MacNiven v Westmoreland Investments Ltd

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Nicholls of Birkenhead,Lord Hoffmann,Lord Hope of Craighead,Lord Hutton,Lord Hobhouse of Woodborough
Judgment Date08 Feb 2001
Neutral Citation[2001] UKHL 6

[2001] UKHL 6

HOUSE OF LORDS

Lord Nicholls of Birkenhead

Lord Hoffmann

Lord Hope of Craighead

Lord Hutton

Lord Hobhouse of Wood- borough

Macniven

(Her Majesty's Inspector of Taxes)

(Appellants)
and
Westmoreland Investments Limited
(Respondents)

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Lord Nicholls of Birkenhead

My Lords,

1

On this appeal the Inland Revenue Commissioners pray in aid what is loosely called the Ramsay principle. This is a reference to the decision in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300. So it is necessary first to remind oneself what the House decided in that case. An initial point to note is that the very phrase “the Ramsay principle” is potentially misleading. In Ramsay the House did not enunciate any new legal principle. What the House did was to highlight that, confronted with new and sophisticated tax avoidance devices, the courts' duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation: see Lord Wilberforce, at [1982] AC 300, 326.

2

Ramsay brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties' intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.

3

This development had already been foreshadowed in the dissenting judgment of Eveleigh LJ in Floor v Davis [1978] Ch 295 and in decisions of the House in Inland Revenue Commissioners v Plummer [1980] AC 896 and Chinn v Hochstrasser [1981] AC 533. In Furniss v Dawson [1984] AC 474, 526, Lord Brightman set out his understanding of the rationale of this approach in these terms:

“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.Ramsay says that the fiscal result is to be no different if the several steps are pre-ordained rather than pre-contracted.”

4

Second, this is not to treat a transaction, or any step in a transaction, as though it were a “sham”, meaning thereby, that it was intended to give the appearance of having a legal effect different from the actual legal effect intended by the parties: see the classic definition of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802. Nor is this to go behind a transaction for some supposed underlying substance. What this does is to enable the court to look at a document or transaction in the context to which it properly belongs.

5

Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision? Thus, in Ramsay the taxpayer company sought to create an allowable loss to offset against a chargeable gain it had made on a sale-leaseback transaction. It sought to do so without suffering any financial detriment, by embarking on and carrying through a scheme which created both a loss which was allowable for tax purposes and a matching gain which was not chargeable. In rejecting the efficacy of this contrived “loss-creating” scheme, Lord Wilberforce, at [1982] AC 300, page 326, observed that a loss which comes and goes as part of a pre-planned, single continuous operation “is not such a loss (or gain) as the legislation is dealing with”. In Inland Revenue Commissioners v Burmah Oil Co Ltd (1981) 54 TC 200, 220, Lord Fraser of Tullybelton described this passage as the ratio of the decision in Ramsay.

6

As noted by Lord Steyn in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991, 1000, this is an exemplification of the established purposive approach to the interpretation of statutes. When searching for the meaning with which Parliament has used the statutory language in question, courts have regard to the underlying purpose that the statutory language is seeking to achieve. Likewise, Lord Cooke of Thorndon regarded Ramsay as an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation: see [1997] 1 WLR 991, 1005.

7

The Ramsay principle or, as I prefer to say, the Ramsay approach to ascertaining the legal nature of transactions and to interpreting taxing statutes, has been the subject of observations in several later decisions. These observations should be read in the context of the particular statutory provisions and sets of facts under consideration. In particular, they cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive, Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in Ramsay. Failure to recognise this can all too easily lead into error. In particular, the much-quoted observation of Lord Brightman in Furniss v Dawson [1984] AC 474, 527, seems to have suffered in this way. Lord Brightman described, as the “limitations of the Ramsay principle”, that there must be a pre-ordained series of transactions, or a single composite transaction, containing steps inserted which have no business purpose apart from the avoidance of a liability to tax. Where those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes.

8

My Lords, I readily accept that the factual situation described by Lord Brightman is one where, typically, the Ramsay approach will be a valuable aid. In such a situation, when ascertaining the legal nature of the transaction and then relating this to the statute, application of the Ramsay approach may well have the effect stated by Lord Brightman. But, as I am sure Lord Brightman would be the first to acknowledge, the Ramsay approach is no more than a useful aid. This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute. I have already mentioned where this led in Ramsay. In Furniss v Dawson [1984] AC 474 it led to the conclusion that, within the meaning of the Finance Act 1965, the disposal of shares was in favour of Wood Bastow and not, as the taxpayer contended, in favour of Greenjacket.

The present case

9

On the present appeal the relevant question is whether the transactions between the taxpayer, Westmoreland Investments Ltd, and the sole shareholders of its parent company, the trustees of the Electricity Supply Pension Scheme, constituted payments of interest within the meaning of section 338 of the Income and Corporation Taxes Act 1988. Westmoreland suffered badly in the commercial property slump of the 1970s. It borrowed heavily from the pension scheme trustees. By the late 1980s it owed the trustees over £70 million, including more than £40 million accrued interest. Its liabilities greatly exceeded its assets. All the liabilities were due to the pension scheme trustees.

10

As matters stood, Westmoreland was valueless. But it had one potential asset: its substantial accrued interest liability. Under section 338 payments of interest, other than interest on bank loans, may be set against profits, and any unused excess may be carried forward under section 75 of the Taxes Act 1988. If Westmoreland could pay to the pension scheme trustees the £40 million arrears of interest, the company would have value as a company with substantial established tax losses. Others might be interested in acquiring Westmoreland, and using it as a vehicle for making profits. The purchaser of Westmoreland could transfer income producing assets to Westmoreland and take advantage of Westmoreland's losses to shelter against tax any future profits on which tax would otherwise be payable.

11

But first Westmoreland had to pay the arrears of interest to the pension scheme trustees. Obviously, Westmoreland was quite unable to make any such payments out of its own resources, or to borrow money for this purpose from a third party. So, the trustees of the pension scheme, to whom Westmoreland was indebted, passed money round in a circle. The genesis of the scheme, and details of its implementation in three instalments, are set out in the judgment of Peter Gibson LJ at [1998] STC 1131, 1137–1139. For present purposes it suffices to note that the trustees loaned the necessary...

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