Griffin v Citibank Investments Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 02 November 2000 |
| Date | 02 November 2000 |
| Court | Chancery Division |
Chancery Division.
Patten J.
Graham Aaronson QC and Camilla Bingham (instructed by the Solicitor for Citibank) for the respondant.
Christopher McCall QC and Michael Furness QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Black Nominees Ltd v Nicol TAX(1975) 50 TC 229
Chinn v Hochstrasser ELR[1981] AC 533
Craven (HMIT) v White TAXELR[1988] BTC 268;[1989] AC 389
Duke of Westminster v IR Commrs TAXELR(1936) 19 TC 490; [1936] AC 1
Edwards v Bairstow ELR[1956] AC 14
Furniss v Dawson & Ors TAXELR[1984] BTC 71;[1984] AC 474
Helby v Matthews ELR[1895] AC 471
In re Hinckes, Dashwood v Hinckes ELR[1921] 1 Ch 475
IR Commrs v Burmah Oil Co Ltd TAX[1982] BTC 56
IR Commrs v Plummer ELR[1980] AC 896
IR Commrs v Wesleyan and General Assurance Society TAX(1946) 30 TC 11
Lloyds and Scottish Finance Ltd v Cyril Lord Carpet Sales LtdUNK[1992] BCLC 609
Mangin v IR Commrs ELR[1971] AC 739
M'Entire and Maconchy v Crossley Bros Ltd [1895] 64 LR 129
Ramsay (WT) Ltd v IR Commrs; Eilbeck (HMIT) v Rawling ELRTAX[1982] AC 300; (1981) 54 TC 101
Scoble v Secretary of State for India TAX(1902) 4 TC 478
Snook v London & West Riding Investments Ltd ELR[1967] 2 QB 786
Corporation tax - Tax avoidance - Appellant purchasing capped call option and floored put option from company in the same group - Combined effect of both options was that the amount paid on exercise was pre-determined and consisted of repayment of purchase price and additional sum - Whether both options were single composite transaction - Whether combined effect of both options was that they were not qualifying options but loans - Whether combined effect of both options was that they were not financial futures - Whether gains chargeable to tax under Sch. D - Income and Corporation Taxes Act 1988,Income and Corporation Taxes Act 1988 section 128s. 128; Taxation of Chargeable Gains Act 1992, s. 143, 144(8).
In December 1994 the taxpayer wished to invest money to produce a capital return in April 1996. It chose to do this by purchasing two options (one call and one put) with the same exercise date, the combined effect of which would be to produce a guaranteed return when exercised. Each option was entered into on standard terms. The taxpayer paid the fair market value for each option. Each option, considered separately, was a "qualifying option" within Taxation of Chargeable Gains Act 1992 section 143s. 143 of the Taxation of Chargeable Gains Act 1992 and accordingly would be taxed as capital and, pursuant toIncome and Corporation Taxes Act 1988 section 128s. 128 of the Income and Corporation Taxes Act 1988, not as Sch. D income. The Revenue contended for an income treatment on the basis that there was a single composite transaction (being a loan the interest from which was income).
(1) Whether the two option contracts constituted a single composite transaction.
(2) Whether Furniss v Dawson TAX[1984] BTC 71 was an exhaustive test.
Held, dismissing the appeal:
1. The basis for the argument that the options formed a single composite transaction was Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300, Furniss v Dawson TAX[1984] BTC 71 and Craven v White TAX[1988] BTC 268; [1989] AC 389. These cases laid down four requirements before a series of transactions could be taxed as a single composite transaction:
(2) that a series of transactions was pre-ordained;
(3) that it had no purpose but tax mitigation;
(4) that there was no practical likelihood that the events would not take place in the order ordained; and
(5) that the events did take place as ordained.
The special commissioners had implicitly decided on the facts that condition (3) was not satisfied and there was no reason to disturb that finding on appeal. It seemed unlikely that condition (2) was satisfied since in this case the investor was merely choosing a fiscally efficient means of investment, not entering a scheme to avoid an existing tax liability. Moreover, there were no steps inserted without commercial purpose. For these reasons the options were not a single composite transaction and should be taxed separately, as the special commissioners had decided.
2. As a matter of principle and authority there was no under-lying or residual principle which could be applied to transactions of this sort, which had a clear commercial purpose, contained no artificial steps and were entered into for full market value on recognised terms. The Ramsay principle did not allow genuine transactions such as the two options to be converted into something quite different if the conditions referred to above were not met.
Patten J: Introduction
1. This is an appeal by the Crown from a decision of the special commissioners (Mr THK Everett and Dr AN Brice) allowing an appeal by the taxpayer, Citibank Investments Ltd ("CIL") against three assessments to corporation tax for the years 1994, 1995 and 1996. Each of these assessments was based in part on gains received in respect of two option contracts which were purchased by CIL from Citibank International plc ("CIP") on 29 December 1994 with an expiration date of 29 April 1996. The contention of the taxpayer, both before the special commissioners and before me, is that the gains arising from the options fall to be treated as capital gains rather than profits or gains chargeable to tax under Sch. D of the Income and Corporation Taxes Act 1988 ("the 1988 Act"). Specifically CIL relies upon the provisions ofIncome and Corporation Taxes Act 1988 section 128s. 128 of the 1988 Act which exempts from a charge to tax under Sch. D gains arising in the course of dealing in "qualifying options" as defined.
2. For the Crown, Mr McCall QC accepts that if taken in isolation each of the two option contracts was a "qualifying option" within the meaning of Income and Corporation Taxes Act 1988 section 128s. 128 but he contends that by the application and operation of the principle laid down by the House of Lords in Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300 the two option contracts fail to be treated for fiscal purposes as one composite transaction the legal nature and effect of which does not satisfy the statutory definition of a "qualifying option" within the meaning of Income and Corporation Taxes Act 1988 section 128s. 128.
3. The appeal therefore raises for my decision the question of what is the nature and scope of the Ramsay principle following its subsequent elaboration and explanation in the cases of IR Commrs v Burmah Oil Co Ltd TAX[1982] BTC 56 ("Burmah"); Furniss v Dawson & Ors TAXELR[1984] BTC 71; [1984] AC 474 ("Furniss v Dawson") and Craven (HMIT) v White TAXELR[1988] BTC 268; [1989] AC 389 ("Craven v White"). In particular I have to decide the apparently novel issue of whether the two ingredients identified by Lord Brightman in his speech in Furniss v Dawson (at p. 76; 527) are essential features of every series or combination of transactions to which the Ramsay principle can apply or whether, notwithstanding the decision in Furniss v Dawson, there remains an underlying and residual principle contained in Lord Wilberforce's speech in Ramsay which can justify the construction and treatment of the two options in this case as some different kind of legal animal notwithstanding the absence of inserted, non-commercial steps which are usually the hallmark of a tax avoidance scheme. The resolution of this issue raises difficult questions both of principle and of authority.
4. At the time relevant to this appeal Income and Corporation Taxes Act 1988 section 128s. 128 of the 1988 Act provided as follows:
128. Commodity and financial futures etc.: losses and gains
Any gain arising to any person in the course of dealing in commodity or financial futures or in qualifying options, which is not chargeable to tax in accordance with Schedule 5AA and apart from this section would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, shall not be chargeable to tax under Schedule D.
In this section "commodity or financial futures" and "qualifying options" have the same meaning as in Taxation of Chargeable Gains Act 1992 section 143section 143 of the 1992 Act, and the reference to a gain arising in the course of dealing in commodity or financial futures includes any gain which is regarded as arising in the course of such dealing by virtue of subsection (3) of that section.
5. A "qualifying option" is defined in Taxation of Chargeable Gains Act 1992 section 143s. 143 of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"). Taxation of Chargeable Gains Act 1992 section 143 subsec-or-para (2)Section 143(2) provides that:
(b) "qualifying option" means a traded option or financial option as defined in Taxation of Chargeable Gains Act 1992 section 144 subsec-or-para (8)section 144(8).
6. The definition of a financial option is contained inTaxation of Chargeable Gains Act 1992 section 144 subsec-or-para (8)s. 144(8)(c) of the 1992 Act:
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(c) "financial option" means an option which is not a traded option, as defined in paragraph (b) above, but which…
(i) relates to currency, shares, securities or an interest rate and is granted (otherwise than as agent) by a member of a recognised stock exchange, by an authorised person within the meaning of the Financial Services Act 1986…
7. Before the special commissioners Mr Aaronson QC took two points which I ought to deal with now simply in order to dispose of them. The first was that the option contracts were "commodity or financial futures" within the meaning of Income and Corporation Taxes Act 1988 section 128s. 128 of the 1988 Act. The second was that some support for the taxpayer's argument might be derived fromIncome and Corporation Taxes Act 1988 schedule 5AASch. 5AA of the 1988 Act which was added by the Finance Act 1997 in relation to profits...
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