Moodie v Commissioners of Inland Revenue and Another ; Sotnick v Same

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date30 April 1991
Judgment citation (vLex)[1991] EWCA Civ J0430-10
Docket Number91/0577
Date30 April 1991

[1991] EWCA Civ J0430-10






Royal Courts of Justice.


Lord Justice Balcombe

Lord Justice McCowan

Sir Christopher Slade


Oliver Christopher David Moodie
(1) Commissioners of Inland Revenue
(2) John Bernard Sinnett (HM Inspector of Taxes)


Richard Eric Sotnick
(1) Commissioners Of Inland Revenue
(2) Alan Michael Edwards (HM Inspector of Taxes)

MR. A.R. THORNHILL Q.C. and MR. KEVIN PROSSER (instructed by Messrs. Berwin Leighton) appeared on behalf of the Appellants.

MR. JONATHAN PARKER Q.C. and MR. PETER CRANFIELD (instructed by the Solicitor for the Inland Revenue) appeared on behalf of the Respondents.


These two appeals, by taxpayers from orders made by Mr. Justice Hoffmann on 4th May 1990, raise the question whether a tax avoidance scheme, which was accepted as effective for its purpose by the House of Lords in I.R.C. v. Plummer [1980] A.C. 896; (1979) 54 T.C. 1, has been rendered ineffective by the subsequent decision of the House of Lords in W.T. Ramsay v. I.R.C. [1982] A.C. 300; (1981) 54 T.C. 101. The Special Commissioners so held and their decision was affirmed by Mr. Justice Hoffmann by the orders under appeal.


The first appellant, Mr. Moodie, heard of the scheme, known as the Cardale Capital Income Plan, from his bank. The scheme subsequently went through several editions, but the version with which Mr. Moodie was concerned was Mark I and, as the Special Commissioners found, was in its essential features identical to that which was considered in Plummer (supra). Those essential features may be summarised as follows.


a) By an annuity agreement made on 8th March 1971 with Home and Overseas Voluntary Aid Services Limited ("HOVAS"), a company with charitable status, in consideration of the sum of £59,400 paid by "HOVAS", Mr. Moodie agreed to pay to "HOVAS" for five years, or during the remainder of his life if shorter, an annuity at such rate as should after deduction of income tax at the standard rate equal £12,000.


b) "HOVAS" paid this consideration by overdrawing on its account with Slater Walker Ltd. ("the bank").


c) The consideration was paid into Mr. Moodie's account with the bank.


d) Mr. Moodie used the consideration money (plus £600) to purchase from Old Change Court (Investments) Limited ("OCC"), another company in the Slater Walker group, 10 promissory notes to the total value of £60,000. By a collateral agreement between Mr. Moodie and OCC these promissory notes carried interest at the rate of six and a half per cent per annum (less tax): no interest was to be paid before 1st April 1973 or after 1st April 1975.


e) The promissory notes were then deposited with "HOVAS", together with 3,764 British Investment Trust shares and 3,600 Scottish United Investors shares belonging to Mr. Moodie, as security for the payment of the annual sums due under the annuity agreement. The dividends on these shares were to be paid to Mr. Moodie.


f) The annual sums of £12,000 payable by Mr. Moodie to HOVAS under the annuity agreement were paid by standing order by Mr. Moodie on his account with the bank. The overdraft so created was immediately liquidated by "HOVAS" releasing promissory notes to the value of £12,000, and OCC paying the amount of these promissory notes to the bank for the credit of Mr. Moodie.


g) The possibility of Mr. Moodie dying during the period of the annuity agreement was covered by an insurance policy taken out at the inception of the scheme.


h) Mr. Moodie signed certificates of deduction of income tax (form R185) to be sent to "HOVAS" with each annual payment under the annuity agreement. The intention was that "HOVAS", as a charity, should then claim repayment of this tax.


These were the essential features of the Mark I scheme undertaken by Mr. Moodie (although there were many other matters of detail which it is unnecessary to mention) and as the Special Commissioners rejected the Revenue's contention that the arrangements made pursuant to the scheme were a sham, and held that they had reality and substance, the Revenue now accepts that the scheme was effective to give rise to the legal relationships and consequences which it purported to create. Nevertheless there are a number of other matters which should be mentioned since they are directly material to the Revenue's "fiscal nullity" argument.


1) The only cash or "real money" in the system was the sum of £3,693 paid by Mr. Moodie to the bank to set the scheme in motion. That sum was made up of £20 "overdraft interest"; £103 stamp duty; £2,970 initial fee payable to S. Cardale & Co. Ltd., the promoters of the scheme; and £600 insurance premium.


2) All other steps in the scheme were effected by book-keeping entries in the participants' accounts with the bank. The Special Commissioners found that at each stage of the scheme, i.e. the payment of the initial consideration for the annuity by "HOVAS" to Mr. Moodie with the purchase by him of the promissory notes, and then the subsequent annual payments of the annuity and the encashment of the promissory notes, the money represented by these book-keeping entries went round in a complete circle, albeit with the introduction of other Slater Walker companies into the circle.


So, as Mr. Justice Hoffmann said in his judgment:

"The scheme was thus self-cancelling at two levels. First, the aggregate of payments cancelled each other out over the five year period of the annuity…But secondly and more importantly, the scheme was self-cancelling at the level of each annual payment. The capital sum which Mr. Moodie was supposed to receive in exchange for the annuity was only released to him by instalments equal to and simultaneous with the annuity instalments."


The second appellant, Mr. Sotnick, entered into the Mark II version of the scheme. In his case the annuity agreement was made on 16th February 1972, the annuity was for £9,000 per annum, the consideration for the annuity was the sum of £37,700, and the charitable company was the Deprived Children's Aid Fund Ltd. ("DCAF"), but these are matters of detail. The Mark II scheme differed from the Mark I scheme in the following respects:


a) Mr. Sotnick paid the first annuity payment of £9,000 out of his own resources.


b) DCAF borrowed the £37,700 from within the Slater Walker group, and paid it into a new account opened for Mr. Sotnick at the National Westminster Bank, into which account Mr. Sotnick paid a sum of £1,900 plus £25 bank charges.


c) The total sum of £39,600 (representing 110 per cent of the amount of the four annuity payments yet to be made) was applied in the purchase of 3 per cent Savings Bonds 1965/75 ("the gilts").


d) The gilts were then deposited with DCAF as security for the four remaining annuity payments.


e) DCAF in turn deposited the gilts with the Slater Walker group as security for the repayment of its loan.


f) As each annuity date came round the sum of £9,000 was paid to DCAF by standing order on Mr. Sotnick's bank account and the money so used was replaced by the release and sale of the requisite amount of the gilts.


g) Mr. Sotnick received interest year by year on the amount of the gilts remaining unsold.


In this case also the Special Commissioners rejected the Revenue's contention that the annuity agreement was a sham. Nevertheless they made a number of findings pertinent to the Revenue's "fiscal nullity" agreement which I need not set out in detail; the judge summarised the effect of the Mark II scheme by saying that it "retained its self-cancelling character both at the overall and at the annual levels."


In the implementation of both schemes certain minor variations of detail occurred. Thus in Mr. Moodie's case he waived his right to receive the accrued interest on the promissory notes. In Mr. Sotnick's case the gilts were sold before the scheme had worked itself out and were replaced as security by promissory notes to the value of the outstanding annuity payments: Mr. Sotnick received £3,362.71 from the proceeds of sale of the gilts. Nevertheless these variations of detail are irrelevant to the issues on this appeal.


In each case before the Special Commissioners the question was whether, in computing his total income for tax purposes in the years under appeal, the taxpayer was entitled to deduct the annuity payments under the schemes. Mr. Moodie's appeals against assessments to income tax and surtax which did not allow for the deduction of the annuity payments were heard shortly before similar appeals by Mr. Sotnick. In each case the Special Commissioners, relying upon their understanding of the principles expounded by the House of Lords in Ramsay (supra), held that the appeals failed. In Moodie they said:

"Our task, as we see it, is not simply to compare this case with the case stated in Plummer but to review the facts established by the very full evidence which was put before us and to consider whether they come within the principles of fiscal nullity as those principles are now understood in the light of the decided cases from Ramsay to Furniss v. Dawson [1984] 2 WLR 226.

…The question remains, whether Mr. Moodie made payments of an annuity in the sense contemplated by the legislation.

The annuities contemplated by the Taxes Acts are, in our opinion, those by which a taxpayer's financial resources are in reality diminished. Since we are satisfied that Mr. Moodie's resources were not in fact, nor were intended to be, diminished by the payments provided for in the annuity...

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