Astall and Another v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PETER SMITH |
| Judgment Date | 27 June 2008 |
| Neutral Citation | [2008] EWHC 1471 (Ch) |
| Docket Number | Case No: CH/2007/APP/0634 |
| Court | Chancery Division |
| Date | 27 June 2008 |
[2008] EWHC 1471 (Ch).
Chancery Division.
Peter Smith J.
Kevin Prosser QC (instructed by McGrigors LLP) for the appellants.
David Ewart QC and Michael Gibbon (instructed by the Solicitor for HM Revenue & Customs) for the respondents.
The following cases were referred to in the judgment:
Barclays Mercantile Business Finance Ltd v Mawson (HMIT)TAX [2004] BTC 414
Edwards (HMIT) v BairstowTAXELR (1955) 36 TC 207; [1956] AC 14
IR Commrs v Scottish Provident InstitutionTAX [2004] BTC 426
MacNiven (HMIT) v Westmoreland Investments LtdTAXELR [2001] BTC 44; [2003] 1 AC 311
WT Ramsay Ltd v IR CommrsTAXELR (1982) 54 TC 101; [1982] AC 300
Income tax - Tax avoidance - Trust - Relevant discounted securities - Tax avoidance scheme - Special commissioner holding security not relevant discounted security because terms of possible redemption at deep gain would never occur - Finance Act 1996, Sch. 13, para. 3.
This was an appeal by the taxpayers against a special commissioner's decision ((2007) Sp C 628), in the context of a tax avoidance scheme, that a security was not a "relevant discounted security" for the purposes of FA 1996, Sch. 13, para. 3 because the terms under which it might possibly be redeemed at a deep gain would never occur.
The taxpayers (J and G) were participants in a tax avoidance scheme promoted by accountants which was based on the definition of a relevant discounted security. The scheme involved each of the taxpayers settling a small sum in a trust under which he had a life interest. The settlor lent money to the trust in return for a security issued by one of the trustees, a company. The terms of the security were that it was redeemable in 15 years at 118 per cent of the issue price, but the taxpayer could redeem the security at 100.1 per cent of the issue price between one and two months after issue. If a condition relating to the dollar-pound exchange rate, which was designed to have an 85 per cent chance of being satisfied ("the market change condition"), was satisfied within one month and a notice to transfer the security was given, the term of the security became 65 years (with the same redemption price). However, a purchaser could redeem it at five per cent of the redemption price (about six per cent of the issue price) on seven days' notice. The taxpayers could then claim the difference between the issue price and six per cent of the issue price as a loss on a relevant discounted security, while the difference remained in the trust for his benefit. The redemption terms were designed to satisfy the definition of a relevant discounted security within FA 1996, Sch. 13, para. 3. The taxpayers conceded that the market change condition had been inserted to anticipate an argument by the Revenue based on WT Ramsay Ltd v IR Commrs [1982] AC 300. The taxpayers appealed against amendments to their self-assessment returns disallowing losses of £1,989,464 in J's case and of £4,976,098 in G's case for 2001-02.
The special commissioner dismissed the appeals, deciding that for purposes of construing the definition of "relevant discounted security" in FA 1996, Sch. 13, para. 3, regard should be had only to real possibilities of redemption, not those written into the security which the parties, and any reasonable person with the knowledge available to the parties, knew would never happen. The difference between the issue price and the redemption price had to give rise to the possibility of making a gain that, objectively, could be seen to exist. There was never such a possibility in the present case since it was a practical certainty that there would be a loss. Adopting that approach in the present case, the market change condition in the security was (as was conceded) inserted purely as an anti-Ramsay device. The 85 per cent chance of the market change condition being satisfied was favourable enough to make it a risk which the taxpayers were willing to accept in the interests of the scheme. The existence of the market change condition and the possibility that a purchaser for the security would not be found, with the consequence that the early redemption option would be exercised, should be ignored on the authority of IR Commrs v Scottish Provident Institution [2004] BTC 426 ("SPI"). The condition was not inserted for any commercial reason. The consequence of the market change condition not being satisfied was that the early redemption option had also to be ignored, just as the possibility of the options not being exercised simultaneously was ignored in SPI. The commissioner found as a fact that it was a practical certainty that at the time of issue of the securities purchasers could have been found who were willing and able to purchase the securities within the relevant timescale at a discount of not more than about ten per cent. Thus the possibility of a purchaser not being found would be ignored for the same reason as the market change condition ((2007) Sp C 628). The taxpayers appealed.
Held, dismissing the appeal:
1. In the light of his findings of fact and his consideration of the legal principles, the commissioner had been led to the conclusion that the purpose of the legislation was to tax gains on securities that were issued at a deep discount and conversely to relieve losses on such securities. On the facts found there was never a possibility of these securities making a gain looked at objectively. Thus it was a practical certainty that there would be a loss. Given that analysis his decision was that the security in question was not within the regime for relief because it was not a "relevant discounted security". The special commissioner had come to that conclusion on the facts and there was no basis for challenging his factual findings. That fatally flawed the taxpayers' appeals because it showed that the commissioner had come to his conclusion whether or not the security was within the legislation by determining the facts that were applicable to that security. His conclusion could not be faulted and therefore his decision could not be faulted that on the facts of the security and in the light of all the evidence the taxpayers had not established that the security fell within the definition "relevant discounted security". As there was no realistic possibility of a deep gain there could be no basis on which to allow the taxpayer to manufacture allowable losses by the expedient of inserting mechanisms giving a theoretical possibility of deep gains but in circumstances where the parties intended that instead far deeper losses should be made. The commissioner was plainly alive to that prospect and on his findings that was an inevitable conclusion. (Edwards v Bairstow [1956] AC 14; 36 TC 207 applied.)
2. The SPI case had addressed both the points that the special commissioner considered, namely the lack of commercial reason for choosing the market change condition by reference to changes in the dollar/sterling exchange rate, and the fact that whilst there was a commercial risk that that would not be achieved the odds were favourable enough to make it a risk which the parties were willing to accept in the interest of the scheme. The commissioner was equally entitled to take into account as part of the facts that the creation of the market change condition was inserted as an anti-Ramsay device just like the decision of the promoters of the scheme not to seek purchasers for the security until after it had been issued. Both those had to be ignored for the same reason as the uncertainty created in SPI. (IR Commrs v Scottish Provident Institution [2004] BTC 426 applied.)
Peter Smith J: Introduction
[1] These are appeals by Mr Astall ("Mr Astall") and Mr Edwards ("Mr Edwards") (collectively "the appellants") from a decision released on 14 August 2007 of the Special Commissioner, Dr Avery Jones ((2007) Sp C 628).
[2] He dismissed the appellants' appeals against the Revenue's amendment of their self assessment returns for the year of assessment 2001/2002 whereby the Revenue refused the appellants' claim to have sustained a loss in that year from the discount on a relevant discounted security for the purposes of the Finance Act 1996, Schedule 13 ("Schedule 13"). He consequently rejected a claim to be entitled to relief from income tax on the amount of income for that year equal to the amount of the loss.
[3] It was common ground before the Special Commissioner (as set out in paragraph 10 of the decision) that each of the appellants sustained a "loss" within the meaning of Schedule 13, paragraph 2 the amount of Mr Astall's loss being £1,989,464 and the amount of Mr Edwards' loss being £4,976,098.
[4] It was also common ground that each of the appellants sustained that loss from the discount on a "security" within the meaning of Schedule 13.
[5] The sole issue before the Special Commissioner was whether that security was a "relevant discounted security" as defined by Schedule 13, paragraph 3.
[6] The Special Commissioner decided that the security was not a "relevant discounted security" as defined. The appellants submitted that his decision was wrong in law.
[7] On 28 January 2002 Mr Edwards paid £7,000 to establish a Settlement. One of the Trustees of the Settlement was a company called Linkfast Industry Ltd ("the Issuer"). On 31 January 2002 ("the Issue Date") the Issuer acting as a Trustee of the Settlement issued to Mr Edwards a loan note instrument constituting £6,238,366 zero coupon loan notes due 31 January 2017 ("the Security").
[8] The issue price in respect of the Security was £5,278,276 which Mr Edwards duly paid to the Issuer on the Issue Date. He financed that purchase partly by a loan from Kleinwort Benson Private Bank of £3,278,276 at interest of 2% over base rate, and the balance out of his own resources.
[9] By Schedule 2 Condition 3.1 unless...
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