Martin Williams @MWilliamsHT
sdOne of Scotland's wealthiest men fights £4.5m tax avoidance claim in courts
SIR FRASER Morrison, one of Scotland's wealthiest men who made his fortune selling the family business to Anglian Water is at the centre of a dispute that he is liable for nearly £4.5 million after using a tax avoidance scheme using Irish trusts to sell shares.
He is fighting the decision of an Upper Tribunal appeal in which judges ruled that he should be paying the tax from the sale of £14.5 million of Anglian shares through specially founded Irish trusts after being transferred by three Scottish trusts founded by Sir Fraser.
It has emerged that two tribunals have so far supported the taxman's view that capital gains tax was owed in the UK over what was seen as a pre-planned sale to investment bank Merrill Lynch which became a "single composite transaction" for tax purposes.
Sir Fraser, who is fighting the claim, argues there is no UK liability as no decision was made in advance to sell shares through the Irish trusts.
Permission for Sir Fraser to appeal to the Court of Appeal has been granted and is expected to be listed later this year.
The entrepreneur, who made his fortune from the sale of his Highland-based family owned construction company, set up three Scottish trusts, the 2002 Maintenance Trust, the 1989 Trust and the 1995 Trust between 1989 and 2002 for the benefit of himself, his wife Lady Patricia Morrison and three adult children, Peter, Claire and Sarah Jane.
Sir Fraser, who lives in Fife, and his brother Gordon, who four years ago together were once thought to be worth £85 million, sold Morrison Construction, the main contractor in the building of the Falkirk Wheel, to Anglian in 2000 for £263 million.
Sir Fraser received Anglian shares and loan notes worth £33.4 million in exchange for his 8,668,983 Morrison shares. The shares and loan notes were later transferred into one of his trusts. His immediate family and related trusts had held over 14 million shares in Morrison.
By the autumn of 2004, the Scottish trusts had shareholdings in Anglian which were then worth £14.5 million.
In October, 2004, while considering selling the Scottish trusts' Anglian shares, it emerged that selling all the 1,933,612 Anglian shares directly onto the market, would incur a capital gains tax liability of £4.5 million.
The tribunal was told that after taking legal advice, a tax avoidance scheme was set up involving transferring the shares to the Irish Trusts and using "specially created options" allowing the Scottish trustees to sell them.
The scheme was devised to take advantage of a much lower capital gains tax bill of £53,638.82 that would arise if the shares were sold in Ireland, according to findings of fact in a first tier tax tribunal decision that found there was a tax liability.
Three new Irish trusts name No 1, No 2 and No 3 which mirrored the Scottish trust were set up which were then "repatriated" to the UK before April 5, 2005, with trustees replaced by the Morrison trustees.
In a challenge to the Upper Tribunal by Sir Fraser and the three Scottish trusts, a fact statement said: "The creation of the Irish Trusts had no purpose other than the avoidance of tax. They would not have been created otherwise."
Factual findings made by the original first-tier tax tribunal said: "The Irish Trusts were created specifically as a vehicle to carry out the scheme to enable capital gains tax to be avoided on the sale of the Anglian shares. If not for the scheme, the Irish Trusts would never have been created.
It added: "Their creation was essential to the tax avoidance scheme to eliminate or minimise liability to capital gains tax on the diversification of the assets held by the Scottish Trustees by the disposal of the Anglian shares and re-investment of the sale proceeds.
"The Scottish Trustees had no formal control over the Irish Trustees but it was unrealistic to assume that the Irish Trustees would do anything that significantly contradicted the views of the Scottish Trustees and the beneficiaries that the trust assets be diversified by selling the Anglian shares.
"The share price would have had to fall dramatically before the Irish Trustees would have hesitated about proceeding with the tax avoidance scheme. There was no dramatic fall in price and the plan proceeded as intended and as anticipated."
On December 1, 2004, the Irish Trustees sold all the Anglian shares for £14,294,867.48 to Merrill Lynch.
In a challenge to the first tier tribunal decision, counsel for Sir Fraser and the three Scottish trusts argued it could not be said that shares sale was a "single composite transaction" for tax purposes as no advance arrangements had been made for the Merrill Lynch sale and neither the identity of the ultimate buyer nor the price was known at the time the stock was sold to the Irish Trust.
Upper tax tribunal judges Justice Richard Arnold and Judge Roger Berner rejected that conclusion and said: "On the [first tier tax tribunal's] findings of fact there was no practical likelihood that the Scottish Trustees would not exercise the options, nor that the Irish Trustees would not sell."
First tier tribunal judge Gordon Reid QC said arrangements designed to obtain a tax advantage through "the creation of artificial conditions might also be described as abusive in another context".
He added: "The Scottish trustees and the beneficiaries are not being penalised. They are simply being called upon to meet or bear the effect of the fiscal liabilities in consequence of a disposal which led to a chargeable gain."
Sir Fraser's legal team would not comment on the case.