Berry
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 October 2009 |
| Neutral Citation | [2009] UKFTT 386 (TC) |
| Date | 22 October 2009 |
| Court | First Tier Tribunal (Tax Chamber) |
[2009] UKFTT 386 (TC)
Sir Stephen Oliver QC, Ian Menzies-Conacher
Aparna Nathan, counsel, for the Appellant
Malcolm Gammie QC, instructed by the General Counsel for HM Revenue and Customs, for the Respondents
Tax avoidance - income tax - discounts - gilt strips - computation of loss - scheme designed to create excess of amount paid for the strip over the amount payable on transfer - excess represented by "premium" for grant by taxpayer of call option - whether option price to be added back in determining amount payable on the taxpayer's transfer - yes - appeal dismissed - FA 1996, Finance Act 1996 schedule 13 subsec-or-para 14ASch. 13, para. 14A
The tribunal upheld the rejection by HMRC of a taxpayer's claim for tax relief under a scheme designed to realise an income loss on the transfer of a gilt strip where, in reality, no loss had actually been sustained by the taxpayer, no amount had been paid by him for the gilt strips and there had not been any actual transfer of the strips. In all the circumstances, there was no real risk that the parties to the transaction would suffer a real economic loss.
The taxpayer was a UK resident individual who appealed against an amendment to his self-assessment increasing the tax due by £157,397.76. The increase resulted from the refusal of his claim for loss relief as a result of gilt strip planning, the object of which was to create an income tax loss representing the difference between the amount paid by a person for the particular gilt strip and the amount payable when a transfer was made of that gilt strip. The taxpayer claimed that the gilt strip planning created a loss of £400,000. He said that the amount paid by him for the gilt strip in question was £6.5m, while the amount payable on his onward transfer was £6.1m. His income tax loss was therefore £400,000. HMRC took the view that there was no such loss.
The planning scheme in question comprised three ingredients. The function of the first ingredient was to satisfy the formalities of FA 1996, Finance Act 1996 schedule 13 subsec-or-para 14ASch. 13, para. 14A which consisted of: (1) documentation to show the amount paid by the customer for the gilt strip; (2) documentation to show the amount payable on the transfer by the customer; and (3) a gilt strip of the size required to achieve the shelter. The documentation showing the amount payable on the transfer by the customer had to evidence a transaction producing the requisite loss. For those purposes the second ingredient was designed as a call option with an option price equal to the loss required by the customer and a strike price of a lesser amount (i.e. such amount as, when aggregated with the strike price, matched the amount paid by the customer for the strip). Underpinning the project was the legal proposition that the grant of an option was separate from and not part of the transaction that occurred on the exercise of the option; the option price would not, therefore, come into the reckoning as an amount payable on the transfer of the gilt strip. It was a fundamental requirement of the arrangements as a whole (and the second ingredient in the design) that none of the parties involved could suffer any economic loss as a result of fluctuations in the price of the gilt strips. The product appeared to have been designed in reliance on a decision of the Court of Session upholding the appeal of Scottish Provident Institution (IR Commrs v Scottish Provident InstitutionTAX[2004] BTC 105). For that purpose a third ingredient was designed into the product as protection against a possible HMRC attack on the grounds that the gilt strip planning produced a preordained and therefore self-cancelling result. The advice received by the designers of the product was that there had to be a real possibility of the gilt strip price falling below a level at which the special purpose vehicle would wish to exercise its call option. Only by demonstrating a possibility that the customer might be left holding the gilt strip in a falling market could the product withstand the reasoning of the House of Lords in WT Ramsay Ltd v IR CommrsELR[1982] AC 300; 54 TC 101 as applied in Furniss v DawsonTAX[1984] BTC 71 and be placed on the safe side of the line established by cases such as Craven v WhiteTAX[1988] BTC 268 and later by Campbell v IR CommrsSCD(2004) Sp C 421.
The taxpayer argued that he had acquired beneficial ownership of the gilt strips. Nothing prevented him, legally or otherwise, from dealing with the gilt strips once they were in his ownership until such time, if ever, as the option was exercised. From the moment when he delivered the purchase notice in the prescribed form he was the owner of the gilt strips and, although they were subject to a charge, he was in the same position as any other person who had given a charge over his property. The option premium paid when the taxpayer did not own the gilt strips could not properly be included as part of 'the amount payable on the transfer' within the meaning of para. 14A(3)(b). So examined, the transactions resulted in the loss determined for purposes of the closely articulated and purely mechanistic computational provisions of Sch. 13, para. 14A, namely the difference between what the taxpayer had paid to acquire the gilt strips and what he received on their transfer.
HMRC argued that the reality of the arrangements was that the product was designed and sold to customers as a package. As such it was intended to be carried through from beginning to end and it was never intended to involve any customer, such as the taxpayer, in any loss within the meaning of para. 14A and never in fact did so. Thus, on the proper interpretation of Sch. 13, para. 14A, which required that the taxpayer claiming a loss should have sustained a loss from the discount in the year as a result of two transactions being an acquisition and a transfer in respect of which he had paid something and received less for the subject matter of the transaction, he failed to satisfy the statutory test. The alleged seven per cent statistical risk that the option to reacquire the gilt strips would not be exercised was a meaningless sham. Even if it had had any reality, it was a commercially irrelevant contingency that had been installed as part of the package: see the approach of the House of Lords in IR Commrs v Scottish Provident InstitutionTAX[2004] BTC 426.
Whether the taxpayer had realised an income tax loss for the purposes of FA 1996, Finance Act 1996 schedule 13 subsec-or-para 14ASch. 13, para. 14A by virtue of entering into so-called gilt strip planning.
The tribunal (Sir Stephen Oliver QC and Ian Menzies-Conacher) (dismissing the appeal) said that the question was whether Sch. 13, para. 14A, construed according to its purpose, intended to apply to the transactions comprised in the gilt strip planning viewed realistically. The purpose of the statutory provision was identified in the opening words of para. 14A(1), namely: "A person who sustains a loss in the year of assessment from the discount on a strip shall be entitled to relief from income tax on the amount of his income for that year according to the amount of loss". The decision in Barclays Mercantile Business Finance Ltd v Mawson (HMIT)TAX[2004] BTC 414 established that it was irrelevant to the construction of the particular provision that the arrangement was designed to produce a tax advantage or, absent any specific anti-avoidance wording, that one or more component parts of the transaction had no commercial or investment purpose but had been inserted for tax reasons. Nonetheless, in determining the reality of the transaction, the fact that the arrangements were designed and implemented as a scheme or package, whether to achieve a tax or some other advantage, would be a relevant consideration in determining as a factual matter the reality of the transaction.
In the context of Finance Act 1996 schedule 13 subsec-or-para 14Apara. 14A the service of the purchase notice and the consequent activation of the forward purchase contract were said to have given the taxpayer an entitlement to the delivery of the gilt strips in return for an amount paid of £6.5m for the strip. However, viewing those transactions as part of a package, if the taxpayer's entitlement was bound to be cancelled by the exercise of the option, then in a practical sense the taxpayer would have had no entitlement to the gilts. Moreover, if for all practical purposes the gilts would not have been placed at the taxpayer's disposal when he served the purchase notice, and satisfied the cash conditions of the forward purchase contract, the taxpayer would have had no real ability to assert either that the gilt strips were transferred to him such that for purposes of para. 3(b) he paid an amount for the strip or that he transferred the strips for purposes of para. 3(a). All depended upon whether the admitted scheme amounted in practice to a single transaction. A finding that the taxpayer who participated in the scheme and took a position in the gilt strips market at a real and significant risk to himself could result in a conclusion that the scheme was not to be regarded for tax purposes as a single transaction.
In the present case, the implementation of the gilt strip planning was exactly as the parties had intended. The self-cancelling result was entirely in line with their expectations that the other parties would be protected by the matching purchase and sale of gilt strips in the market and that the taxpayer would pay his fee. That left the option contract and the forward purchase contract and the associated debits and credits entries as ingredients in a single scheme. The scheme was designed to ensure that no real money ever reached the taxpayer. The £390,000 premium might have been credited to him; but it was retained under the bank's control for use in financing the exercise of the forward purchase...
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