Craven (HM Inspector of Taxes) v White; Commissioners of Inland Revenue v Bowater Property Developments Ltd; Baylis (HM Inspector of Taxes) v Gregory
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Templeman,Lord Oliver of Aylmerton,Lord Goff of Chiveley,Lord Jauncey of Tullichettle |
| Judgment Date | 21 July 1988 |
| Judgment citation (vLex) | [1988] UKHL J0721-1 |
| Date | 21 July 1988 |
| Court | House of Lords |
[1988] UKHL J0721-1
Lord Keith of Kinkel
Lord Templeman
Lord Oliver of Aylmerton
Lord Goff of Chieveley
Lord Jauncey of Tullichettle
House of Lords
My Lords,
These conjoined appeals raise questions as to the nature and scope of the principle which emerged from Furniss v. Dawson [1984] A.C. 474. That case was founded on but represented an advance from what was laid down in W.T. Ramsay Ltd. Inland Revenue Commissioners. [1982] A.C. 300 and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. (1981) 54 T.C. 200.
The latter two decisions were concerned with a situation where the taxpayer had sought to create an allowable loss with a view to setting it off, for purposes of capital gains tax or corporation tax on a capital gains basis, against chargeable gains. The transactions into which the taxpayer had entered for that end were entirely artificial. They were of a circular self-cancelling character so that the taxpayer ended up no worse off from a financial point of view than before the transactions were entered into. Each successive transaction in the series must inevitably, in order to achieve the desired result, follow upon its predecessor and none of them had any other purpose than tax avoidance. It was held that each set of transactions had to be regarded as a whole and that when it was completed there was no real financial loss such as the relevant legislation allowed to be set off against chargeable gains.
Neither in Ramsay nor in Burmah was there any commercial purpose whatever in the transactions entered into. However, Lord Diplock in Burmah 54 T.C. 200, 214 indicated that the new approach adopted by the House in Ramsay to a pre-ordained series of transactions which included steps that had no commercial purpose apart from tax avoidance might apply whether or not there were also included the achievement of a legitimate commercial end. In Furniss v. Dawson [1984] A.C. 474 the taxpayers' purpose was directed to the achievement of a legitimate commercial end, namely the sale to an independent party of their shareholdings in two family companies. In order, however, to defer capital gains tax on the sale they arranged that an Isle of Man company controlled by them (Greenjacket) should acquire the shareholdings in exchange for an issue to the taxpayers (the Dawsons) of its own shares, and should immediately sell the shareholdings on to the outside purchaser (Wood Bastow) for a price payable to itself. The taxpayers thus hoped to take advantage of the provisions of paragraphs 4(2) and 6(1) of Schedule 7 of the Finance Act 1965. This House held, however, that the insertion into the sale transaction of the share exchange arrangement with the Isle of Man company fell to be disregarded for fiscal purposes, with the result that for those purposes the taxpayers must be treated as having made a direct disposal to the purchaser. Lord Brightman, with whose speech the rest of their Lordships agreed, said, at p. 526:
"My Lords, in my opinion the rationale of the new approach is this. In a pre-planned tax-saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are pre-ordained rather than pre-contracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons contracted to transfer their shares in the operating companies to Greenjacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the operating companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed, and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the pre-ordained series of steps are to be found in an informal arrangement instead of a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the words 'this is not a binding contract.'
"The formulation by Lord Diplock in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 33 expresses the limitations of the Ramsay principle. First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax — not 'no business effect.' If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.
"In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect. If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket.
"The formulation, therefore, involves two findings of fact, first, whether there was a pre-ordained series of transactions, i.e. a single composite transaction, secondly, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. Those are facts to be found by the commissioners. They may be primary facts or, more probably, inferences to be drawn from the primary facts. If they are inferences, they are nevertheless facts to be found by the commissioners. Such inferences of fact cannot be disturbed by the court save on Edward v. Bairstow [1956] A.C. 14 principles."
This passage appears to embody the ratio decidendi of the case.
My Lords, in my opinion the nature of the principle to be derived from the three cases is this: the court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions in question, regarded as a whole, so as to ascertain its true effect in law; and finally it must apply the enactment as construed to the true effect of the series of transactions and so decide whether or not the enactment was intended to cover it. The most important feature of the principle is that the series of transactions is to be regarded as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in advance by a guiding will which was in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax.
The principle does not involve, in my opinion, that it is part of the judicial function to treat as nugatory any step whatever which a taxpayer may take with a view to the avoidance or mitigation of tax. It remains true in general that the taxpayer, where he is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision such as section 460 of the Income and Corporation Taxes Act 1970.
In Ramsay and in Burmah the result of application of the principle was to demonstrate that the true legal effect of the series of transactions entered into, regarded as a whole, was precisely nil from the point of view of creating an allowable loss such as the relevant legislation intended to make deductible in computing chargeable gains. In Furniss v. Dawson the result was that the two interconnected transactions under consideration were held to be equivalent in legal effect to a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons transferred the shares in the family companies to Wood Bastow in consideration of a price paid by the latter to Greenjacket. The result of that was that Greenjacket never acquired control of the family companies within the meaning of paragraph 6(2) of Schedule 7 to the Finance Act 1965....
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