Berry v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 February 2011 |
| Neutral Citation | [2011] UKUT 81 (TCC) |
| Date | 25 February 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 81 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Lewison J.
Aparna Nathan and Marika Lemos (instructed by RBC International Wealth Planning) for the appellant.
Malcolm Gammie QC (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Barclays Mercantile Business Finance Ltd v MawsonTAXTAX [2004] BTC 414; 76 TC 446
Campbell v IR CommrsSCD (2004) Sp C 421
Carreras Group Ltd v Stamp CommissionerTAX [2004] BTC 8,077
Collector of Stamp Revenue v Arrowtown Assets LtdUNK (2004) ITLR 454
Edwards v BairstowELRTAX [1956] AC 14; 36 TC 207
Ensign Tankers (Leasing) Ltd v StokesTAXELR [1992] BTC 110; [1992] 1 AC 655
Gripple Ltd v R & C CommrsTAX [2010] BTC 873
IR Commrs v Burmah Oil Co LtdTAXTAX [1982] BTC 56; (1981) 54 TC 200
IR Commrs v Scottish Provident InstitutionTAXTAXTAX [2004] BTC 426; 76 TC 538 (HL); [2004] BTC 105 (CSIH)
MacNiven v Westmoreland Investments LtdTAX [2001] BTC 44
Mayes v R & C CommrsTAX [2009] BTC 617
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300; (1981) 54 TC 101
Income tax - Tax avoidance - Gilt strips - Discounts - Loss from discount - Computation of loss - Scheme designed to create excess of amount paid for 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 - Application of Ramsay principle - Taxpayer's appeal dismissed - FA 1996, Sch. 13, Finance Act 1996 schedule 13 subsec-or-para 14Apara. 14A.
This was an appeal by the taxpayer against a decision of the First-tier Tribunal ([2009] UKFTT 386 (TC); [2009] TC 00321) that he was not entitled to relief against income tax for losses that he claimed to have suffered as a result of "Gilt Strip Planning".
A "gilt strip" was a UK Treasury Government stock issued by the Bank of England. "Strip" was an acronym for separate trading of registered interest and principal flows, which could be traded separately as zero-coupon gilts. Thus a three year gilt would have seven individual cash flows comprising six (semi-annual) coupon payments and a principal repayment.
The taxpayer was a UK resident individual who appealed against an amendment to his self-assessment in respect of the 2003-2004 year of 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 for a 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 scheme was devised and marketed by Abacus. It involved the sale and purchase of gilt strips to and from a special purpose vehicle provided by a bank. Taxpayers subscribing to the scheme would agree to purchase gilt strips for £X under a forward purchase contract and at the same time would grant in consideration of a premium of £Y an option to buy them from the taxpayer for £(X-Y). Underpinning the scheme was the legal proposition that the grant of the option was separate from and not part of the transaction that occurred on the exercise of the option, so that the option price would not come into the reckoning as an amount payable on the transfer of the gilt strip. If both the contract for purchase was completed and the option was exercised the taxpayer would claim a loss of £Y. However, the contract contemplated that the taxpayer might default, in which case he would pay the seller £Y. Since the seller of the gilt strips and the option holder, which had paid £Y for the option, were both under the control of Abacus, the economic effect was that neither the taxpayer nor Abacus would have suffered any loss. The application to the bank for a loan facility indicated that neither party, nor the bank, could suffer any economic loss as a result of the fluctuations in the price of the gilt strip.
The taxpayer argued that the option premium paid when he did not own the gilt strips could not properly be included as part of "the amount payable on the transfer" within the meaning of paragraph 14A(3)(b) of Sch. 13 to FA 1996.
HMRC submitted and the First-tier Tribunal concluded that, looking at the transactions in the realistic manner required by the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414 and IR Commrs v Scottish Provident Institution [2004] BTC 426 and construing paragraph 14A in the light of what it required, no loss had been sustained by the taxpayer. The purpose of the statutory provision was stated in the opening words of paragraph 14A(1): "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 taxpayer appealed. He argued, relying on the decisions of the Inner House of the Court of Session in Scottish Provident [2004] BTC 105 and the Special Commissioners in Campbell v IR Commrs (2004) Sp C 421, that the purpose of the legislation was to be found in the prescriptive way in which it was drafted.
Held, dismissing the taxpayer's appeal:
1. The principle derived from WT Ramsay Ltd v IR Commrs [1982] AC 300; 54 TC 101 and explained in BMBF v Mawson and Scottish Provident was a general principle of statutory construction. As such it could not be disapplied, as the taxpayer suggested it should be, in interpreting paragraph 14A. The FTT's approach based on the Ramsay principle did not involve any error of law.
2. The FTT had identified the purpose of the statutory provision as being stated in the opening words of paragraph 14A(1). The FTT was right to identify the purpose of the paragraph in the way it did. This was not a case in which Parliament had used algebra to create a notional profit or loss. It had used words which had a recognised commercial meaning; and it was to be expected that Parliament intended to tax (or relieve) real commercial outcomes. The FTT was right not to adopt a slavishly literal "tick-box" interpretation of the legislation. That was precisely how the Ramsay principle was meant to operate. Thus the FTT made no error of law in identifying the purpose of the legislation. In particular they were right to find that the transactions in the present case were different and distinguishable from the transactions in Campbell's case.
3. Once the FTT had reached the conclusion that there was no element of real risk and that the anti-Ramsay device (consisting of the possibility that the option would not be exercised) could be disregarded because that was how the parties had proceeded, the FTT was left with a self-cancelling scheme. Looked at realistically, if and in so far as the taxpayer bought and sold gilt strips, the purchase price and the sale price were the same. The option fee was no more than a refundable deposit. The taxpayer's overall economic position before and after had not changed (apart from the fact that he had paid the fees required to participate in the scheme). That was exactly the situation that Lord Wilberforce described in Ramsay and the view of the facts that the FTT took was a realistic one. Thus they made no error of law. The scheme in issue in this appeal fell squarely within the Ramsay principle as described in Ramsay itself. The subsequent elucidation of the principle had done no more than to explain what that principle entailed.
Lewison J: Introduction
1. Mr Berry appeals against the decision of the First-tier Tribunal (Tax) (Sir Stephen Oliver QC and Mr Ian Menzies-Conacher; [2009] UKFTT 386 (TC); [2009] TC 00321) that he was not entitled to relief against income tax for losses that he claims to have suffered as a result of "Gilt Strip Planning". Ms Aparna Nathan and Ms Marika Lemos appear on his behalf. Mr Malcolm Gammie QC appears for HMRC.
2. As the FTT explained, a gilt strip is a UK Treasury Government stock issued by the Bank of England. "Strip" is an acronym for Separate Trading of Registered Interest and Principal flows which can be traded separately as zero-coupon gilts. Thus a three year gilt will have seven individual cash flows comprising six (semi-annual) coupon payments and a principal repayment. The strip market began in the UK on 6 December 1997; and broadly all new issues of conventional fixed coupon gilts are "strippable" (with a delay after the first issue date). The object of the Gilt Strip Planning is 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 is made of that gilt strip. Mr Berry claims that the Gilt Strip Planning created a loss of £390,000. He says that the amount paid by him for the gilt strip in question was £6.5 million, while the amount payable on his onward transfer was £6.1 million (both figures have been rounded). His income tax loss was therefore £400,000. HMRC, the Respondents, say there was no such loss.
3. The FTT described the scheme in detail (para. 9-44). I need not repeat all that detail. I can summarise the scheme as follows.
4. The Gilt Strip Planning scheme was devised by Abacus Wealth Planning ("Abacus") and marketed to potential customers. Mr Berry became aware of the Gilt Strip Planning idea at a presentation in the latter part of November 2003. The presentation had taken the form of a slide show supported by some explanatory material. The explanatory material stated...
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