Padfield and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 December 2020 |
| Neutral Citation | [2020] UKFTT 513 (TC) |
| Date | 23 December 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 513 (TC)
Judge Tony Beare
Mr Michael Sherry, counsel, instructed by RPC, appeared for the appellant
Mr Christopher Stone and Ms Anna Greenley, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
Capital gains tax and income tax – Whether a loss arising as a result of two forward contracts over securities (and a related acquisition and disposal) which led to a loss in respect of shares or certificates of deposit and a matching gain in respect of gilts was allowable for capital gains tax purposes (TCGA 1992, s. 16) or deductible against miscellaneous income (ITA 2007, s. 152) – No, because the principle outlined in WT Ramsay Ltd v IR Commrs (1981) 54 TC 101 applied to the transactions – In addition, in the case of the shares, the loss was not allowable because it arose in connection with arrangements which had securing a tax advantage as a main purpose – Whether the acquisition and disposal under the forward contracts were by way of bargain made at arm's length – Yes, because the terms of both contracts, together, could be taken into account for that purpose – Whether the consideration paid for the shares under one of the forward contracts was given wholly and exclusively for the shares – The position was unclear – Further evidence and submissions would have been required if that question had been relevant to the outcome of the appeals – Appeals dismissed.
The FTT concluded that a loss arising on disposal of securities under a forward contract where a matching gain arose in respect of gilts was not, under the Ramsay principle, an allowable loss for capital gains tax or income tax purposes.
This case was a lead case in relation to a structure known as the volatility investment strategy (VIS) marketed by Redbox Tax Associates LLP (Redbox). Under the structure, each participant entered into a forward purchase contract for the purchase of securities from a bank, Schroder & Co Ltd (Schroders) and, simultaneously, a forward sale contract for the sale of securities to Schroders (together referred to as a “trade”). The contracts contained identical triggers linked to the level of the FTSE 100 and provided for delivery of securities on the same day. The price payable for the securities under the contracts was fixed at the outset but the nature and value of the securities depended on the trigger. In summary, if the FTSE 100 remained within a specified band, small gains would arise to the participants, but if it fell outside the range, substantial gains and losses would arise. The terms of the contracts were designed to ensure that the securities on which gains arose were gilts but that any losses arose either in relation to shares or certificates of deposit. (in the case of forward purchase contracts, any gain or loss would arise on a subsequent sale in the market of the securities and in the case of forward sale contracts, the securities required to satisfy the contract had first to be acquired). Where the losses arose in relation to shares, an allowable loss for CGT purposes was claimed (TCGA 1992, s. 16) and where it arose on certificates of deposit (which is within the charge to income tax under ITTOIA 2005, s. 551), loss relief against miscellaneous income was claimed under ITA 2007, s. 152. The participants also paid a commission to Redbox and a contribution to a “fighting fund” to fund a test case that would be run until successfully settled, until no funds remained or no further appeal was possible, or until senior counsel advised that the case was unlikely to succeed.
The four appellants appealed against closure notices seeking to deny the loss relief claimed for either capital gains tax or income tax purposes, as appropriate. The issues to be resolved were:
- whether the separate identity of the forward purchase and sale contracts should be disregarded (on Ramsay principles) so that the net effect of entering into the matching contracts meant that there was no allowable (s. 16) or deductible (s. 152) loss (issue 1);
- alternatively (for income tax purposes), whether s. 152 only applied to real economic losses (issue 2);
- alternatively (for capital gains tax purposes) whether TCGA 1992, s. 16A applied to disallow any loss (issue 3);
- further (for CGT purposes), if the appellants were successful on issue 1, whether TCGA 1992, s. 17 (non-arm's length transactions) operated to substitute market value so that no chargeable gain or allowable loss arose (issue 4); and
- in relation to one of the participants who had realised a loss on a subsequent sale of securities acquired under a forward purchase contract, whether the allowable cost under TCGA 1992, s. 38 was restricted to market value of the securities when acquired rather than price paid.
The Tribunal were obliged to make findings of fact based mainly on documentary evidence as Redbox declined to provide witness evidence and only one of the four appellants gave such evidence. Significant facts found common to all four appellants were as follows:
- the VIS structure was devised and marketed as a single arrangement;
- as a result of netting provisions in the contract with Schroders, the only amount which each appellant stood to lose was the difference between the acquisition prices payable under the contracts plus dealing costs
- although there was a 50–60% chance of a profit arising on each trade under the structure, each appellant intended to continue to enter into further trades until a loss was realised;
- there was never any realistic chance of an appellant realising pre-tax profits (after taking into account fees and commissions);
- the Tribunal was not satisfied that each appellant would have entered into each trade if he did not have chargeable gains or miscellaneous income to shelter, nor that the terms of each forward contract were such that any person would have been prepared to enter into it without also entering into the other forward contract at the same time.
The Tribunal concluded that the two forward contracts together with the acquisition necessary to satisfy the forward sale contract and the sale in the market of securities acquired under the forward purchase contract were a single composite transaction that was self-cancelling because the VIS structure was a single integrated scheme designed to deliver a tax-relievable loss. Each specific transaction that occurred took place without further involvement of the appellants, as Schroders were provided by a letter of authority authorising them to buy and sell on their behalf the securities that were the subject of the two forward contracts. In the Tribunal's view, the facts could not be distinguished from Ramsay (in which there were “circular self-cancelling paper transactions”) on the grounds that each separate transaction (buying and selling of securities in the market) actually took place because it was also necessary to show that there was a business purpose, which had not been demonstrated in this case and, moreover, in considering the question of whether there were “real” transactions, it was the position of the appellants that was relevant. Once they had signed the necessary paperwork they played no further role in proceedings so that, as far as they were concerned, the transactions themselves had no “real world” existence.
Although their conclusion that no allowable or deductible loss arose because of the characterisation as a composite self-cancelling transaction meant that the appellants' case failed, the Tribunal proceeded, for completeness, to consider the remaining issues.
As the Ramsay principle is a principle of statutory construction, the Tribunal considered that the meaning of the word “loss” had already been established (issue 1) as meaning “real economic loss” and therefore that should also apply in relation to losses under ITA 2007, s. 152, so that relief would be denied.
For the purposes of the targeted anti-avoidance provision in TCGA 1992, s. 16A, it was agreed by both parties that arrangements existed (the VIS structure) and that a tax advantage arose. The only point of contention was whether the purpose or main purpose of the arrangements was to secure a loss. The Tribunal found that the only possible conclusion was that securing an allowable loss was a main purpose of the arrangements and further considered that it was the only purpose as there was nothing in the evidence provided to suggest that there was any other purpose to the arrangements.
Gains or losses were generated because the price payable under the forward contracts was fixed at the outset but the market value of the securities acquired or sold under the contracts varied. However, if s. 17 applied to substitute market value for price paid, no gain or loss would arise. On the basis of the FTT decision in Price [2013] TC 02703 (later upheld by the Upper Tribunal) and the High Court judgment in Bullivant Holding Ltd v IR Commrs [1998] BTC 234, the Tribunal considered that the terms of the whole composite transaction had to be taken into account, and on that basis the appellants and Schroders were each acting in accordance with their own commercial interests and therefore that s. 17 did not apply.
As described above, this arose in relation to only one of the participants whose loss had arisen as a result of a forward purchase contract and was therefore only realised on subsequent disposal of the securities acquired under that contract. As the market value of the securities was substantially less than the price paid, the question was whether the expenditure was wholly and exclusively incurred on the acquisition of the securities. The Tribunal considered it did not automatically follow that because the acquisition under the forward contract was made under a bargain at arm's length the whole of the consideration was given wholly and exclusively for the securities, but that...
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Redbox Tax Associates Llp
...promoter liable to significant penalties under TMA 1970, s. 98C. The effectiveness of the Volatility structure was tested in Padfield [2021] TC 07983, in which the FTT concluded that the losses created were not, under the Ramsay principle, allowable losses for capital gains tax or income ta......