Cairns v MacDiarmid
| Jurisdiction | England & Wales |
| Judgment Date | 17 December 1982 |
| Date | 17 December 1982 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. A. Sumption and Mr. T. Sowler (instruction by Messrs. Jefferson) for the taxpayer.
Mr. D. C. Potter Q.C. and Mr. P. Goldsmith (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Donaldson M.R., Kerr L.J. and Sir Sebag Shaw (not present).
Tax avoidance - Scheme to avoid income tax - Payment of annual interest - Employee paid £5,000 interest in advance on loan from employer - Employee received £5,000 bonus from employer - Whether interest payment attracted relief by set-off against bonus - Finance Act 1972 section 75 subsec-or-para (1)Finance Act 1972, sec. 75(1)(a).
This was an appeal by the taxpayer from a decision of Nourse J. reported at 82 BTC 74 that a payment of £5,000 by the taxpayer to his employer was not a payment of annual interest and did not attract relief. He held that it was a payment made in discharge of a purely artificial liability created in order to achieve a tax advantage.
The taxpayer entered into a scheme devised by his employers, Rossminster, to enable a bonus payment of £5,000, taxable as Sch. E income, to attract relief from income tax.
The taxpayer borrowed £37,740 from Rossminster on 1 March 1974 for two years with interest at 13.25 per cent payable in advance. He paid to Rossminster £5,000 which he alleged to be an interest payment. On 5 March 1974, another company controlled by Rossminster took over the taxpayer's liability under the loan in return for the payment of £32,740 to that company by the taxpayer. The taxpayer was then relieved of any further obligations under the loan.
The question before the court was whether the payment of £5,000 could be regarded as annual interest therefore qualifying for tax relief underFinance Act 1972 section 75 subsec-or-para (1)sec. 75(1)(a) of the Finance Act 1972.
Held, appeal dismissed.
1. The payment was not annual interest but short interest. The character of the transactions, although not sham, when viewed as a whole were so artificial and devoid of purpose, other than a fiscal one, as to disqualify them from consideration in the context of taxation.
2. As in Ramsay v. I.R. Commrs. ELR[1980] A.C. 300, at the end of a series of connected and intended transactions the taxpayer's financial position was precisely as it was at the beginning. Accordingly, the payment of £5,000 was not interest or annual interest within the meaning of Finance Act 1972 section 75sec. 75 of the 1972 Act.
3. Whether interest can be properly described as "annual interest" depends on the true intention of the parties. On the facts of the case it was clear that there never was any intention that the cheque for £5,000 should in fact represent interest which could be described as annual.
Sir John Donaldson M.R.: This appeal concerns a tax avoidance scheme which was widely used in 1974. It is therefore in the nature of a test case, although it is of no interest to current practitioners of the art, since the scheme received its quietus in the Finance Act1976.
The facts were these. Mr. Cairns was employed by Mr. Tucker, a chartered accountant and well-known tax consultant. In February 1974 Mr. Tucker promised to pay Mr. Cairns a bonus of £5,000. Both he and Mr. Cairns would naturally have preferred this to be free of income tax and no doubt it was a matter of professional pride to both that it should be.Finance Act 1972 section 75Section 75 of theFinance Act 1972 seemed to provide a possible solution not only to Mr. Cairns' problem, but also to that of various clients of Mr. Tucker. It provided, so far as is material, that annual interest chargeable to tax under Income and Corporation Taxes Act 1988Sch. D, Case III could be set off against other income in computing the income tax payable. Some way had to be found whereby Mr. Cairns could pay such annual interest to the full amount of £5,000 without experiencing the pangs and regrets normally associated with such a payment.
The problem was not new and Mr. Tucker had devised a scheme called the "non-deposit scheme", sometimes also referred to as the "one year high income scheme". As applied to Mr. Cairns it worked...
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