding what would more usually have been only intermediate inserted steps, the end result would still be a transfer of gold and not a payment of cash. 

81.   Other differences arise as well. On the first approach we would need to pay regard to the fact that even if we concluded that purposively a mechanism to deliver cash was not a payment in kind, nevertheless we would not have the aid of any of the paragraphs of  Regulation 18 to which we referred in paragraph 57 above to assist us in valuing the “mechanism to deliver cash”. Regulation 18 contains an aid to the valuation of every single carve out from the “payments in kind” NIC exemption provided for in Schedule 1A to the Regulations but it contains no guidance as to the valuation of something that is excluded on more general grounds from ranking as a “payment in kind” without actually being cash. We would also have to address how, if at all, the cost of primary as distinct from secondary NICs could be deducted from earnings and recovered from employees. On the second approach, where the fiction would be to treat cash as having been paid, the first of these points would not arise at all, though whether the deduction at source points would still arise is more difficult. 
Whose intentions and expectations are significant? 
82.   The two different approaches to the case advanced by the Respondents also differ somewhat when we consider whose intentions might be material to the result in cases of this nature.  Whilst we have already rejected evidence given by Mr. Davies in two areas (choice of purchaser and possible retention of the coins as an investment), we actually consider that the right approach is to look at the intentions of the parties putting the scheme together, and that in cases for instance of bonus payments to large numbers of executives in investment banks in the City, it would be obvious that it would be the intentions of the deliverer of the bonuses that would count.  This point is far less telling where the same two directors had the dual role of delivering and receiving the bonuses, but nevertheless we consider that in the investment bank type case, if the personnel department put together a mechanism to deliver cash in a form that would save the employer the cost of secondary NICs, it would be the intentions of the deliverer, and the arrangements that it would doubtless put in place, not any individual thoughts (as distinct from amusement or bemusement) on the part of the recipients that would influence whether there was realistically “a mechanism to deliver cash”. 
83.    By contrast on the second or more traditional Ramsay approach, it might be appropriate to look at the intentions and expectations of all parties, so that the intentions of the recipients might be of more significance. 
Our decision on the 1994 issue.
84.    We consider that the more straight-forward way of dealing with this case as regards the 1994 issue is along the lines of the first, and not the second, of the approaches contrasted in the preceding paragraphs. Our decision then, on the relevant test is that it is entirely apt in this case to say that what EDI did in September 1994 was to provide “a mechanism to deliver cash”, and on a purposive construction of the phrase “payment in kind” we decide that the mechanism to deliver cash was not a “payment in kind”. 

Our reasons for that decision.
85.    We will now give our reasons for that decision. We will then consider whether the Respondents also prevail on the second approach. 
86.    We find it largely unnecessary to justify our conclusion that what EDI provided in this case can fairly be described as “a mechanism to deliver cash”.  This inevitably follows from the conclusions that we have already drawn on the facts. The more difficult part of our decision is that on the purposive interpretation of the phrase “payment in kind”.
Precedent.
87.    In this regard it is worth noting first that our approach is entirely in line with that put forward by Lord Hoffmann at paragraph 68 of MacNiven when commenting on Langley J’s decision in NMB. The Appellants argued that the NMB case should now be seen to be right for the wrong reason, and that we should apply the reasoning of Lord Hoffmann, with which perhaps understandably the Appellants were entirely in accord.   In other words we should approach this case along the lines of the first, rather than the second, of the alternatives contrasted in paragraphs 77 and 78 above. This of course we have done. EDI’s main argument for then distinguishing the EDI case from the NMB case, as refined by Lord Hoffmann, was the absence in the EDI case of the accompanying arrangements under which recipients could immediately sell their sponge or their gold for cash to a dealer. Since however we have already concluded that the facts of this case are essentially identical to those in NMB insofar as arrangements were concerned, it follows that Lord Hoffmann’s remarks, with which the Appellants agreed, are equally appropriate to this case. Thus on the purposive construction of Regulation 19(1)(d) we adopt Lord Hoffmann’s conclusion that “it is obvious that such a transaction was not what the Social Security (Contributions) Regulations 1979 (SI 1979/591) contemplated as a payment in kind”.
The argument geared to deduction at source of primary contributions.
88.     It is fair however to observe that Lord Hoffmann was only referring to the NMB case, to support a proposition that he was advancing in the MacNiven case and he was not directly dealing with the NMB case at all; nor did he have the benefit of the argument by counsel for the Appellants in this case.  That argument was to the effect that on a purposive construction the NIC exemption for “payments in kind” should be assumed to have been inserted simply to accommodate the difficulty or impossibility of deducting tax or NICs at source from earnings when the earnings took the form of payments in kind. And if this were the purpose of the exemption there might be more force in the argument that  the exemption should still apply to the formal delivery of a bonus by the employer by the transfer of an asset, however artificial.   
89.   It is easier to discuss the obvious sense of trying to interpret a statutory provision in a purposive manner than always to discern the relevant purpose with any certainty.     In this case however we agree with one of the observations of counsel for the Respondents to the effect that we should interpret the phrase “payment in kind” in the context of the whole terms of the provision in Regulation 19(1)(d), namely;
“any payment in kind, or by way of the provision of board or lodging or of services or other facilities”.
This approach does seem to us to support the proposition that the likely purpose of the exemption was a substantive one, rather than a mechanical concession, the substantive purpose being to disregard those benefits in kind that would realistically be enjoyed by the employee in kind, would generally be hard to value, and generally be secondary in importance. The underlying intention might have been geared to the fact that, with the rates of NICs being lower than the rates of income tax, it was not worth addressing the complication of charging NICs in respect of such benefits or it might have been that it might be wrong to exact NICs in respect of such benefits as the provision of coal for miners, or the provision of board and lodging for certain classes of workers. Whatever the purpose it does appear that the common thread to the various matters identified in Regulation 19(1)(d) was that the benefits be available to be used realistically and enjoyed by the recipient. 
90.     Before directly addressing the argument about deducting tax or NICs at source we think that it is worth looking at the current equivalent wording of the replacement NIC Regulation, to see whether the exemption remains in its earlier form. It is wrong, other than in cases of real ambiguity, to construe an earlier statute or regulation by referring to a later one, but in fairness to the Appellants if our strong opinion that the Respondents’ construction of the phrase is right is in fact undermined by later changes, we would have to regard this as significant. On referring to the latest provisions however it is striking to note that Paragraph 1 of Part II of Schedule 3 to the Social Security (Contributions) Regulations 2001(SI 2001/1004) is worded in an identical manner to the wording of Regulation 19(1)(d). Having regard to the avoidance that had been based on the use of the phrase “payment in kind”, and to the feature that the more modern Regulations contain more complex provisions both for valuing many non-cash benefits, and changes to the statutory provisions and the Regulations dealing with employers accounting for NICs and recovering the cost of NICs from employees where appropriate, it seems reasonable to suppose that if the “payments in kind” exemption had been purely mechanical it would now have been superseded by changes to the valuation and collection rules. In fact however it has been left in absolutely unchanged form. 
91.     Since in the present case only secondary Class 1 NICs are involved where the NICs paid by the employer cannot be recovered in any way from the employee even when the earnings are simply paid in cash, no direct issue of deduction of NICs arises.   We agree however that on the structure of the legislation, payments in kind could (with lower basic salary) have occasioned liability to primary Class 1 NICs which the employer could normally recover from the employee, if they were not to be disregarded. It was suggested in this case by counsel for both the Appellants and the Respondents that if NICs were due in respect of the transfer of the gold, and any primary Class 1 contributions had been due, then the employer would have been unable to deduct and recover the cost of those primary contributions from the employee in any way and would simply have had to bear the cost itself. We certainly accept that the effect of paragraph 3(3) of Schedule 1 to the Social Security Contributions and Benefits Act 1992 was to preclude the employer from recovering the cost in any way other than by a deduction from earnings. And equally we accept that the same result arose under the Regulations. In other words paragraph 12 (2) of Schedule 1 to the 1979 Regulations also provided that “An employer shall not be entitled to recover any earnings-related contributions paid or to be paid by him on behalf of any employee otherwise than by deduction in accordance with these Regulations”. Since we were not addressed fully on the point we make the following point tentatively but for our part on a fair interpretation of paragraph 3(3) of Schedule 1 to the Act (quoted in paragraph 53 above), we can see no reason why the employer would not have been entitled to recover any primary Class 1 contributions due by retaining and selling a small element of the gold. 
92.    Whether or not we are right to suggest that primary contributions could have been collected from the employee in the way just suggested, and that proposition would need to be confirmed by deciding that the detail of the Regulations also enabled the employer to effect a similar deduction, we note that the decision in NMB proceeded without any reference to whether mechanical difficulties might have arisen had primary Class 1 NICs been in point. Also we were not addressed on whether special recovery provisions were in place in 1994 and 1995 to enable NICs to be recovered by employers from employees where appropriate, when primary Class 1 NICs were due on transfers of those assets whose transfer clearly contributed to earnings because the assets were in one of the categories set out in Schedule 1A. If no statutory provision and no regulation provided for recovery in this situation then the problem of non-recovery would have been much more serious in that it would have caused difficulties in cases clearly covered by Schedule 1A. By contrast the possible inability of the employer to recover the rare primary contributions from employees in those cases which were so artificial that momentary and artificial transfers of assets fell outside the general exemption provision for “payments in kind” would be a minor consideration. We note also that sub-paragraphs 3A and 3B have now been inserted into paragraph 3 of Schedule 1 to the 1992 Act, so remedying this lacuna in relation to all of the payments in kind specifically carved out of the exemption by the original Schedule 1A, but in 1994 and 1995 it appears to us that if the recovery suggestion that we made at the end of the previous paragraph be wrong, then the mechanical difficulties of non-recovery were far wider than merely those that might arise as a result of our decision and the artificiality of the Appellants’ transactions. 
The absence of a valuation rule in Regulation 18 to cover the present case.
93.    We have already observed in paragraph 57 above that Regulation 18 contained a valuation rule to deal with every form of asset transfer that was specifically excluded from the “payment in kind” exemption by the provisions of Schedule 1A. And it is fair to say that our decision occasions a slight difficulty that would not have arisen on the adoption of the “second approach” on which the NMB decision itself was based.   In other words in NMB the original analysis was that the recipients of bonus simply received cash, so that no valuation difficulty occurred. On our approach in this case we treat the earnings as the gold, designed to be convertible into money, but we accept that there is no rule in primary  legislation or Regulations for how this form of bonus should be valued. 
94.    Having observed that point, we are certainly not minded to change our decision. We also think that no practical difficulty is occasioned by the point, since the obvious value of the earnings is the amount of cash that the earner could obtain on selling the gold at the first available opportunity. There is the extremely fine point that, after the changes made in 1995, with both the addition of paragraph 9C to Schedule 1A itself and the corresponding addition of new Regulation 18(9) for valuing assets where trading arrangements existed, a fractionally different result could arise under Regulation 18(9) from the one that we have just suggested. This is because the valuation rule in Regulation 18(9) values the benefit by reference to the cash that could be received actually on receipt of the asset in respect of which trading arrangements exist, rather than at the point when the owner might first obtain cash on selling the gold. In this case the difference is minimal and we imagine that in practice it will be ignored. 
The piece-meal changes made to NICs legislation and Regulations.
95.     The point that we now address is whether doubt is cast on our interpretation of the phrase “payment in kind” by the feature that whenever a new NIC avoidance device was evolved, the reaction of the authorities was to plug the particular hole, rather than to rely on the purposive construction of the phrase to undermine the device. This point was addressed and dismissed in the NMB case, and it has somewhat less force now in the light of the fact that the authorities have actually challenged the platinum sponge and gold coin cases on general grounds, aside from the fact that the “trading arrangements” provision was inserted in 1995. We consider, for the reasons given in the NMB decisions at both levels, that the hole and plug approach has no effect on our role of deciding the proper construction of the general words now in dispute. We also observe in passing that there are countless examples in tax law where an abuse has been the subject of legislation and simultaneously an announcement has been made that the abuse will be challenged under the pre-existing law, or it has simply been so challenged without such a prior announcement. 
Other authority.
96.    We have also considered whether we should be influenced by the decision of Andrew Collins J. in the case of Tullett and Tokyo Forex International Limited v. Secretary of State for Social Security [2000] EWHC Admin 350.  In that case it was held that there was no liability for NICs where the employer had transferred gilts to an insurance company to enhance the value of policies that were already held by employees. We consider that this case has no bearing on the present case. Aside from the fact that no arguments were advanced in relation to the application of Ramsay principles (albeit that it would now be said that statutes and regulations should always be interpreted purposively, in accordance with Ramsay principles, as currently understood), there had been no findings of fact in relation to pre-ordination.   Accordingly Andrew Collins J. had to decide that case simply on the basis that the value of policies held by employees had been enhanced, and the facts stopped short of demonstrating that the scheme devised by the employer company went the further step of providing the arranged steps for the surrender of those policies. Naturally it was appreciated that the policies could be surrendered, but the facts, as found, did not treat the scheme as one where the mechanism devised and provided by the employer arranged the steps under which the policies would inevitably be surrendered, in the way that the steps in the present scheme entirely paved the way for turning the gold into cash, under the arranged sale to GIL
The decision on the 1994 issue.
97.   For these reasons we consider that the delivery of bonus of mechanics designed to provide cash to directors by EDI in September 1994 was not an example of what Regulation 19(1)(d) had in mind in exempting “payments in kind” from liability to NICs, and that secondary Class 1 NICs are thus due by EDI on the value realisable by individual directors on selling their coins on the first occasion on which they were able to sell those coins. 
The second, or strict Ramsay, approach.
98.   We shall now consider the more difficult question of whether the Respondents are right to say that we could, in the alternative, have disregarded the intermediate steps and treated the employer companies as having paid the cash that the employees received on selling their coins, notwithstanding that the cash directly arose from the sale of the coins to GIL. The Appellants’ contention here of course was that following the re-analysis of the Ramsay/Furniss doctrine in MacNiven and Mawson, we should not adopt this approach. 
99.   We find this a more difficult question.  We see it as more natural, in interpreting the law and applying it to the facts, to adopt what we have described as the first of two different approaches to the broad application of tax law to the facts of this case. 
100.  One reasonably clear observation that we can make in relation to the second approach, it seems, is that if the Furniss case remains good law, and this has not overtly been judicially questioned, then it must naturally follow that the Ramsay approach also applies in this case to the analysis of the facts, and to what we have described as the second approach, namely that of disregarding intermediate steps.  
101.  The current statement of the Ramsay principle is that we must interpret the facts in a realistic legal manner, in the context of the applicable statutory provision.  The applicable provision here requires us to discern whether something ranks as a payment in kind. That seems to us to be a concept that admits quite as much of a broad realistic interpretation of the facts as did the facts in the Furniss case. In the Furniss case, the shareholders parted with their shares to Greenjacket in exchange for shares, and it was Greenjacket that sold those shares to Wood Bastow and received the consideration. It was presumably impossible for Greenjacket to be liquidated or to effect any reduction of capital or declare a dividend so that the cash receipts for the sale of the shares would end up in the hands of the original shareholders, without triggering the deferred gain or generating income for income tax purposes.  Accordingly the proceeds could only have been received, at best, by the original shareholders by way of loan, in other words in a non-absolute manner. Moreover in the Furniss case the relevant statutory provisions treated the original shareholders as having made a taxable disposal if they disposed of their original shares for anything other than an issue of shares or debentures by Greenjacket. The issue was nothing to do with whether the original shareholders transferred their shares either to Greenjacket or to Wood Bastow. Since the original shareholders only ever received, as absolute receipts, an “issue of shares or debentures by Greenjacket”, and they never received anything that Greenjacket received, we have to conclude that the degree of tax re-analysis involved in that case was far greater than anything possibly in contention here. Furthermore the tax question in debate in Furniss appears to have been a far more tightly defined one than the relatively general issue posed for us in this case. 
102.  In these circumstances, and unless the Furniss decision is actually said by the House of Lords to have been wrong, we find it very difficult to say that the arguments advanced by the Respondents, to the effect that the Ramsay principle applies in this case so as to enable us to look very generally at the facts, and strike out intermediate steps, are wrong. We nevertheless find this approach to be quite inconsistent with the directions given to us by the House of Lords in the MacNiven and Mawson cases, and to be altogether inconsistent with the actual decision in Mawson.       
103.   In the Mawson case it seems to us that the related transactions which were described as “happenstances” were quite as material to the realistic construction of the facts, as are all the transactions relevant to the transfer of the gold, and the provision of arrangements for the sale of the gold relevant to the reality in this case. In the capital allowance context, it has been the case with all finance leasing for a period of at least forty years that the lessor acquiring the asset has been largely insulated from variations in the ultimate value of a leased asset at the end of the primary period of leasing. In other words in one way or another the lessee, not the lessor, enjoys the benefit, if the value of the leased asset is higher than its anticipated residual value (by reference to which the rentals were calculated) and the lessee bears the risk if it is lower.  So in all finance leasing there is always a close affinity with secured lending.    Where however the lessee directly or indirectly funds the lessor’s capital expenditure, and where deposits or guarantees (particularly cash backed guarantees) remove the lessor’s need to fund the transaction and the lessor’s exposure to the lessee’s credit risk, these transactions go further to modify the reality of a leasing transaction. Thus where a finance lessor acquired an asset and leased it in the manner considered in Mawson, such that the only or main consequence of these transactions would have been to confer on the lessor the entitlement to the capital allowances for tax purposes, it is understandable why it was contended that this might well have influenced the ultimate tax result on traditional Ramsay principles. In the light of the fact that it has now clearly been held that these various steps cannot be collapsed and re-analysed for tax purposes, so that the court’s function was simply to consider whether the lessor “had incurred capital expenditure on the provision of the asset” by reference to the facts of the purchase transaction in isolation, it seems to us that on the current approach to analysing the facts, we cannot collapse and ignore the intermediate steps, and treat the employer as having paid cash.  
104.    This of course in no way conflicts with our task of then interpreting the phrase “payment in kind” purposively, which has been our aim in the earlier paragraphs of this decision. We have done that with some confidence both because our approach to the purposive construction of the critical phrases seems to be realistic, but with more confidence since we appear to have reached a decision entirely in line with the words of Lord Hoffmann. This consideration of which of the two different approaches that we canvassed in paragraphs 77 and 78 is the correct one does however indicate the way in which the Ramsay principle has been significantly modified, and as it now stands the correct approach is to pay far more attention to the purposive interpretation of the statute, rather than to strike out steps once certain well known and often stated conditions are satisfied. 
105.    In this case we think that the right course has been to adopt the first and not the second of the approaches that we canvassed in paragraphs 77 and 78 above and that is the basis on which we make our decision in relation to the 1994 case.
Trading arrangements, and the alternative ground for our decision in relation to the 1995 and 1996 bonus arrangements. 
106.   We turn finally, and shortly, to the issue of whether we consider that “trading arrangements” were in place in 1995 and 1996 in this case once the Regulations had been changed in the way that we have already described. This issue is irrelevant if our main decision in relation to the 1994 transaction is correct but is an additional ground on which the 1995 and 1996 transactions would have to be tested if our main decision is wrong.    
107.   It is our view that this question is very simple, and we decide that “trading arrangements” did exist. We adopt all of the reasoning of the Secretary of State and Langley J. in the NMB case, which we regard as unquestionably right, quite apart from our being bound by that decision of the High Court, once we make the decision, as we have done, that there was no material difference between the arrangements in this case and those in NMB. In other words there can be material trading arrangements even if there might have been other ways of disposing of the assets. Whether on further enquiry there would have emerged to be such other ways of realistically selling the coins in this case seems somewhat open to doubt, but there were indisputably convenient, and “tailor-made” arrangements made, from Day 1, for the sale of the gold in a particular way, and there was never a single departure from that route. The feature that the sale arrangements did not, and could not, promise to deliver a fixed or ascertained price is irrelevant. Their purpose was to observe the feature that in the short envisaged time frame between transfer of the gold and intended sale of the gold, price fluctuations would be minimal, and having regard to the fine margins negotiated, the arrangements would provide a price not significantly below the employer companies’ costs.   And the arrangements invariably did that. 

108.     For all these reasons we dismiss the appeal.

STEPHEN OLIVER QC

HOWARD M NOWLAN

SPECIAL COMMISSIONERS

RELEASED: 26 April 2006

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