Astall and Another v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 01 January 2007 |
| Date | 01 January 2007 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F. Avery Jones CBE
Kevin Prosser QC, counsel, instructed by McGrigors LLP solicitors, for the Appellants
David Ewart QC and Michael Gibbon, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
Relevant discounted securities - Tax avoidance scheme - The security was not a relevant discounted security because the terms under which it might possibly be redeemed at a deep gain will never occur - Apeal dismissed
A special commissioner decided that a tax avoidance scheme involving a deep discount on the redemption of securities did not fall within the statutory definition of a relevant discounted security for purposes of Finance Act 1996 schedule 13 subsec-or-para 3FA 1996, Sch. 13, para. 3.
These were appeals by two taxpayers (J and G) who were two sample participants in a tax avoidance scheme promoted by KPMG which was based on the definition of relevant discounted securities.
The scheme consisted of 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, the 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 object was that the taxpayers claimed the difference between the issue price and six per cent of the issue price (less a turn for the purchasing bank) as a loss on a relevant discounted security, while the difference remained in the trust for the benefit of the taxpayer. The taxpayers conceded that the market change condition had been inserted to repel an anticipated argument by the Revenue based on WT Ramsay Ltd v IR CommrsELR[1982] AC 300.
The taxpayers both appealed against amendments to their self-assessment disallowing losses of £1,989,464 in J's case and losses of £4,976,098 in G's case for 2001-02 which had been claimed on the basis that they were losses incurred under the scheme and fell within Finance Act 1996 schedule 13 subsec-or-para 3FA 1996, Sch. 13, para. 3.
Whether the taxpayers had sustained losses from the discount on relevant discounted securities within the meaning of FA 1996, Sch. 13.
The special commissioner (Dr John Avery Jones) (dismissing the appeals) said that for purposes of construing the definition of "relevant discounted securities" in Finance Act 1996 schedule 13 subsec-or-para 3FA 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 purpose of the legislation was to tax gains on securities issued at a deep discount and to relieve losses on such securities. 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 InstitutionTAX[2004] BTC 426. 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 must also be ignored, just as the possibility of the options not being exercised simultaneously was ignored in Scottish Provident.
The decision not to seek a purchaser for the securities until after their issue was slightly different. In Scottish Provident, the House of Lords commented that there was an uncertainty about whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together. That was far removed from the present transaction where from the start one could predict with certainty that the taxpayer put 100 in, six (less a turn) came back to the taxpayer from a bank which recovered six from the trust, leaving the remaining 94 in the trust. The only uncertainty was the amount of the bank's turn. Not seeking purchasers in advance was just as much a course of action, or inaction, chosen not for any commercial reason but solely to enable the taxpayers to claim that there was no composite transaction.
The commissioner had 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 time scale 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.
In the present case, the scheme was entirely artificial and the taxpayers had no commercial purposes in entering into it other than generating an artificial loss to set against taxable income. The terms of the security were structured so that it fell within the definition of a relevant discounted security for tax purposes. The three alternatives given to the taxpayers after the market change condition had been satisfied amounted to a choice between (a) redeeming the security at 100.1 of the issue price (the 0.1 necessarily being paid out of the initial capital of the trust) and accordingly losing the benefit of the fee of one per cent plus VAT that had been paid; (b) selling the security with the hope of a tax loss of 94; and (c) holding the zero-coupon security for 15 years with an effective annual yield of about 1.1 per cent.
It was a practical certainty that no one would choose (a) or (c). The choice offered to the purchaser of the securities was between redeeming them on seven days' notice and realising the discount as a profit, or holding the zero-coupon securities for 65 years with an effective annual yield of about 4.76 per cent which was about the market rate. It was also a practical certainty that any purchaser would immediately redeem them at five per cent of their redemption price. No purchaser would have considered holding the securities for 65 years. Further, it was a practical certainty that the securities would cease to exist within two months of their issue: either (a) the market change condition would be satisfied and the securities sold and redeemed by the purchaser; or (b) in the event of the market change condition not being satisfied, the taxpayers would redeem their securities.
On a realistic view of the facts, the scheme had been designed to fix the capital of the trust so as to meet the premium on early redemption and that was the only possible source of funds. The parties intended that that should be used for the purpose and objectively that was the only possibility when considering the matter at the date of issue of the security. Early redemption would always require a circular transaction using the capital of the trust. The possibility of such a transaction did not mean that the security was within the statutory definition of a relevant discounted security. The terms of the early redemption option had been structured so as to create a deep gain according to the formula but one which could be paid only by means of a circular transaction involving the payment by J of the capital that he put into the trust for no other purpose (apart from funding the premium on redemption on default). The only way in which the early redemption premium could be paid was by using the trust capital. The relevant statutory provisions, construed purposively, were not intended to apply to such a transaction.
1. These are appeals by Mr John Astall and Mr Graham Edwards who are two sample participants in a tax avoidance scheme promoted by KPMG which was based on the definition of relevant discounted securities. They both appeal against amendments to their self-assessment made on 16 January 2007 disallowing losses of £1,989,464 in Mr Astall's case and losses of £4,976,098 in Mr Edwards' case for the year 2001-02. The Appellants were represented by Mr Kevin Prosser QC, and the Revenue by Mr David Ewart QC and Mr Michael Gibbon.
2. In outline the scheme consists of each of the Appellants settling a small sum in a trust under which he has a life interest. The settlor lends money to the trust in return for a security issued by one of the...
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