Mayes v HM Revenue and Customs

JurisdictionEngland & Wales
JudgeMrs Justice Proudman
Judgment Date08 October 2009
Neutral Citation[2009] EWHC 2443 (Ch)
Docket NumberCase No: CH/2009/APP/0072& 0063
CourtChancery Division
Date08 October 2009

[2009] EWHC 2443 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

ON APPEAL FROM THE SPECIAL COMMISSIONERS

Before: Mrs Justice Proudman

Case No: CH/2009/APP/0072& 0063

Between
David Mayes
Appellant
The Commissioners for Her
and
Majesty's Revenue & Customs
Respondents

Michael Furness QC (instructed by McGrigors LLP) for the Appellant

David Ewart QC (instructed by the Solicitor to HMRC) for the Respondent

Hearing dates: 13 and 14 July 2009

Mrs Justice Proudman

Mrs Justice Proudman:

1

There are before me two appeals under the Taxes Management Act 1970 on points of law from the decision of the Special Commissioner, Dr David Williams, given on 15 th December 2008. The appeals concern a tax avoidance scheme known as “Ships 2”.

Corresponding Deficiency Relief

2

The first appeal, and the one involving the larger sum of tax, is Mr Mayes's appeal about corresponding deficiency relief and I propose to deal with it first.

3

The primary objective of the Ships 2 scheme was to use the corresponding deficiency relief afforded by Chapter II of Part XIII of the Income and Corporation Taxes Act 1988 (Taxes Act) to reduce the liability to higher rate income tax for UK resident individuals.

4

The product was a Bond comprising a group of 20 pre-existing single premium “non-qualifying” life assurance policies. It was marketed as combining the tax efficiency of a life insurance policy with the advantages of instant access. As is often the case with tax schemes, the applicable provisions of the Taxes Act are complex but the idea behind the scheme was simple. The scheme involved part-surrender of the policies comprised in the Bonds by a non-resident company (thus creating the potential for relief, a chargeable event, without triggering an actual charge to tax), followed by a full surrender by the individual investor who could then claim the relief. To manufacture a chargeable event and maximise the amount of the relief, the non-resident company added and then withdrew a large sum of money by way of purported premiums within the space of a month.

5

Mr Ewart QC on behalf of HMRC usefully divided the scheme as implemented in the present case into seven steps, as follows:

(1)

02 04 2002

A Jersey resident individual purchased from AIG Life (part of the American Insurance Group) by means of single premiums of £5,000 two Bonds comprising several policies on his life.

(2)

06 03 2003

He assigned the Bonds to a Luxembourg company (“JSI”) for value.

(3)

07 03 2003

JSI paid £375,000 to AIG Life in respect of each policy in the first Bond and £50,000 in respect of each policy in the second Bond.

(4)

31 03 2003

JSI withdrew from the Bonds all the sums paid on 07 03 2003.

(5)

06 11 2003

JSI assigned the Bonds to an LLP for value.

(6)

18 12 2003

The LLP assigned the Bonds to Mr Mayes for value.

(7)

13 02 2004

Mr Mayes surrendered both Bonds to AIG Life, receiving in return the remaining proceeds in the Bonds. He then claimed income tax relief arising from the surrender for the tax year 2003–4.

6

HMRC's contention, accepted by the Special Commissioner, relates to Steps 3 and 4, the part of the scheme whereby additional premiums were added and the amounts of those premiums withdrawn within the same month. Mr Ewart submitted that Steps 3 and 4 were, taken together, a pre-ordained, composite, self-cancelling transaction devoid of commercial content which fell to be disregarded pursuant to the principle in Ramsay v. IRC [1981] STC 174. Accordingly, he submitted, there was no chargeable event and no corresponding relief. For fiscal purposes, nothing happened. The steps were (in the language of Lord Goff of Chieveley in Ensign Tankers (Leasing) Ltd v. Stokes [1992] 1 AC 655 at 681), an artificial structure by which “the taxpayer conjures out of the air a loss, or a gain…which otherwise would never have existed…designed to achieve an adventitious tax benefit…”

7

There is a certain amount of common ground between the parties. It is agreed that the transactions in the present case did not constitute a sham. It is also agreed that the transactions comprised a tax avoidance scheme, marketed as such. It is further common ground that the mere fact that the inserted steps were followed solely for tax avoidance purposes is insufficient to invoke the Ramsay principle: see the observations of the Special Commissioners on Craven v. White [1988] STC 476 in Campbell v. IRC [2004] STC (SCD) 396 at 409 [73]. Nor is the fact that some parts of the transaction were circular or pre-ordained. The Court must adopt a purposive interpretation of the legislation in question to decide whether the transaction does or does not fall within the relief it affords. This entails an examination of the underlying purpose that the statutory language is seeking to achieve: see per Lord Nicholls of Birkenhead in MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd [2003] 1 AC 311 at 319 [6].

8

Where the parties are at odds is as to how to apply a purposive construction in the present case. There are clear statements of principle in the authorities but it is not easy to apply them to different situations. It is also true to say that each authority contains slightly different formulations of those principles. Mr Ewart submitted that the case was close to IRC v. McGuckian [1997] 1 WLR 991 in which Lord Browne-Wilkinson said (at 998),

“the statutory principles are to be applied to the substance of the transaction, disregarding artificial steps in the composite transaction or series of transactions inserted only for the purpose of seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the artificial steps but what was its purpose. Having identified the artificial steps inserted with that purpose and disregarded them, then what is left is to apply the statutory language of the taxing act to the transaction carried through stripped of its artificial steps.”

9

Mr Ewart relied on the fact that the objective, and the only objective, of the scheme was that future investors should receive the relief, which had been artificially generated through Steps 3 and 4. Those steps were pre-planned; as he put it, “programmed to happen”, and they had neither commercial intent nor commercial effect. He relied on the statement of Lord Wilberforce in Ramsay that the court is not obliged to adopt a “step by step, dissecting, approach which the parties themselves may have negated”. The transaction must be viewed in the real world, with the focus on the end result.

10

Mr Furness QC submitted on Mr Mayes's behalf that the case was closer to MacNiven. He said that HMRC was trying to revert to the submission which was made in that case and failed (see p. 325) to the effect that there is a rebuttable rule of construction of tax legislation that if a transaction is circular and purely tax-motivated without any commercial purpose it can be disregarded. The correct approach is that of Lord Hoffmann in MacNiven, namely to start by construing the legislation in each case. I observe that Mr Ewart did not renew the submission he made before the Special Commissioners in Campbell (at 406 [54] and see the comment at 410 [77]) to the effect that the ratio of MacNiven was not to be found in the speech of Lord Hoffmann.

11

Mr Furness submitted that the applicable statutory provisions are highly prescriptive, exacting tax on the basis of a formulaic arithmetical approach to transactions. Steps 3 and 4 were real transactions comprising the payment and repayment of real premiums on real life policies with real surrenders. HMRC's case could not account for what the payments were if they were not premiums, or how the repayments fell to be characterised if they were not partial surrenders. Indeed the statement of facts agreed between the parties presupposes that the transactions at Steps 3 and 4 properly fall to be characterised as payments of premiums and part surrenders of the policies.

12

As I understood Mr Ewart, his point was this was irrelevant: steps which are purely artificial can be ignored when applying the fiscal legislation even if they may be considered real steps for other purposes. There is a contrast between the juristic categorisation of the transactions and the “real world” in the sense of the commercial context which is to influence the construction of the words as used in the statute: see per Lord Hoffmann in MacNiven at p.329 ([40]–[41]). As Lord Hoffmann went on to say at p. 331–2 ([47]–[48]), commenting on an oft-quoted passage from Lord Brightman's speech in Furniss v. Dawson [1984] AC 474 at 527 (reformulating what Lord Diplock had said in IRC v. Burmah Oil Co Ltd [1982] STC 30 at 32–3):

“…When Lord Brightman said that the inserted steps are to be 'disregarded for fiscal purposes', I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept. In the Furniss case, this was the concept of a disposal by one person to another. For that purpose, and for that purpose only, the disposal to Greenjacket was disregarded. But that does not mean that it was treated, even for tax purposes, as if it had never happened. The payment by Wood Bastow was undoubtedly to Greenjacket and so far as this might be relevant for tax or any other purposes, it could not be disregarded.”

13

Mr Ewart argued that it was irrelevant to analyse the nature of the payments for insurance purposes; the agreed statement of facts to the effect that there were genuine life assurance policies, genuine premiums and genuine partial surrenders does not affect the present argument, neither does the fact that AIG presumably had to account for the deposited premiums for tax purposes. The steps were artificial in that there was no commercial possibility that they...

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