HM Revenue and Customs v D'Arcy
| Jurisdiction | England & Wales |
| Judgment Date | 14 June 2006 |
| Date | 14 June 2006 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F. Avery Jones CBE
Kevin Prosser QC and Mr James Henderson, counsel, instructed by P E Shirley & o, chartered accountants, for the Appellant
Michael Furness QC, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
Accrued income scheme - short sale of gilts - whether the Appellant "becomes and does not cease to be entitled to them on the day" within s. 710(7) TA 1988 - no - accordingly on no day did the nominal value of gilts held by her exceed £5,000 and no charge arises under the accrued income scheme practice - Revenue stating its conclusion in the closure notice that Ramsay applied to deny a deduction for manufactured interest - whether it is open to them to abandon the Ramsay argument and contend that instead a charge to tax arises under the accrued income scheme - yes - appeal allowed
1. This is an appeal by Mrs Philippa D'Arcy against the conclusion in a closure notice dated 15 February 2005 and the amendments to her return for 2001-02 to give effect to that conclusion. The Appellant was represented by Mr Kevin Prosser QC and Mr James Henderson, and the Revenue by Mr Michael Furness QC.
2. In brief the Appellant entered into a tax avoidance scheme involving transactions in gilts designed to create a tax deduction for a manufactured interest payment. The Revenue issued a closure notice contending that Ramsay applied with the effect that no deduction was created (and a smaller amount of income was not taxable), but they have since abandoned that contention and now contend that the deduction is allowable but that Appellant is taxable on an amount approximately equal to the deduction under the accrued income scheme. The Appellant raises two points, first that the Revenue cannot change the basis of their conclusion as stated in the closure notice, and secondly, that the accrued income scheme does not give the result for which the Revenue contend. I understand that there are other cases where the taxpayer has entered into a similar scheme but it is only the Appellant who has received a closure notice in relation to it, so that the procedural point will not be relevant to the other cases.
3. I had a bundle of documents and skeleton arguments from both parties including a skeleton in reply from the Appellant. There was an agreed statement of facts as follows to which I have added a few words of clarification between square brackets:
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(2) The appellant is Mrs Philippa D'Arcy (formerly Ahern, née Rose) who is the founder and chief executive officer of a company called The Rose Partnership which carries on specialist executive search business in the City of London.
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(3) The Appellant was introduced to the relevant transactions by Mr Philip Shirley, a tax adviser. Mr Shirley wrote to the Appellant by letter dated 10 January 2002
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(4) Attached to this letter was a projection, prepared by Mr Shirley, of the returns, costs and tax effects of the proposed transactions, subject (as mentioned in the letter) to the possibility of a movement in the value of the gilts.
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(5) On 16th January 2002, the Appellant countersigned the letter of 10 January 2002 thereby accepting its terms.
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(6) The letter and projection referred to proposed transactions with a nominal value of £33.5m; in the event the actual transactions had a nominal value of £31m
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(7) Having been contacted by Mr Shirley, NCL Investments Limited ("NCL"), a firm of agency brokers and members of The Stock Exchange, wrote a letter dated 23 January 2002 addressed to the Appellant and headed "Execution Only Service Terms and Conditions" setting out their standard terms and conditions. This letter was countersigned by the Appellant on 24 January 2002
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(8) By a second letter dated 23 January 2002 addressed to the Appellant and headed "Stock Lending Master Loan Agreement," NCL set out the terms on which they would provide a facility to "repo" securities on behalf of the Appellant. This letter was dated and signed for and on behalf of NCL on 24th January 2002 and countersigned by the Appellant on 25 January 2002.
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(9) Annexed to the second letter of 23 January 2002 was a Global Master Repurchase Agreement ("GMRA") between NCL and Royal Bank of Scotland Plc ("RBS") dated as of 13th August 2001, setting out the standard International Securities Market Association (ISMA) terms on which NCL would enter into "repo" transactions with RBS.
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(10) By letter dated 24 January 2002 Mr Shirley told the Appellant that he was expecting to do the transactions around 13/14 February 2002 and that he would contact her shortly before the 12th February to inform her of the margin to be provided to NCL.
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(11) The Appellant transferred £350,000 to NCL on 12 February 2002 by transfer from her account with HSBC Republic.
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(12) On 13 February 2002, NCL entered into a "repo" transaction with RBS on the standard ISMA terms whereby NCL agreed to buy £31m nominal value Treasury 9¾ % 2002 gilts (the "Gilts") from RBS for settlement on 14 February 2002 for a purchase price of £33,664,926.15 [at the price of £108.596536 which includes accrued interest]; and NCL agreed to re-sell to RBS equivalent Gilts for settlement on 20 February 2002 for a resale price of £33,683,464.92 (interest element £18,538.77). The Gilts were transferred from RBS's account with the Central Gilts Office (CGO) to NCL's CGO account in accordance with normal practice.
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(13) NCL carried out transactions on behalf of a number of other persons at the same time as the Appellant and the aggregate transaction related to gilts with a nominal value of £139.4m and the documentation in relation to the transactions with RBS and JPMS (see below) refer to the aggregate values of the transactions.
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(14) Since the term of the "repo" extended over an "Income Payment Date" (as defined as the record date, here corresponding to the ex div date), it was a term of the repo transaction that NCL should pay RBS £1,511,250 by way of "manufactured interest."
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(15) By letter to the Appellant dated 19th February 2002, NCL confirmed the terms of the repo transaction.
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(16) On 13 February 2002, NCL agreed with a market maker, JP Morgan Securities ("JPMS") to sell to JPMS £31m nominal value Gilts for settlement on 14th February 2002 for a sale price of £33,325,176.90 [I have changed this figure to the figure in the contract note from £33,238,276.90 in the agreed statement of facts; this is made up of the price at £102.98 (£31,923,800) plus 171 days of accrued interest (£1,404,476.90) and less commission (£3,100)]. This transaction took place in accordance with the rules of The Stock Exchange with the market maker offering the best price prevailing at the time.
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(17) NCL subsequently confirmed to the Appellant the terms of the transaction with JPMS by issuing a Contract Note dated 13 February 2002.
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(18) On settlement of this transaction, on 14 February 2002 JPMS paid NCL £33,325,176.90, and this amount was credited by NCL to the Appellant's account. The Gilts were transferred from NCL's CGO account to JPMS's CGO account in accordance with normal practice.
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(19) On 20 February 2002, NCL agreed with a market maker, again JPMS, to buy from JPMS £31m nominal value Gilts for settlement the same day for a purchase price of £31,855,456.79 [made up of the price at £102.935 xd (£31,909,850) less 7 days accrued interest (£57,493.21) plus commission (£3,100)]. This transaction took place in accordance with the rules of The Stock Exchange with the market maker offering the best price prevailing at the time.
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(20) NCL subsequently confirmed to the Appellant the terms of the transaction with JPMS by issuing a Contract Note dated 20 February 2002.
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(21) The purchase price was paid to JPMS by NCL on 20 February 2002 and the Appellant's account with NCL was debited with this amount. The Gilts were transferred from JPMS's CGO account to NCL's CGO account in accordance with normal practice.
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(22) Also on 20 February 2002, NCL closed out the repo transaction by transferring the Gilts to RBS for the agreed sale price of £33,683,464.92, which amount was credited to the Appellant's account with NCL. The Gilts were transferred from NCL's CGO account to RBS's CGO account in accordance with normal practice.
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(23) On 20 February 2002 Mr Shirley sent a fax to the Appellant informing her of the terms and effects of the closing out of the short position.
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(24) On 27 February 2002 the date on which the half yearly coupon was due to be paid on the Gilts, NCL paid the sum of £6,795,750 to RBS and the Appellant's account was debited with her share of that amount (ie £1,511,250).
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(25) The Appellant did not, apart from the above, hold any securities within the meaning of Income and Corporation Taxes Act 1988 section 710s. 710 ICTA 1988 in 2000/01 or 2001/02.
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(26) The sole reason why the Appellant entered into the Stock Lending Master Loan Agreement with NCL was to reduce her income tax liability.
4. This question is whether the Revenue can argue in this appeal that the accrued income scheme applies, contrary to their conclusion stated in the closure notice that Ramsay applied.
5. I find the following additional facts relating to this question:
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(2) The closure notice dated 15 February 2005 stated:
My conclusion is that the disposal, acquisition and repo over £31,000,000 nominal of Treasury 9¾% 2002 should be regarded as a composite whole which was circular and self cancelling....Your return is amended as follows:
Claim. Your tax return included a claim for income tax relief in respect of manufactured interest of £1,511,250. In my opinion, the claim is not allowable.
Income. In connection with the transaction giving rise to your claim for manufactured interest relief, you returned interest from Royal Bank of Scotland and from NCL Investments Ltd...
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