Commissioners of Inland Revenue v Burmah Oil Company Ltd

JurisdictionUK Non-devolved
CourtHouse of Lords
JudgeLord Diplock,Lord Fraser of Tullybelton,Lord Scarman,Lord Roskill,Lord Brandon of Oakbrook
Judgment Date03 December 1981
Judgment citation (vLex)[1981] UKHL J1203-3
Date03 December 1981
Docket NumberNo. 5.

[1981] UKHL J1203-3

House of Lords

Commissioners of Inland Revenue
(Appellants)
and
Burmah Oil Company Limited
(Respondents)
1

Upon Report from the Appellate Committee to whom was referred the Cause Commissioners of Inland Revenue against Burmah Oil Company Limited, That the Committee had heard Counsel on Thursday the 5th day of November last upon the Petition and Appeal of the Commissioners of Inland Revenue of Somerset House, Strand, London praying that the matter of the Interlocutor set forth in the Schedule thereto, namely an Interlocutor of the Lords of Session in Scotland of the First Division of the 13th day of November 1980 might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Interlocutor might be reversed, varied or altered or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as also upon the Case of the Burmah Oil Company lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

2

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Interlocutor of the 13th day of November 1980 complained of in the said Appeal be, and the same is hereby, Recalled except so far as regards the words "find the appellants liable to the respondent in expenses and remit the account thereof, when lodged, to the Auditor of Court to tax and to report" and that the assessment by the Commissioners of Inland Revenue to Corporation Tax for the accounting period ended the 31st day of December 1972 be, and the same is hereby, Restored with the Variation that the sum of chargeable profits assessed be increased to £3,776,493: And it is further Ordered that there be no Order as to Costs in this House: And it is also further Ordered, That the said Cause be and the same is hereby remitted back to the Court of Session in Scotland to proceed as accords.

[1981] UKHL J1203-4

House of Lords

Lord Diplock

Lord Fraser of Tullybelton

Lord Scarman

Lord Roskill

Lord Brandon of Oakbrook

Commissioners of Inland Revenue
(Appellants)
and
Burmah Oil Company Limited
(Respondents)
Lord Diplock

My Lords,

1

I agree with the reasons for allowing this appeal that will be given in the speech of my noble and learned friend Lord Fraser of Tullybelton. Like him I can find no flaw in the construction placed by the Court of Session on the relevant provisions of the Finance Act 1965; but like him I also think that this case falls within the principle recently enunciated in the reasons for the decision of this House in W. T. Ramsay Ltd. v. I.R.C. [1981] 2 W.L.R. 449, to which my noble and learned friend was party. It is only in deference to the Court of Session that I venture to add a brief comment of my own, since their decision is being reversed upon a ground that was never argued before them and at the time of the hearing, which was after I.R.C. v. Plummer [1980] A.C. 896 but before Ramsay's case had been determined by this House, may well have not been open to the Court of Session.

2

It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay's case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the over-ruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin's oft-quoted dictum in I.R.C. v. Duke of Westminster [1936] A.C.I, 19, "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be", tells us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straight-forward way. The Duke of Westminster's case was about a simple transaction entered into between two real persons each with a mind of his own, the Duke and his gardener—even though in the nineteen-thirties and at a time of high unemployment there might be reason to expect that the mind of the gardener would manifest some degree of subservience to that of the Duke. The kinds of tax-avoidance schemes that have occupied the attention of the courts in recent years, however, involve inter-connected transactions between artificial persons, limited companies, without minds of their own but directed by a single master-mind. In Ramsay the master-mind was the deviser and vendor of the tax-avoidance scheme; in the instant case it was Burmah, the parent company of the wholly-owned subsidiary companies between which the pre-ordained series of transactions took place. Burmah was acting in accordance with advice obtained from advisers of the highest integrity who, in reliance on Lord Tomlin's dictum, did not foresee the difference in approach to tax avoidance schemes involving inter-company transactions that would have been adopted by this House by the time some nine years later when the particular scheme that they had devised in 1972 was eventually to come before it.

3

As will appear from the analysis of the intra-group transactions in the speech of my noble and learned friend, Lord Fraser of Tullybelton, the only real asset involved in the whole series of transactions was Burmah's holding of B.P. shares. Whether if Burmah had sold these shares in 1972, the relevant tax year, to some third party it would have realised a capital loss for the purpose of corporation tax on capital gains, which I will refer to as capital gains tax and, if so, what that loss would have been we do not know; it continued to retain the shares. By two previous transactions, undertaken for good commercial reasons with its wholly-owned subsidiary Holdings, it had transferred the shares to Holdings at market price and subsequently transferred them back again to Burmah at a time when the market price had fallen, as a result of which there were entries in the books of both parent and subsidiary companies which showed an unsecured indebtedness by Holdings to Burmah of the order of £160 million. This represented the extent of Holdings' insolvency since it had no assets out of which to pay this sum. A bad debt which is not a debt on a security is not a deductible loss for the purposes of capital gains tax; so a scheme was designed to convert this debt into a loss on realisation of Burmah's shares in Holdings on liquidation of that company. The essence of the scheme was that Burmah should subscribe £160 million for a rights issue of fresh shares in Holdings, thus putting it into a position to make a declaration of solvency and go into voluntary liquidation. The £160 million was the subject of two circles of book entries described by my noble and learned friend, in the course of which the £160 million indebtedness of Holdings to Burmah was transmogrified into a loss of the same amount (less a minor difference) upon the realisation of Burmah's shares in Holdings upon the voluntary liquidation of the latter company. I agree with Lord Fraser of Tullybelton that the approach to tax avoidance schemes of this character sanctioned by Ramsay entitles your Lordships to ignore the intermediate circular book entries and to look at the end result, which was that Burmah wrote off Holdings' indebtedness to it of £160 million by itself providing Holdings with the money to pay it, ostensibly in the form of fresh capital. The real loss it sustained was of a debt not on a security.

Lord Fraser of Tullybelton

My Lords,

4

This is an appeal from an interlocutor of the Court of Session as the Court of Exchequer in Scotland. The appeal raises two issues. The first is one of pure construction of the statutory provisions relating to capital gains tax (or corporation tax in this case as the taxpayer is a limited company). The second issue raises a question with wider implications as to whether certain transactions, which on the face of them and according to the taxpayer's submission, resulted in an allowable capital loss, should be disregarded as artificial. The second issue was raised for the first time in the appellants' printed case for your Lordships' House; it is founded on the decision of the House in the recent case of W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1981] 2 W.L.R. 449, which was later in date than the decision of the Court of Session now under appeal.

5

The appellants are the Commissioners of Inland Revenue. The respondent is the Burmah Oil Co. Ltd. ("Burmah"). Burmah was assessed to corporation tax for its accounting period ended 31st December 1972 in a sum of over £3 million. Burmah appealed to the Special Commissioners against the assessment, the question of principle being whether, for the purpose of computing its capital gain for corporation tax purposes, there had accrued during that accounting period a substantial allowable capital loss. The Special Commissioners allowed the respondent's appeal in principle and the figures were agreed. The appellants appealed to the Court of Session and on 13th November 1980 their appeal was refused by the First Division (The Lord President, Lord Cameron and Lord Stott). They now appeal to this House.

6

The facts are fully set out in the case stated by the Special Commissioners for the opinion of the court, and I shall summarise them now only to the extent necessary to explain my opinion. Burmah was at...

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