D Campbell v The Commissioners of the Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 06 June 2004 |
| Date | 06 June 2004 |
| Court | Special Commissioners (UK) |
special commissioners decision
Theodore Wallace & Julian Ghosh
Richard Bramwell QC, instructed by Coutts and Co, for the Appellant
David Ewart, instructed by the Solicitor of Inland Revenue, for the Respondents
INCOME TAX - Anti-Avoidance - Relevant discounted security - Loss on gift to wife - Subscription for security and gift part of scheme to produce loss - Avoidance not the Appellant's sole purpose in subscribing - Ramsay (1982), Westmoreland (2003) and Arrowtown (2003) considered - Finance Act 1996 schedule 13 subsec-or-para 2FA 1996, Sch 13, para 2 - Appeal allowed
1. This is an appeal against an amendment made by the Inland Revenue to the tax return of the Appellant, Mr Campbell, for the year of assessment ended 5 April 2000. The Appellant, in that return, sought relief for a loss of £2,483,100 claimed on the transfer, by the Appellant to his wife, of a relevant discounted security, within the Finance Act 1996, Schedule 13, paragraph 3(1). The amendment to the return was the disallowance of the entire amount claimed.
2. We were provided with an agreed statement of facts. The Appellant gave oral evidence. Mr Grimes, called by the Revenue as an expert witness, also gave oral evidence. Both were cross examined.
3. The following facts were agreed or appeared from the documents.
4. In December 1997 the Appellant became Chief Executive of the Ginger Media Group Ltd. As such he acquired a number of share options. He and his wife had also held substantial stock exchange investments for some time. In January 1998 the Appellant and his wife entered into a portfolio management agreement with NatWest, with funds worth £1.6m. Their investment advisor was Mr Greg Waunford Brown. It became a possibility in late 1999 that the Ginger Media Group would subject to regulatory approval be taken over by Scottish Media or another bidder. In such event the Appellant would exercise the options which had a market value far greater than the exercise price thus incurring a substantial liability to income tax under Schedule E. In October 1999 the Appellant discussed with his advisor, Mr Greg Waunford Brown, how best to shelter this from income tax. Mr Waunford Brown arranged a meeting between the Appellant and members of Coutts Tax Advisory Department on 15 October 1999. At that meeting Coutts recommended that the Appellant shelter most of the taxable income arising on the exercise of the share options by use of the scheme which is set out below. The scheme was intended to give rise to an income loss which would offset the gain on the share options.
The scheme
Step 1: The creation of Sabre Rock
5. On the advice of Coutts, on 14 December 1999 the Appellant formed a company named Chestnut Rainbows Limited, which was re-named as Sabre Rock Limited in February 2000 ("the Company"), with issued capital of £2. The Appellant was the sole shareholder and director of the Company.
Step 2: The borrowing from NatWest
6. On 23 December 1999 the Appellant borrowed £3,900,000 from NatWest to fund the subscription for a loan note and incidental expenses. The terms of the loan were (a) interest at 1.5 per cent per annum over base payable quarterly; (b) repayable as to £1,800,000 on 31 March 2000, as to £900,000 on 31 January 2001 and as to the balance on 31 January 2002; although all amounts outstanding were repayable on demand; (c) security was given by a charge over the share portfolios of the Appellant and his wife, a second mortgage over their matrimonial home, a charge over a life policy and a lien over the loan notes to be issued by the Company ("the Loan Notes").
Step 3: The subscription for the Loan Notes
7. On 24 December 1999 the Appellant subscribed £3,750,000 for 375,000 Loan Notes in the Company in units of £10.
8. Under clause 1.1 the redemption price, which was to be calculated by the auditors, was:
an amount per Loan Note equal to ten pounds plus an amount found by taking 50 per cent of the excess of the Capital profits of the Company over the Capital Losses of the Company less an Allowance for Tax thereon on the disposal of Investments in the period from the date of issue of the Loan Note until its redemption multiplied by ten and divided by the number shown in clause 2.1 below or £1.25 per £1 par value whichever is greater.
The number shown in clause 2.1 was £3,750,000. Under clause 3 the Loan Notes carried interest of 2 per cent per annum payable in advance.
Clause 4.1 provided,
Those Loan Notes not previously redeemed or purchased by the Company under any of the provisions of this Instrument or converted under clause 5 of this Instrument or otherwise dealt with by agreement outside the terms of this Instrument shall be redeemed … within … twenty Business Days from the Redemption Date …
The redemption date was the tenth anniversary from the date of the issue of the Loan Notes. Clause 5 provided for accelerated repayment in certain events.
Step 4: The gift of the Loan Notes to the Spouse
9. Scottish Media acquired Ginger Media Group Ltd on 14 March 2000.
10. On 15 March 2000 the Appellant gifted the Loan Notes to his wife, Mrs Tracey Campbell, by a Deed of Gift.
11. The Appellant's taxable Schedule E income from his share options was £3,354,097. In January 2001 the balance of the loan from NatWest was re-financed by loans from Barclays and Merrill Lynch.
The activities of the Company
12. The Company's first bank account was opened on 17 December 1999 with NatWest. On 24 December 1999 it received the £3,750,000 subscription money. NatWest was appointed as the Company's investment advisor.
13. As at 31 March 2001 the Company had invested in £1,856,009 in listed securities, the market value of which was £1,690,077. As at 31 March 2002 the Company had invested £2,065,240 in listed securities, the market value of which was £1,776,952.
14. The Company also made a number of unlisted investments, including in shares in UCTX Ltd, a financial services communications business, To the Hollist and Beyond Ltd, a country pub, Ticketaide.com, Clickmusic Ltd, and Zenith Group, a television production company of which the Appellant is non-executive chairman. The Company also bought jointly with the Appellant a boat intended for chartering.
15. By a letter dated 27 September 2001 Mrs Campbell formally requested from the Company an encashment of £250,000 against the £3,750,000 Loan Notes held in her name. The request was expressed to be made in the light of exceptional market conditions which had unexpectedly reduced the funds available to her for building works to which she was already committed and for living expenses. She noted in her letter that "Clause 4.1 permits such redemption, if all sides agree, outside the terms of the loan note." The Company acceded to her request on 27 September 2001.
16. Mrs Campbell made a further request for encashment of £118,150.89 against the Loan Notes by a letter dated 30 January 2003, which was also acceded to on that day at a meeting of the Company at 5pm.
17. In his tax return for the year 1999/2000 the Appellant claimed a loss of £2,483,100 on the transfer of the Loan Notes to his wife on 15 March 2000. This was calculated on the basis that the aggregate market value of the Loan Notes on the date of the transfer was £1,266,900. A market value of £1,500,000 at 15 March 2000 was agreed later between the parties in correspondence. On that basis the loss would be £2,250,000, being the difference between the amount that the Appellant subscribed for the Loan Notes and the market value he was deemed to have received on their transfer to his wife.
18. The Revenue amended the Appellant's return by a letter dated 24 September 2002. The Appellant appealed the amendment by a letter dated 8 October 2002.
19. The Appellant confirmed a witness statement and was cross-examined at some length.
20. He said that after working for Pepsi-Cola as a marketing manager he joined the Virgin Group in 1986 and started Virgin Radio in 1992 as chief executive. In 1997 Virgin Radio was sold to Ginger Media Group in a management buyout. The Appellant was chief executive.
21. By 1999 Ginger Media Group had grown and a number of possibilities were being considered including sale. The Appellant held shares and options in Ginger Media Group and foresaw a substantial income tax charge on exercise of the options.
22. In October 1999 the Appellant discussed the implications of a take-over with Mr Waunford Brown his personal investment adviser at NatWest who arranged for him to see the Coutts Tax Advisory team on 15 October. The RDS (Relevant Discounted Security) proposal was explained to the Appellant. In his statement the Appellant said that the proposal fitted in with his own investment plans and that the capitalisation of an investment company would give him the chance to invest on a larger scale. He told the Tribunal that the stock markets were very bullish in late 1999 although there are always risks. Since he was the sole shareholder in the Company he could always get the money out to repay the loan to the bank. The sale of Ginger Media Group was uncertain at that stage and the gift of Loan Notes would not occur until a sale. If there had been no sale he would have reduced the amount of money in the Company. He would have had to make a judgment if the sale did not go forward.
23. The Appellant told Mr Ewart that the idea of borrowing £3.9 million to subscribe for loan notes rather than wait for a take-over came from his tax advisers but fitted in with what he wanted to do. He wanted a combination of investing in the market and in private ventures and unquoted investments. He said that the best way to have a series of investments and to do it in a tax efficient manner was to have a company. If the sale went forward it would be more tax efficient. The...
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