Mayes v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 2008 |
| Date | 15 December 2008 |
| Court | Special Commissioners |
special commissioners decision
Dr David Williams
Kevin Prosser QC, instructed by McGrigors, solicitors, for the Appellant
David Ewart QC, instructed by the Solicitor to HMRC, for the Respondents
Income tax - Income and Corporation Taxes Act 1988 Income and Corporation Taxes Act 1988 section 539ss. 539-549 - whether payments into and out of life policies produced a corresponding deficiency under s. 549 - capital gains tax - whether sum paid for second hand life insurance life policies purchased with a view to claiming an income tax relief produced an allowable loss for capital gains tax - Carreras Group Ltd v Stamp Commissioner applied - R & C Commrs v Drummond applied
A special commissioner decided that payments into and out of second-hand insurance policies ("SHIPs") did not give rise to corresponding deficiency relief from income tax. However, sums paid for such policies purchased to claim income tax relief produced an allowable loss for capital gains tax purposes.
This case concerned a tax avoidance scheme, marketed as "SHIPS 2", using payments of premiums to and subsequent surrenders in part and then fully of existing non-qualifying life assurance policies (or second-hand insurance policies) ("the bonds") with the objective of providing relief against higher rate income tax for UK resident individuals in 2003-04. The taxpayer claimed that by use of this scheme he became entitled to a deduction of £1,876,134 against other income for higher rate income tax purposes for purposes of the tax relief given by ICTA 1988, Pt. XIII, Ch. II (as a result of corresponding deficiency relief. He also claimed relief of £131,323 against gains liable to capital gains tax for losses on the disposal of policies during that year.
In a letter closing an enquiry into the taxpayer's tax return for that year, an officer of Revenue and Customs concluded that there was no capital loss arising from the disposal of the policies. The officer also concluded that there was no corresponding deficiency on which to claim relief from higher rate income tax.
The taxpayer appealed arguing that he was entitled both to income tax losses and capital gains tax losses in respect of the same assets. HMRC contended initially that the taxpayer was not entitled to relief for either kind of loss. It was agreed that the commissioner should decide in principle whether either loss was allowable but should leave the precise amounts of any reliefs for the parties to agree.
Whether the taxpayer was entitled to a corresponding deficiency relief under Income and Corporation Taxes Act 1988 section 549ICTA 1988, s. 549 following the completion of the withdrawal from the bonds that had been assigned to him; and whether the sums paid by the taxpayer for the bonds were, for capital gains tax purposes, 'consideration given by him … wholly and exclusively for the acquisition of' the bonds.
The special commissioner (Dr David Williams) (allowing the appeal in part) said that the reason why the funds were paid into and then encashed from the bonds was to activate the benefit of Income and Corporation Taxes Act 1988 section 549 subsec-or-para 1ICTA 1988, s. 549(1). Part of the scheme relied on a strict application of the timetable incorporated in the calculations required for Income and Corporation Taxes Act 1988 part XIII chapter IIICTA 1988, Ch. II, Pt. XIII. The bonds were purchased by the taxpayer and the full funds withdrawn within the same tax year. All the events were assumed to have occurred in one 'year' so that only one calculation needed to be done for the purposes of Income and Corporation Taxes Act 1988 section 541 subsec-or-para 1s. 541(1)(b). There was no previous year to consider.
The gain in Income and Corporation Taxes Act 1988 section 540 subsec-or-para 1s. 540(1)(a)(v) required a further calculation. The allowable annual amount (as defined) had to be deducted from the reckonable aggregate value, but only if the year in question was not the final year. Here it required only the calculation of the reckonable aggregate value. Income and Corporation Taxes Act 1988 section 546 subsec-or-para 1Section 546(1) required the identification of the value, at the time of final surrender of any part or share in the rights conferred by the bond surrendered during the life of the bond. To that was added five per cent (or one-twentieth), as there was only one year involved, of any payment made by way of premium or lump sum consideration. The sum of those two amounts was the "reckonable aggregate value" for the purposes of s. 540(1)(a)(v). The "relevant capital payments" were any sums of a capital nature paid out under a policy before the chargeable event otherwise than because of disability (Income and Corporation Taxes Act 1988 section 541 subsec-or-para 5s. 541(5)). Income and Corporation Taxes Act 1988 section 549Section 549 provided that the calculation might result in a loss.
The overall effect was to charge the gains (or allow the losses) on the final surrender of a policy after taking into account any earlier chargeable events relating to that policy. That was what s. 539 stated to be the purpose of the Chapter. The ultimate question was whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically. In the present context that question became whether a corresponding deficiency could be claimed by the taxpayer under s. 549 by reference to a previous chargeable event consistently with s. 539 and the other sections in the Chapter when the deficiency related back not to an actual chargeable event but to the co-ordinated series of actions evidenced here (Carreras Group Ltd v Stamp CommissionerUNK [2004] UKPC 16; [2004] BTC 8,077 applied).
Standing back from the individual bonds and looking at the whole transaction and the common elements present, a series of companies deposited some £300m and then encashed the entire sum a short time later. It was known by all concerned that the entire funds were to be withdrawn within a pre-defined short period of them being deposited into the bonds. Further, the terms on which the money was held during the period were not standard terms of the bonds but specific and uncommercial terms to the investors and required a third party subsidy to the providers of the funds to make the scheme acceptable in market terms.
In the real world, the bonds were worth, in commercial terms, much the same after the funds had been encashed as before they had been put in. There was no other direct value to the companies undertaking pre-arranged self-cancelling steps with no commercial purpose other than the tax advantage that it was intended to secure in the UK under the terms of the Chapter on the onward sales of the bonds through a third party associated with the funding operation. They followed a pre-set timetable that had been discussed by all concerned. The encashment had been arranged before the funds went in, and was understood to be part of the deal under which the funds were deposited.
On those findings, to apply the sections in question to the two self-cancelling steps to generate a "reckonable aggregate value" such as to create a "corresponding deficiency", would not be a rational application of the Chapter and was not intended by the legislature. The calculations required by the Chapter were properly to be undertaken without reference to the payments in and the payments out. That reflected both the plans and the language used by those who took part in the actual funding operation.
Therefore the appeal was dismissed in so far as it related to the contended amount of corresponding deficiency relief. If there was any relief, then it was to be calculated without reference to any of the sums paid into the bonds, and then withdrawn again. That was a decision in principle.
The next question was whether the sums paid by the taxpayer for the bonds were, for capital gains tax purposes, 'consideration given by him … wholly and exclusively for the acquisition of' the bonds. It was rightly conceded for HMRC that the commissioner was bound by the judgment of Norris J in Drummond v R & C Commrs [2008] EWHC 1758; [2008] BTC 473. An amount was allowable to the taxpayer for the loss on the final surrender of the bonds. As a matter of fact it was neither the seller nor the taxpayer who determined the price he paid, but a third party to the transaction. There were therefore questions of fact to be decided before the exact amount of any loss could be determined. But as there was no corresponding deficiency for income tax purposes, it was appropriate on the facts to accept that the taxpayer did have a capital loss in buying the bonds and to enquire into the detail no further at this stage. Accordingly that aspect of the appeal would be allowed in principle.
1. This case concerns a tax avoidance scheme marketed as SHIPS 2. It is a scheme using what are said to be the payments of premiums to and subsequent surrenders in part and then fully of existing non-qualifying life assurance policies (or Second Hand Insurance Policies) with the objective of providing relief against higher rate income tax for UK resident individuals in 2003-04. David Mayes, the Appellant, claims that by use of this scheme he becomes entitled to a deduction of £1,876, 134 against other income for higher rate income tax purposes in 2003-04. This is because of a relief known as corresponding deficiency relief. He also claims relief of £131,323 against gains liable to capital gains tax for losses on the disposal of policies during that year.
2. In a letter closing an enquiry into Mr Mayes' tax return for that year, an officer of Revenue and Customs concluded that there was no capital loss arising from the disposal of the policies. The officer also concluded that there was no...
To continue reading
Request your trial
-
Mayes v HM Revenue and Customs
...no corresponding deficiency on which to claim relief from higher rate income tax. On the taxpayer's appeal, the special commissioner ((2008) Sp C 729) found that payments into and out of the scheme did not give rise to corresponding deficiency relief from income tax. He accepted HMRC's cont......