TaxTMI 
TaxTMI 
2000 (2) TMI 839
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....crued interest made by it in 1988, 1989 and 1990. WIL cross appealed from the decision that an agreement entered into under section 54 of the Taxes Management Act 1970 for the year ended 31 March 1988 did not bind the Crown as to the charges on income available for carrying forward to future accounting periods. The facts are stated in the opinion of Lord Hoffmann. Christopher McCall QC and Michael Furness QC for the Crown. David Milne QC and Adrian Shipwright for the taxpayer. Their Lordships took time for consideration. 8 February 2001. Lord Nicholls of Birkenhead My Lords, 1. On this appeal the Inland Revenue Commissioners pray in aid what is loosely called the Ramsay principle. This is a reference to the decision in W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300. So it is necessary first to remind oneself what the House decided in that case. An initial point to note is that the very phrase 'the Ramsay principle' is potentially misleading. In Ramsay case the House did not enunciate any new legal principle. What the House did was to highlight that, confronted with new and sophisticated tax avoidance devices, the courts' duty is to determine the legal n....
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....e of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision ? Thus, in Ramsay the taxpayer company sought to create an allowable loss to offset against a chargeable gain it had made on a sale-leaseback transaction. It sought to do so without suffering any financial detriment, by embarking on and carrying through a scheme which created both a loss which was allowable for tax purposes and a matching gain which was not chargeable. In rejecting the efficacy of this contrived 'losscreating' scheme, Lord Wilberforce [1982] AC 300, 326, observed that a loss which comes and goes as part of a pre-planned, single continuous operation "is not such a loss (or gain) as the legislation is dealing with". In Inland Revenue Comrs v Burmah Oil Co Ltd [1982] STC 30, 37, Lord Fraser of Tullybelton described this passage as the ratio of the decision in the Ramsay case. 6. As noted by Lord Steyn in Inland Revenue Comrs v McGuckian [1997] 1 WLR 991, 1000, ....
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....ion and its application to the facts of the case. Further, as I have sought to explain,the Ramsay case did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which theRamsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute. I have already mentioned where this led in the Ramsay case. In Furniss v Dawson [1984] AC 474 it led to the conclusion that, within the meaning of the Finance Act 1965, the disposal of shares was in favour of Wood Bastow and not, as the taxpayer contended, in favour of Greenjacket. The present case 9. On the present appeal the relevant question is whether the transactions between the taxpayer, Westmoreland Investments Ltd ("WIL"), and the sole shareholders of its parent company, the trustees of the Electricity Supply Pension Scheme, constituted payments of interest within the meaning of section 338 of the Income and Corporation Taxes Act 198....
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....ill and Mummery LJJ, reversed the judge's decision. 13. My Lords, I confess that during the course of this appeal I have followed the same road to Damascus as Peter Gibson LJ. Like him, my initial view, which remained unchanged for some time, was that a payment comprising a circular flow of cash between borrower and lender, made for no commercial purpose other than gaining a tax advantage, would not constitute payment within the meaning of section 338. Eventually, I have found myself compelled to reach the contrary conclusion. My reasons are as follows. 14. Section 338(1) provides, in short, that charges on income shall be allowed as deductions against profits in computing the corporation tax of a company. "Charges on income" are defined in section 338(2) as "payments of any description mentioned in subsection (3) below". So far as relevant, sub- section (3) provides that "the payments referred to in subsection (2)(a) above are-(a) any yearly interest . . .". Prima facie, payment of interest in section 338 has its normal legal meaning, and connotes simply satisfaction of the obligation to pay. In the present case, WIL's obligation to pay the accrued interest to the tr....
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....unattractive to the Inland Revenue. The feature which makes the WIL transactions unattractive to the Inland Revenue is different. It is the ability of the pension scheme trustees to reclaim the tax deducted by WIL from the payments. But that is the consequence of the tax exempt status of the pension scheme. The concept of payment in section 338(3)(a) cannot vary according to the tax status of the person to whom the interest is owed. 18. For these reasons, and those set out in the speech of my noble and learned friend Lord Hoffmann, I would dismiss this appeal. I also agree with Lord Hoffmann's reasons for rejecting the three subsidiary points on which the Inland Revenue sought to place some reliance. WIL's cross-appeal does not arise. Lord Hoffmann My Lords, The issue 19. The question in this appeal is whether certain payments of interest made by a property investment company named Westmoreland Investments Ltd ("WIL") in the years 1988 to 1990 were "charges upon income" within the meaning of section 338 of the Income and Corporation Taxes Act 1988 and therefore allowable deductions in computing its profits or losses for the purposes of corporation tax. I spea....
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....erefore allowed a deduction in respect of bank interest immediately it is debited in the books of the bank. It does not matter whether the liability has been discharged or not. But other yearly interest is deductible only when it has been paid. Why the distinction ? It reflects the difference in the way in which the Crown recovers tax from the recipient of the interest. In the ordinary case of yearly interest, the person who pays must deduct the tax and account to the revenue : see section 349(2). But this rule does not apply to banks : see section 349(3)(a). A person who pays interest to a bank does not deduct tax. The interest is part of the bank's trading income and must be brought into account in the computation of profits when it falls due and is debited to the borrower in its books. In both cases, therefore, the provisions of section 338 and 349 synchronise the payer's right to a deduction and Crown's right to treat the interest as a taxable receipt of the payee. The facts 22. My Lords, the relevant facts can be briefly summarised. WIL was owned by the Electricity Supply Pension Scheme ("the scheme"), an approved superannuation scheme which is exempt from income....
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.... purchaser for the shares and loan debts of WIL. On 20 December 1990 a development company bought the shares for a nominal sum and the indebtedness of over GBP100m for 2p in the GBP. The scheme realised GBP2m for assets which otherwise would have been worth nothing. The findings of the special commissioners 26. The special commissioners made the following findings : "We find that all the loans made to WIL from 1980 onwards were real loans and WIL used them for real purposes, viz the discharge of real earlier outstanding loans and the payment of real accrued interest, temporary investment in part and the payment of income tax in pursuance of the statutory obligation in that behalf . . . We do not find that the interest free loans made by the scheme in 1988/89 and 1989/90 were different in character from the earlier loans . . . [A]s Mr Milne QC submits on behalf of WIL, the object of the refinancing was to crystallise the actual loss by paying interest which hitherto had merely been accrued and had not been paid. There is no question but that that accrued interest was real." The Commissioners therefore held that the interest had been "paid" within the meaning of sec....
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....language which can be brought within his final parenthesis. This cannot be called a principle of construction except in the sense of some paramount provision subject to which everything else must be read, like section 2(2) of the European Communities Act 1972. But the courts have no constitutional authority to impose such an overlay upon the tax legislation and, as I hope to demonstrate, they have not attempted to do so. Ramsay : the fountainhead 30. As is well known, the Ramsay case [1982] AC 300 was concerned with a tax avoidance scheme designed to manufacture a capital loss to set off against a capital gain. The question before the House was whether a transaction by which the taxpayer company acquired certain shares for GBP185,034 and almost immediately sold them for GBP9,387, gave rise to a "loss accruing on a disposal of an asset"within the meaning of section 23(1) of the Finance Act 1965. Both the acquisition and sale of the shares formed part of a pre-planned series of transactions by which the alleged loss was exactly balanced by a gain which was alleged to fall within an exemption from the charge. The aggregate effect was that the taxpayer suffered no loss except the....
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....true and fair view of the taxpayer's dealings, would not have said that the company had entered into a transaction giving rise to a loss which happened to have been offset by a corresponding gain. There had never been any commercial possibility that the transactions would not have cancelled each other out. Therefore, notwithstanding the juristic independence of each of the stages of the circular transaction, the commercial view would have been to lump them all together, as the parties themselves intended, and describe them as a composite transaction which had no financial consequences. The innovation in the Ramsay case was to give the statutory concepts of "disposal" and "loss" a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, so that in the case of a concept such as a "disposal", the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a preplanned series of transactions. Commercial concepts in tax legislation 33. There is nothing new about terms used in tax legislation (or, for that matter, any legislation) bein....
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....was the realisation that such an approach need not be confined to well recognised accounting concepts such as profit and loss but could be the appropriate construction of other taxation concepts as well. The American doctrine 36. Lord Wilberforce, while cautioning against a facile transposition of American decisions on different statutes, approved the approach of Judge Learned Hand in one of his many judgments dealing with tax avoidance schemes : Gilbert v Comr of Inland Revenue (1957) 248 F 2d 399. Perhaps the seminal judgment was in Helvering v Gregory (1934) 69 F 2d 809, affirmed (1935) 293 US 465, which concerned a scheme of great simplicity. The taxpayer was a stockholder in a corporation which held some shares which she wished to realise without paying tax on the gains. Instead of having the corporation sell the shares directly to the buyer, she caused it to incorporate a subsidiary and exchange the shares for an allotment of shares in the subsidiary. The subsidiary was put into liquidation and distributed the shares to the stockholder as a dividend. She then sold them to the buyer. She claimed that the exchange of shares fell within the tax exemption for a "reorganizat....
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....eference to a commercial concept, then to have regard to the business "substance" of the matter is not to ignore the legal position but to give effect to it. The real world 40. The speeches in the Ramsay case [1982] AC 300 and subsequent cases contain numerous references to the "real" nature of the transaction and to what happens in "the real world". These expressions are illuminating in their context, but you have to be careful about the sense in which they are being used. Otherwise you land in all kinds of unnecessary philosophical difficulties about the nature of reality and, in particular, about how a transaction can be said not to be a "sham" and yet be "disregarded" for the purpose of deciding what happened in "the real world". The point to hold onto is that something may be real for one purpose but not for another. When people speak of something being a "real" something, they mean that it falls within some concept which they have in mind, by contrast with something else which might have been thought to do so, but does not. When an economist says that real incomes have fallen, he is not intending to contrast real incomes with imaginary incomes. The contrast is specifica....
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.... capital gains tax. As in the Ramsay case, it had produced a loss by a circular series of transactions which had no business purpose. A subsidiary owed it a substantial sum which it could not repay. As a bad debt on capital account, this would not have been an allowable loss. Burmah therefore invested the same amount in shares in the subsidiary, which used the money to repay the debt and then went into liquidation. Burmah recovered nothing on its share investment and claimed that it had thereby suffered a loss. The House of Lords held that this was not a loss caused by a disposal within the meaning of the Act. The transaction left Burmah no worse off than it had been before and merely purported to convert a bad debt into an allowable loss. 44. My Lords, in retrospect the Burmah case is an entirely straightforward application of the construction which the Ramsay case gave to the concept of a disposal giving rise to a loss in the capital gains tax legislation, namely that it meant a loss in commercial terms and not a series of preplanned transactions which had no business purpose. From this construction it followed that, as Lord Diplock said, the House would "ignore the intermedia....
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.... the same Schedule a disposal of shares forming part of a reorganisation was not treated as a disposal for the purposes of capital gains tax. By a preplanned transaction, Greenjacket then sold the shares to Wood Bastow for cash. But the Revenue claimed that there had been no "real" disposal to Greenjacket. It was merely a preplanned stage in a disposal from the Dawsons to Wood Bastow and fell outside the exception for a reorganisation of share capital. 46. Thus, while the question in the Ramsay case [1982] AC 300 had been whether there was a disposal giving rise to a loss, the question in the Furniss case was whether the disposal had been to one person rather than another. But the House decided that the Ramsay construction, involving, as I have said, a commercial characterisation of the relevant concept, could be equally applied to the latter question. Greenjacket was merely an artificially introduced intermediate party which was never intended to own the shares for more than an instant. Commercially, therefore, the transaction was a transfer by the Dawsons to Wood Bastow in exchange for a payment to Greenjacket. In answering the statutory question : "To whom was the disposal ma....
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....garded. 49. For present purposes, however, the point I wish to emphasise is that Lord Brightman's formulation in the Furniss case, like Lord Diplock's formulation in the Burmah case, is not a principle of construction. It is a statement of the consequences of giving a commercial construction to a fiscal concept. Before one can apply Lord Brightman's words, it is first necessary to construe the statutory language and decide that it refers to a concept which Parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component parts. But there are many terms in tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning. In such cases, the Ramsay principle can have no application. It is necessary to make this point because, in the first flush of victory after the Ramsay, Burmah and Furniss cases, there was a tendency on the part of the Inland Revenue to treat Lord Brightman's words as if they were a broad spectrum antibiotic which killed off all tax avoidance schemes, whatever the tax and whatever the relevant statutory provisions. 50. The disti....
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....ed the dividend, it would of course have been income. But Shurltrust did not receive the dividend. It received a payment from Mallardchoice which was a capital payment for an assignment of its right to income. 53. The Inland Revenue's argument, relying upon the formulation in the Furniss case [1984] AC 474 was that the assignment should be disregarded. The Northern Ireland Court of Appeal said (not, if I may respectfully say so, without justification) that one could not simply "disregard" the assignment. The payment of the money by Mallardchoice to Shurltrust was the consideration for the assignment and an integral part of that transaction. If the assignment had to be disregarded, one could not explain how Shurltrust had received any money at all. 54. It seems to me that the Crown caused unnecessary difficulties for itself in the McGuckian case by failing to notice that the question was different from that in Furniss v Dawson and therefore did not necessarily respond to precisely the same analysis. In the Furniss case the question was the identity of the disponee. In the McGuckian case it was the nature of the payment received by Shurltrust-capital or income ? In the form....
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.... limitations cannot be universals. Always one must go back to the discernible intent of the taxing Act. I suspect that the advisers of those bent on tax avoidance...do not always pay sufficient heed to the theme in the speeches in the Furniss case . . . to the effect that the journey's end may not yet have been found." 57. I would only add that it is not only tax avoiders who may not pay sufficient heed to the necessity of concentrating on the application of the particular taxing provision to the particular facts. The Inland Revenue sometimes also fails to do so. The journey's end may be different because the journey itself is not the same. The limits of Ramsay 58. The limitations of the Ramsay principle therefore arise out of the para- mount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were ....
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....n and General Assurance Society [1946] 2 All ER 749, 751 : "In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable. It is sufficient to refer to the common case where property is sold for a lump sum payable by instalments. If a piece of property is sold for GBP1,000 and the purchase price is to be paid in ten instalments of GBP100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of GBP100 a year for ten years, tax is payable. The net result, from the financial point of view, is precisely the same in each case, but one method of achieving it attracts tax and the other method does not." 61. It follows that a transaction which, for the avoidance of tax, has been structured to produce, say, capital, and does produce capital in the ordinary commercial sense of that concept (unlike the payment in Inland Revenue Comrs v McGuckian [1997] 1 WLR 991) cannot be "recharacterised" as producing income : see Comr of Inland Revenue v Wattie [....
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....Lords, after what I fear was a lengthy analysis of the Ramsay principle I return to the present appeal. Carnwath J, who [1997] STC 1103 allowed an appeal from the special commissioners, said that the case was very much like Inland Revenue Comrs v Burmah Oil Co. Ltd 54 TC 200. In that case, the transaction left Burmah no worse off than it had been before and merely purported to convert a bad debt into an allowable loss. Similarly in this case, said Carnwath J, the transaction made no difference to the scheme or WIL but merely purported to convert an unpaid interest debt into a payment which could be deducted. In so doing, he treated the passage in the speech of Lord Diplock which I have already quoted (and the similar passage in the speech of Lord Brightman in the Furniss case) as being of general application, irrespective of the nature of the concept to which the statute refers. 64. My Lords, I can see that one could read these passages in such broad terms. But I do not think that it would be consistent with treating Ramsay as a principle of construction. In my opinion, what the Burmah case decided was that the statutory concept of a loss accruing upon a disposal has a business ....
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....hat many commercial refinancing operations discharge old debts and create new ones without any cash flow either way. Nor is there any apparent policy to be found in section 338 which would require a negative cash flow. Otherwise, why should bank interest be deductible without any payment at all ? As I have already said, the only apparent reason for the insistence on payment of yearly interest is that payment gives rise to an obligation to deduct tax. In the present case, WIL complied with that obligation. The Crown's real complaint is that the scheme, as an exempt fund, was able to reclaim the tax. But this cannot be remedied by giving the word "paid" a different meaning in the case of a payment to an exempt lender. The word must mean the same, whatever the status of the lender. 68. 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 wh....
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....representing principal less the first instalment of interest. It would be very strange if in either of those cases there was not a payment of interest for the purposes of [the Taxes Act], and to say that there was not would in my judgment attach to the word 'pays' a significance which in the context it cannot possibly bear." The other case to which Peter Gibson LJ referred was Customs and Excise Comrs v Faith Construction Ltd [1990] 1 QB 905. The question there was whether builders had received a "payment" in respect of a supply of services within the meaning of section 5(1) of the Value Added Tax Act 1983. That section provided that a supply of services was deemed to take place when the supplier received payment in respect of it. The facts were that in early 1984 a building company had entered into an agreement to erect a building but had not yet begun work. It was then announced in the March budget that with effect from 1 June 1984 the rate of VAT on building services would be increased from zero to the standard rate. To avoid payment of VAT, the customer paid the builder in advance. The builder then lent the money back to the customer on terms that it would be repayable only ....
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....onsidered. It seems to contemplate some arrangement by which the burden of the interest payment is transferred to someone else. But there was no such arrangement in this case. The burden of the interest payment never shifted from WIL. The revenue submits that there was no burden because the interest payment was cancelled by the loan. This amounts to collapsing the two transactions and treating the interest as never having been paid at all. But this would be contrary to the findings of fact. Once it is accepted that the interest was paid, it seems to me that the burden of payment could only have been borne by WIL. (b) Section 75(3) 72. This provides that charges on income in a given accounting period can be carried forward to succeeding accounting periods only if they were paid "wholly and exclusively for purposes of the company's business." The revenue says that the interest payments were not paid for the purposes of the company's business but to make it more attractive to a purchaser. It was conceded that the loans upon which the interest was payable had been borrowed wholly and exclusively for the purposes of the company's business. The special commissioners sai....
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....he deduction. It is one of statutory interpretation. I would approach it without any preconceived notions as to whether this is a case of tax mitigation or of tax avoidance. The only relevant questions are : (1) the question of law : what is the meaning of the words used by the statute ? and (2) the question of fact : does the transaction, stripped of any steps that are artificial and should be ignored, fall within the meaning of those words ? 78. Section 338(1) of the Income and Corporation Taxes Act 1988 provides that there shall be allowed as deductions for the relevant accounting period "any charges on income paid by the company in the accounting period, so far as paid out of the company's profits brought into charge to corporation tax". Subsection (2)(a) of that section provides that "charges on income" means for the purposes of corporation tax "payments" of any description mentioned in subsection (3). Subsection (3)(a) states that the payments referred to in sub- section (2) include "any yearly interest". Those are the provisions on which WIL's claim to an allowable deduction in the end depends. There is no question in this case of the taxpayer ha....
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.... to me, in the end, to give rise to any real difficulty. The words "paid" and "payment" are to be construed according to their ordinary meaning. The question whether a payment has been made is a question of fact. That question has been answered by the findings made by the special commissioners. The evidence established to their satisfaction that a loan was in fact made by the Scheme to WIL and that WIL used that loan to pay interest to the Scheme. The interest was a charge on income because it was a payment of a description mentioned in section 338(3) of the 1988 Act. That point having been established, the rule in section 338(1) determines the fiscal effectiveness of the transaction for the purposes of WIL's liability to corporation tax. 82. There remains for disposal WIL's cross-appeal. It was directed to WIL's alternative argument that an agreement which it entered into with the Inspector of Taxes under section 54 of the Taxes Management Act 1970 for the year ended 31 March 1988 determined not only the question what tax was payable in respect of the period covered by the assessment under appeal but also the amount of charges on income which were available for carr....
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.... accounting period. A determination of the amount of management expenses and charges on income for one accounting period automatically resulted in any excess being treated as expenses of management for the next. It would be absurd if, despite its determination by agreement for one accounting period, that figure had to be relitigated each year. Except in cases of manifest error, both parties to the section 54 agreement should be bound by the agreement that they had made. 87. The effect of a section 54 agreement is however to be found in the words of the statutory provision under which it is made. Section 54 states that the like consequences shall ensue for all purposes as would have ensued if the commissioners had determined the appeal. The procedure for appeals forms part of the process which has been laid down by the statute for the assessment and collection of tax. Section 30A of the 1970 Act (as inserted by sections 196, 199 and Schedule 19 to the Finance Act 1994) provides that after the notice of assessment has been served on the person assessed, the assessment shall not be altered except in accordance with the express provisions of the Taxes Acts. Section 31 of the Act ena....
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....on the legislation that applies in the United Kingdom. The purpose of an appeal under section 31 of the 1970 Act is to challenge the amount charged to tax by an assessment. The finality that attaches to the determination of the appeal by the general commissioners or by the special commissioners or to the settling of the appeal by agreement relates only to the amount chargeable under that assessment. The question as to the amount of any reliefs carried forward to subsequent periods remains open for examination as the assessment for each subsequent period is issued. This is because the Taxes Acts do not provide any means by which that amount may be determined conclusively, whether by appeal or by agreement, for any period other than that to which the assessment relates. 90. For these reasons I would hold that an agreement made under section 54 has no wider effect upon the position of either party than that which has been provided for by the statute. As Carnwath J [1997] STC 1103, 1133E-F indicated, the issue turns simply and solely upon the machinery which the Taxes Acts provide for determining the amount in question between the commissioners and the taxpayer. That machinery is li....
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....nd no loss in the sense contemplated by the legislation" The same theme was stated by Lord Goff of Chieveley in See [1990] 183 ITR 216 (HL) Craven v White (Stephen) [1989] AC 398, 519 : "What the courts have established, however, is that certain tax avoidance schemes, although not shams in the sense of not being what they purport to be, are nevertheless unacceptable because they embrace transactions which are not 'real' disposals or do not generate 'real' losses (or gains) and so are held not to attract certain fiscal consequences which would normally be attached to disposals or losses (or gains) under the relevant statute." Lord Goff of Chieveley reiterated this theme in See [1994] 209 ITR 231 (HL) Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655, 681 : "Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the tax payer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed. These structures are designed to achieve an adventitious tax benefit for the taxpayer, and in truth are no more than raids on ....