INTM436070 - Transfer pricing before CTSA

Waterloo plc and others v CIR: meaning of 'business facility'

This case is discussed elsewhere in this guidance - in relation to transfer pricing enquiries into stock options, for example, at INTM464140 - but here we are concentrating on its relevance to ICTA88/S773(4)

In this case, the company set up a share option scheme for some employees of its subsidiaries and was held to have given business facilities to which an arm’s length price was to be applied.

Waterloo established the share option scheme under a trust and made interest-free loans to the trustee, which was a limited company, so that the trustee could purchase shares and grant options over those shares to employees of Waterloo and its subsidiaries. The Inland Revenue argued, successfully, that

  • Waterloo had provided business facilities within ICTA88/S773(4) to its subsidiaries, in the form of increased benefits for the employees of the subsidiary companies, and
  • ICTA88/S770(1) accordingly applied the arm’s length price to the transaction, since the buyer was a body of persons over whom the seller had control.

There was a giving of business facilities where the recipient was a body of persons over whom the giver had control. The Commissioners found that the provider was Waterloo and the recipients were the subsidiary companies, which were both bodies of persons (each a company).

As the Commissioners put it:

'It [Waterloo] did not give the business facilities through the trust; the trust was part of the business facilities which were given.'

A facility not a transaction

This case came in the wake of the Ametalco case, a 1996 Special Commissioners' decision which endorsed the view that financial facilities such as loans were included in the phrase 'business facilities of whatever kind' in ICTA88/S773(4) (see INTM501050). Counsel for Waterloo accepted that the granting of an interest-free loan was, in principle, a facility but argued that the provision of share options for the group employees was not for business purposes.

The Inland Revenue relied on Ametalco, where the Commissioners had stated that the 'giving of business facilities of whatever kind' in ICTA88/S773(4) was 'a very wide description'. The business facilities provided therefore included:

  • the making of interest-free loans to the trustee and
  • other matters relating to the trust, including
  • the institution of the trust,
  • the engagement of the trustee,
  • the remuneration of the trustee,
  • the annual operation of the scheme, and
  • the administration of the scheme.

It was argued that such facilities would not be provided without cost between parties operating at arm's length.

The Commissioners adopted the principle that the phrase 'business facility of whatever kind' was a very wide description and decided that they could look at the various elements listed above and regard the 'bundle' as the facility. Whether remuneration or not, the stock options were benefits that Waterloo believed would incentivise chosen employees, and thereby benefit of the Waterloo business worldwide. The ability to have those options was thus a facility given as a business facility. It was more than the grant of the interest-free loans to the trustee; what Waterloo gave was a total facility for giving benefits to employees in the form of share options.

Waterloo's argument sought to distinguish the case of a mere provision of business facilities (where there should be no charge to tax) from the case of a transaction whereby business facilities were provided to the other party to the transaction, but the Commissioners saw no justification for the distinction:

'If there were a giving of business facilities, then Section 773(4) provides that ICTA88/S770 shall, with the necessary adaptations, have effect in relation to the giving of the business facilities as it has effect in relation to sales and that the references in ICTA88/S770 to sales, sellers, buyers and prices must be deemed to be extended accordingly. Thus, we have to adapt and extend the actual words of ICTA88/S770 to the fact that there has been a 'giving' rather than a 'sale' and a recipient rather than a buyer. Therefore, the mere provision of business facilities would, in our view, fall within the section.'

Thus the widening of ICTA88/S773(4) endorsed by the Ametalco case was confirmed by a decision that the very language of ICTA88/S770 required 'necessary adaptation' to fit the provision of a business facility.

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