Explainaway Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 October 2012 |
| Neutral Citation | [2012] UKUT 362 (TCC) |
| Date | 19 October 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 362 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Newey J, Judge Greg Sinfield.
Julian Ghosh QC and Elizabeth Wilson (instructed by Mayer Brown International LLP) for the appellants.
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 MawsonUNKTAX [2004] UKHL 51; [2004] BTC 414
Collector of Stamp Revenue v Arrowtown Assets LtdUNK [2003] HKCFA 46; (2004) 6 ITLR 454
Cooper v StubbsELRTAX [1925] 2 KB 753; (1925) 10 TC 29
Craven v WhiteTAXELR [1988] BTC 268; [1989] AC 398
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
FA & AB Ltd v LuptonELRTAX [1972] AC 634; (1971) 47 TC 580
IR Commrs v Scottish Provident InstitutionUNKTAXWLR [2004] UKHL 52; [2004] BTC 426; [2004] 1 WLR 3172
Schofield v R & C CommrsUNKTAX [2012] EWCA Civ 927; [2012] BTC 226
WT Ramsay v IR CommrsELRTAX [1982] AC 300; (1981) 54 TC 101
Corporation tax - Scheme to avoid tax on chargeable gains - Whether derivative transactions gave rise to chargeable gains and losses - Whether loss arising on disposal of shares in group company allowable loss - Application of Ramsay principle - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 128s. 128 - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 2 section 143ss. 2, 143.
These were an appeal by the taxpayers and a cross-appeal by HMRC from a decision of the First-tier Tribunal ([2011] UKFTT 414 (TC); [2011] TC 01267) relating to a capital gains tax mitigation scheme.
A company (P) was the beneficial owner of shares in another company (W) which would give rise to a gain on disposal. P entered into a scheme which involved selling the shares to a new subsidiary which would dispose of them in the open market. The subsidiary was then to purchase two futures which would produce corresponding gains and losses on a predetermined movement in the FTSE. Before the end of its current accounting period the subsidiary would close out one of the two contracts which should be standing at a loss equal to the realised gain. The subsidiary would then take out a further future to secure the profit on the original gain contract. The subsidiary would then be disposed of by P to a capital loss group. The gain on the remaining future that was held by the subsidiary would not be pre-entry and would be offset by losses of the capital loss group.
The scheme was put into effect in respect of some of the shares in W. In March 2001 P transferred the shares to the first appellant subsidiary (E). E sold the shares in the market giving rise to a net chargeable gain of £8,595,731. E then entered into two derivative transactions with a bank (K). Each contract had the same nominal value and maturity date. One involved a long position in futures and the other a short position. Apart from generating a commission for K, they were designed to be self-cancelling. E closed out the long contract at a loss of £8.7m. It took out a new long contract with K which had the effect of locking in the profit that was latent in the short contract. It was hoped that that profit would be sheltered by selling E to a company with capital losses, but in the event no such sale was achieved.
E claimed that the closing out of the first long contract gave rise to an allowable loss of £8.8m in the accounting period ended 31 December 2001, offsetting its gain on the shares in W. In February 2002, it closed out the short contract and the second long contract, on the basis of which it claimed to have realised a chargeable gain of £8.7m in the accounting period ended 31 December 2002. At the same time, three subsidiaries of E, two of which were appellants, entered into further derivative contracts as part of an arrangement designed to avoid the tax that would otherwise be payable on the gain of £8.7m. Again the derivative transactions entered into were broadly equal and opposite in effect. The shares in one of the subsidiaries were sold in December 2002, after the derivatives contracts had been closed out, and E contended that an allowable capital loss of £8.86m arose on the sale which could be set against the gain of £8.7m which had arisen earlier in the same accounting period.
The FTT held ([2011] UKFTT 414 (TC); [2011] TC 01267) that the derivatives transactions gave rise to chargeable gains and losses but the loss arising on the final disposal by E of shares in the subsidiary was not an allowable loss by reason of the Ramsay principle. HMRC appealed against the FTT's conclusions in relation to the 2001 derivative transactions. Their position was essentially that those transactions did not give rise to any gains, profits or losses for the purposes of the relevant statutory provisions having regard to the decision of the House of Lords in FA & AB Ltd v Lupton [1972] AC 634; 47 TC 580 and the Ramsay principle. E appealed against the decision that the final disposal was caught by Ramsay.
Held, allowing HMRC's appeal and dismissing the taxpayers' appeal:
1.The "loss" and "gain" generated by the 2001 derivative transactions would be relevant for corporation tax purposes only if, but for ICTA 1988, s. 128, they would have fallen within Sch. D, Case VI which was concerned with income profits and losses. If derivatives produced gains and losses in the course of trading, they were naturally viewed as income profits and losses. Where, on the other hand, gains and losses did not arise from trading, the context had to be examined to determine whether they represented income profits and losses. The "loss" and "gain" from the 2001 derivative transactions were not of that nature. Viewed in their context, the transactions were tax planning machinery and accordingly did not generate income profits or losses. The 2001 derivative transactions stood alone and were not undertaken in the hope that they would, of themselves, produce any profit. The immediate objective was to achieve a loss, albeit one balanced by a locked-in gain. There was no question of E ultimately achieving a profit, nor any prospect of it being out-of-pocket. An indication of the fiscal motivation behind the 2001 derivative transactions was to be found in the fact that, in combination, they were incapable of either generating any profit for E or protecting the company from risk. While the form and content of a transaction were important, the purpose for which the transaction was entered into was also relevant. It followed that any loss or gain the 2001 derivative transactions might have generated would not have fallen within Sch. D, Case VI but for ICTA 1988, s. 128 and that TCGA 1992, s. 143 did not apply. (Cooper v Stubbs [1925] 2 KB 753; 10 TC 29 considered; FA & AB Ltd v Lupton [1972] AC 634; 47 TC 580 applied.)
2.The FTT was plainly correct to have taken the view that the Ramsay principle could operate in the context of both TCGA 1992, s. 2 and ICTA 1988, s. 128 which were both concerned with an end result, namely a profit or gain, or a loss, having a commercial reality. The transactions in this case were essentially self-cancelling. The aim was to achieve fiscal consequences. The fact that it was hoped that the 2001 derivative transactions would lead on to a sale of E did not preclude the application of the Ramsay principle to the 2001 derivative transactions. They were of themselves designed to achieve a "loss" and "gain" of fiscal significance without there ever being any prospect of a loss or gain having a commercial reality. In those circumstances, the transactions should not be considered to have produced a "loss", "gain" or "profits" within the meaning of the relevant provisions. There was no practical likelihood that no loss would arise on either of the derivatives and it was of no consequence that at the outset it could not be said which of the two derivatives the loss would be realised on. Accordingly, HMRC's appeal would succeed even if the decision on Lupton was wrong. The only relevant chargeable gain was that which accrued on E's sale of the W shares. The loss and gain on the derivatives were not a real loss or a real gain within the scope of the relevant legislation.
3.On the basis of the FTT's factual findings, which were not open to challenge on appeal, there was no real scope for challenge to the FTT's conclusion that the Ramsay principle was applicable and the loss on the disposal of the shares in the subsidiary was not an allowable loss. If, as the FTT found, there was no practical likelihood that no loss would be realised or that the shares in the relevant company would not be disposed of, there was no real risk that such a disposal would not be effected, and the ultimate disposition was certain. On the facts as found, there was no intellectual difficulty in treating the transactions as a single indivisible whole. This was not a case in which there was a sensible and genuine interruption between the intermediate transaction and the disposal to an ultimate purchaser. (Craven v White [1988] BTC 268; [1989] AC 398 distinguished.)
1.This case is about the effectiveness of some tax planning that was designed to avoid the corporation tax that would otherwise have arisen on the disposal of certain shares. The First-tier Tribunal (Judge Roger Berner and Mr Tym Marsh) concluded, in effect, that the tax planning had not succeeded in avoiding liability to tax, although it had operated to defer the charge by a year (see [2011] UKFTT 414 (TC); [2011] TC 01267). Both sides appeal against the decision ("the Decision"). The Appellants argue that the Tribunal ("the FTT") ought to have held that there was no tax liability at all, HM Revenue and Customs ("HMRC") that the FTT was wrong to take the view that the tax charge had been deferred.
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