Composite tax avoidance scheme analysed as a whole; allowance limited to the partnership's actual expenditure.

A pre-ordained composite film-financing arrangement had to be viewed as a whole for tax purposes, so self-cancelling steps and other commercially unreal elements were disregarded. The partnership's real expenditure was limited to the amount actually contributed and put at risk, not the larger figure routed through the scheme account. Applying that principle, first-year allowance was available only on $3.25m rather than $14m, because the taxing statute was applied to the transaction's true legal and fiscal effect, not its form.

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Issues: Whether, on a true construction of the composite arrangements for the making and exploitation of the film, the partnership incurred capital expenditure of $14m or only $3.25m for the purposes of first-year allowance under section 41 of the Finance Act 1971.

Analysis: The documents executed as part of the scheme had to be read as a single composite transaction. On that analysis, the payments routed through the scheme current account were self-cancelling and did not represent real borrowing or real expenditure by the partnership beyond its actual contribution of $3.25m. The court applied the principle that a tax avoidance scheme must be analysed as a whole to ascertain its true legal and fiscal effect, and that inserted steps lacking commercial purpose may be disregarded for fiscal purposes. The partnership's genuine trading investment was limited to the amount actually put at risk and expended by it.

Conclusion: The partnership was entitled to a first-year allowance only on $3.25m, not on $14m; the appellant succeeded only to that extent.

Ratio Decidendi: In a pre-ordained composite transaction designed to obtain a tax advantage, the court must determine the transaction's true legal effect as a whole and apply the taxing statute to the real expenditure incurred, disregarding self-cancelling or commercially unreal steps inserted only for tax avoidance.

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