Mayes v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Thomas,Lord Justice Toulson |
| Judgment Date | 12 April 2011 |
| Neutral Citation | [2011] EWCA Civ 407 |
| Docket Number | Case No: A3/2009/2450 & 2462 |
| Court | Court of Appeal (Civil Division) |
| Date | 12 April 2011 |
[2011] EWCA Civ 407
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON MRS JUSTICE PROUDMAN
CH/2009/APP/0072 & 0063
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Thomas
and
Lord Justice Toulson
Case No: A3/2009/2450 & 2462
Mr David Ewart QC and Mr David Yates (instructed by HMRC Solicitor's Office) for the Appellant
Mr Michael Furness QC (instructed by McGrigors LLP) for the Respondent
Hearing dates: 28 th & 29 th July 2010
Two linked appeals
These are two linked second appeals under the Taxes Management Act 1970. They relate to a tax-saving thing called SHIPS 2. It was marketed by Matrix Tax Solutions, a firm of tax advisers providing introductory services, as "A Higher-Rate Income Tax Relief Structure" and as an "innovative tax solution." A central feature of SHIPS 2 was the purchase by a non-resident company of non-qualifying life assurance policies called AIG Bonds ("AIG" standing for the American Insurance Group) followed, very soon after, by their partial surrender and a withdrawal of funds. The principal point in dispute is whether, as a matter of law and as was held by the Special Commissioner, those pre-ordained, composite, artificial and tax-motivated events in SHIPS 2 are to be disregarded for fiscal purposes.
The final destination of the voyage in SHIPS 2 was the creation, by a programme of planned events, of an amount of "corresponding deficiency relief" i.e. a loss. The sales literature of SHIPS 2 targeted taxpayers resident in the United Kingdom having high earnings or significant investment income. They were told that they could use the corresponding deficiency relief as loss, pay less income tax and claim capital gains tax (CGT) loss relief.
In both appeals the broad question is whether SHIPS 2 accomplished the tax consequences that its authors and operatives set out to achieve. In one appeal the issue is the availability of a deductible loss (corresponding deficiency relief) for income tax purposes. In the other appeal the issue is the proper amount of a payment deductible for CGT purposes.
The Special Commissioner (Dr David Williams) decided the case at first instance on 15 December 2008. He heard an appeal from a Notice of Assessment issued on 25 January 2007 in respect of the 2003/2004 tax year. Her Majesty's Revenue and Customs (HMRC) won that appeal.
Mr David Mayes, a participant in SHIPS 2 and the lead applicant in litigation funded by 70 participants with a similar interest, appealed. At the first level of appeal on 8 October 2009 Proudman J decided that Mr Mayes won the corresponding deficiency relief issue, but that, against the wishes of Mr Mayes, the CGT issue should be remitted for further facts to be found at first instance.
A second level appeal is now brought to this court by HMRC with permission granted by Lloyd LJ on 17 December 2009. Permission was granted on the ground that the issues raised by HMRC on the interpretation of the Chapter II of Part XIII of the Income & Corporation Taxes Act 1988 ( ICTA) relating to the taxation of life policies are of sufficient general importance and show sufficient prospects of success to warrant a second appeal.
Mr Mayes has brought his second appeal from the part of Proudman J's order that remitted the case to the First-tier Tribunal (Tax Chamber) (now exercising the jurisdiction formerly in the Special Commissioner) for the determination of the facts relevant to the CGT issue. It concerns the amount paid by him for the assignment of life assurance policies under a Deed of Assignment dated 18 December 2003. The CGT question is this: for the purpose of determining, for CGT purposes, the loss suffered by Mr Mayes, were the sums paid by him under the Deed of Assignment consideration given by him wholly and exclusively for the acquisition of the life assurance policies (marketed as AIG Bonds) and therefore deductible from the surrender proceeds of the policies receivable by him? Mr Mayes' primary case is that the whole of the consideration paid by him is deductible for CGT purposes. HMRC say that he was paying not for the Bonds, but for the tax benefits of his passage on SHIPS 2.
Mr Mayes was refused permission by Lloyd LJ on the ground that the CGT issue was a factual one that did not warrant a second appeal. Permission was granted by Sir Scott Baker at the oral hearing of a renewed application on 29 January 2010.
As the different outcomes before the Special Commissioner and in the Chancery Division might suggest, this case is not a simple one, even for the tax experts. The principal difficulty is in how judicial pronouncements on statutory construction, cast in very general terms and developed by the highest courts over the last 30 years in the context of pre-ordained, self-cancelling, composite, artificially structured transactions set up solely for tax avoidance purposes, should be applied to the particular facts of this case. An unusual feature of this case is that the series of pre-planned steps, which HMRC say include artificial, unreal and uncommercial tax-avoidance insertions, are built on or structured around a set of provisions in ICTA for the taxation of life assurance policies: and those provisions operate on a basis and in a manner that can fairly be described as artificial, unreal and uncommercial.
For reasons that will become apparent it is unlikely that this test case will be finally resolved at this level of appeal.
Background
Mr Mayes is a UK resident. He is one of a group of participants in SHIPS 2. The only object of SHIPS 2 was to minimise the income tax liabilities of the participants as higher-rate taxpayers and their liabilities for CGT. The transactions were structured in a seven point programme, which will be explained in more detail below. Some of the steps were self-cancelling. The steps to the creation of deductible losses included the payment of initial premiums for life assurance policies; the payment of additional "top-up" premiums by a non-resident company; followed, in less than a month, by a partial surrender of the policies by that same company, thereby creating a potential for relief without triggering a charge to tax; later followed by a full surrender of the policies by the individual investor, in this case Mr Mayes, who then claimed that he was entitled to make deductions for tax reduction purposes.
Put more technically SHIPS 2 was designed to produce (a) allowable deductions from total income in the form of corresponding deficiency relief resulting on the disposal of the policies within the meaning of s.549 ICTA; and (b) capital sums allowable as deductions in the computation of gains for the purpose of CGT under s.38 of the Taxation of Chargeable Gains Act 1992 ( TCGA).
In a luminous judgment Proudman J identified what she described as "the instinctive reaction" to the scheme (i.e. the likely reaction of almost every taxpayer except the participants in SHIPS 2). She said:-
"45. I sympathise with the instinctive reaction that such an obvious scheme ought not to succeed…"
HMRC persuaded the Special Commissioner that SHIPS 2 did not succeed. (If it did, about £24m would be lost in tax, though that fact is irrelevant to the point of law.) They appeal from the reversal of fortune before Proudman J. They say that their appeal raises a point of general principle: what is the current approach of the courts to the interpretation of fiscal legislation and its application to tax avoidance schemes? The intricate ICTA provisions, around which tax-planning technologists have ingeniously crafted the seven pre-planned steps in SHIPS 2, are of the kind that arouse reactions against the tax planning industry and against the tax laws upon which it depends. It seems to be a regular feature of structures like SHIPS 2 that, although they are linked to difficult and complicated legislation, they are based on remarkably simple ideas.
One reaction, based more on academic reflection rather than on gut reaction, is that "…neither justice nor reason has any place in tax law", which "..more than any other branch of municipal law…is open to the reproach of being utterly incomprehensible by the individuals affected, and even more frequently by their legal advisers": The Oxford Companion to Law by Professor David M Walker QC (1980) at pp 1207–8. Another passage in the same work lambasts "…the enormous volume and constantly changing detail of the chaotic and largely incomprehensible body of verbiage called the law of taxation."
For those who have to interpret and apply the law, Philippics and denunciations of the tax system in general, or of a particular product of tax technology, are not of much practical use. On the journey through unfamiliar ICTA and SHIPS 2 terrain it is more re-assuring to keep company with clear-thinking, objective and careful expert guides, such as Mr David Ewart QC for HMRC and Mr Michael Furness QC for Mr Mayes, than to be carried away by emotive expressions of intelligent indignation.
HMRC are charged with operating a complex system for collecting tax in accordance with the law. When they are in dispute with taxpayers (and with non-taxpayers) the constitutional duty of the tribunals and the courts is plain: to construe the language of the legislation in accordance with the principles of statutory interpretation, to analyse the transactions in question in accordance with the applicable general law and to apply the correct construction of the legislation to them.
The relevant transactions may, for forensic purposes, be rudely labelled as "schemes" or "devices" or "dodges", or be analysed less crudely as "circular" or "self-cancelling" or "pre-ordained" or...
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