Ramsay (W T) Ltd v Commissioners of Inland Revenue

The first of these appeals is an appeal by W. T. Ramsay Ltd, a farming company. In its accounting period ending 31 May 1973 it made a "chargeable gain" for purposes of corporation tax by a sale-leaseback transaction. This gain it desired to counteract, so as to avoid the tax, by establishing an allowable loss. The method chosen was to purchase from a company specialising in such matters a ready-made scheme. The general nature of this was to create out of a neutral situation two assets one of which would decrease in value for the benefit of the other. The decreasing asset would be sold, so as to create the desired loss; the increasing asset would be sold, yielding a gain which it was hoped would be exempt from tax.

In the courts below, attention was concentrated upon the question whether the gain just referred to was in truth exempt from tax or not. The Court of Appeal, reversing the decision of Goulding J., decided that it was not. In this House, the Crown, while supporting this decision of the Court of Appeal, mounted a fundamental attack upon the whole of the scheme acquired and used by the appellant. It contended that it should simply be disregarded as artificial and fiscally ineffective.

Immediately after this appeal there was heard another taxpayer's appeal� Eilbeck v. Rawling. This involved a scheme of a different character altogether, but one also designed to create a loss allowable for purposes of capital gains tax, together with a non-taxable gain, by a scheme acquired for this purpose. Similarly, this case was decided, against the taxpayer, in the Court of Appeal upon consideration of a particular aspect of the scheme: and similarly, the Crown in this House advanced a fundamental argument against the scheme as a whole.

I propose to consider first the fundamental issue, which raises arguments common to both cases. This is obviously of great importance both in principle and in scope. I shall then consider the particular, and quite separate arguments, relevant to each of the two appeals.

I will first state the general features of the schemes which are relevant to the wider argument.

In each case we have a taxpayer who has realised an ascertained and quantified gain: in Ramsay£187,977, in Rawling£355,094. He is then advised to consult specialists willing to provide, for a fee, a preconceived and ready made plan designed to produce an equivalent allowable loss. The taxpayer merely has to state the figure involved i.e. the amount of the gain he desires to counteract, and the necessary particulars are inserted into the scheme.

The scheme consists, as do others which have come to the notice of the courts, of a number of steps to be carried out, documents to be executed, payments to be made, according to a timetable, in each case rapid (see the attractive description by Buckley L.J. in Rawling). In each case two assets appear, like "particles" in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss, and which gain is intended not to be taxable. Like the particles, these assets have a very short life. Having served their purpose they cancel each other out and disappear. At the end of the series of operations, the taxpayer's financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses, to the promoter of the scheme.

There are other significant features which are normally found in schemes of this character. First, it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end�they are not intended to be arrested half-way (cf. Chinn v. Hochstrasser [1981] W.L.R. 14). This intention may be expressed either as a firm contractual obligation (it was so in Rowling) or as in Ramsay as an expectation without contractual force.

Secondly, although sums of money, sometimes considerable, are supposed to be involved in individual transactions, the taxpayer does not have to put his hand in his pocket (cf. I.R.C. v. Plummer, ( [1980] A.C. 896, Chinn (supra.)). The money is provided by means of a loan from a finance house which is firmly secured by a charge on any asset the taxpayer may appear to have, and which is automatically repaid at the end of the operation. In some cases one may doubt whether, in any real sense, any money existed at all. It seems very doubtful whether any real money was involved in Rawling: but facts as to this matter are for the commissioners to find. I will assume that in some sense money did pass as expressed in respect of each transaction in each of the instant cases. Finally, in each of the present cases it is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax.

In these circumstances, your Lordships are invited to take, with regard to schemes of the character I have described, what may appear to be a new approach. We are asked, in fact, to treat them as fiscally, a nullity, not producing either a gain or a loss. Mr. Potter, Q.C. described this as revolutionary, so I think it opportune to restate some familiar principles and some of the leading decisions so as to show the position we are now in.

1. A subject is only to be taxed upon clear words, not upon "intendment" or upon the "equity" of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are "clear words" is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded, (see� I.R.C. v. Wesleyan and General Assurance Society (1948) 30 T.C. 11, 16 per Lord Greene: Mangin v. IRC. [1971] AC 739,746 per Lord Donovan. The relevant Act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains less allowable losses, arising from disposals.

2. A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect.

3. It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham. In this context to say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that. I shall return to this point.

Each of these three principles would be fully respected by the decision we are invited to make Something more must be said as to the next principle.

4. Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well known principle of I.R.C. v. Duke of Westminster [1936] A.C. 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax�see Chinn v. Hochstrasser [1981] 2 W.L.R. 14, I.R.C. v. Plummer [1980] A.C. 896.

For the commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not "shams", from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd v. Nicol (1975) 50T.C.229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the Commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction, or a number of independent transactions.

I will now refer to some recent cases which show the limitations of the Westminster doctrine and illustrate the present situation in the law.

1. Floor v. Davis [ [1978] Ch. 295 (1979) 2 W.L.R. 830 (H.L.). The key...