Re McGuckian (No 1)

CourtHouse of Lords
JudgeLORD BROWNE-WILKINSON, LORD LLOYD OF BERWICK, LORD STEYN, LORD COOKE OF THORNDON, LORD CLYDE
Judgment Date12 Jun 1997
JurisdictionEngland & Wales

[1997] UKHL J0612-1

HOUSE OF LORDS

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Steyn

Lord Cooke of Thorndon

Lord Clyde

Commissioners of Inland Revenue
(Original Appellants and Cross-Respondents)
and
McGuckian
(Original Respondent and Cross-Appellant)

(Northern Ireland)

LORD BROWNE-WILKINSON

My Lords,

1

This appeal concerns a claim by the appellants, the Commissioners of Inland Revenue, against the respondent, Mr. McGuckian, for income tax upon a dividend paid on 27 November 1979 (in the tax year 1979-80) by Ballinamore Textiles Ltd. ("Ballinamore"), a company incorporated and resident in the Republic of Ireland.

2

At all times Mr. McGuckian and his wife have been resident and domiciled in the United Kingdom. In the early 1970s they each owned 500 £1 shares in Ballinamore, the entire issued share capital at the time. Over the years, Ballinamore made profits and had built up reserves which were available to be distributed by way of dividend. In 1976, or thereabouts, Mr. McGuckian was introduced to a Mr. Taylor, an English solicitor well known as a tax consultant. Acting on his advice, in 1976 and 1977 a number of steps (the details of which are not relevant) were taken whereby the shares in Ballinamore previously owned by Mr. and Mrs. McGuckian were transferred to the trustee of a settlement. At all material times the trustee of the settlement was a Guernsey company, Shurltrust Ltd. The beneficiaries of that settlement were Mr. and Mrs. McGuckian and the income was payable to Mrs. McGuckian.

3

In November 1979 Ballinamore had income available for distribution by way of dividend amounting to £400,055. On 23 November 1979 Shurltrust (the trustee which owned the Ballinamore shares) assigned to Mallardchoice Ltd. ("Mallardchoice") the right to any dividend payable by Ballinamore in 1979. Mallardchoice was a United Kingdom company associated with the tax consultant, Mr. Taylor. The consideration for the assignment was expressed to be £396,054. This sum represents 99 per cent. of the dividend in fact paid by Ballinamore.

4

On 27 November 1979 Ballinamore declared a dividend of £400,055. on the shares held by Shurltrust. Ballinamore gave a cheque for that amount to a Dublin solicitor for Mallardchoice. The solicitor paid the cheque into his client account out of which he then paid 99 per cent. of that sum (i.e. £396,054) to Shurltrust. The solicitor then paid the balance of one per cent. (less his own fee of £200) to an agent for Mallardchoice.

5

Thereafter there followed a long period during which the Inland Revenue sought to discover what had taken place. There was prolonged correspondence between them and Mr. Taylor who took every step to obfuscate what had happened and obstruct the revenue in discovering the true facts. Eventually, two weeks before the expiry of the six-year period applicable to the raising of assessments in respect of the year 1979-80 an assessment to income tax was made on Mr. McGuckian for 1979-80 in the amount of £400,055. The notice of assessment referred to Chapter III, Part XVII of the Income and Corporation Taxes Act 1970 which contains the charging provisions of section 478 but does not include the charging provisions of section 470. At the date of the assessment, the Revenue had not discovered the existence of the settlement.

6

Mr. McGuckian appealed against the assessment. The appeal came before the special commissioner, Mr. O'Brien, before whom the Crown contended, first, that the transactions between Shurltrust and Mallardchoice were a sham and, secondly, that there was a liability to tax under the Act of 1970, section 470. The revenue did not argue before the special commissioner that the principle stated in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 applied. The special commissioner held that the transactions were not a sham and that, since the notice of assessment stated that the tax liability arose under section 478, he could not uphold it under section 470.

7

In the Court of Appeal the Crown contended that although the transactions were not a sham they fell to be disregarded under the Ramsay principle. The Crown further argued that the special commissioner should have upheld the assessment under section 470 and that, even if the special commissioner did not have the power so to do, the Court of Appeal had the necessary power to remit the case to him with a direction that he should uphold an assessment under section 470. The Court of Appeal (Sir Brian Hutton L.C.J., Kelly and Carswell L.JJ.) by a majority rejected the Crown's argument based on the Ramsay principle, Kelly L.J. dissenting. However, it held that it did have power to remit the case to the special commissioner with a direction that he uphold the assessment under section 470.

8

The Crown appeal to your Lordships against the dismissal of their claim based on the Ramsay principle. Mr. McGuckian cross-appeals against the order remitting the case to the special commissioner. Your Lordships heard argument only on the Crown's appeal and at the conclusion of the hearing indicated that, since the Crown's appeal would succeed, the issues raised by the cross-appeal did not fall for decision.

9

Section 478 of the Income and Corporation Taxes Act 1970 provides, so far as relevant, as follows:

"For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows:-

"(1) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provision of this section, be deemed to be the income of that individual for all the purposes of the Income Tax Acts."

10

Five conditions have to be satisfied in order for section 478 to apply:

11

(1) The taxpayer (or his or her spouse) has made a "transfer of assets" by virtue of which income became payable to a person resident outside the United Kingdom. It is agreed that this condition was satisfied since Mr. and Mrs. McGuckian transferred the shares in Ballinamore to Shurltrust, whereby the dividends declared by Ballinamore were potentially payable to a non-resident, Shurltrust.

12

(2) There is income of the non-resident. Shurltrust received £396,054., being 99 per cent. of the consideration for the assignment of the right to the Ballinamore dividends. Prima facie, this sum, being the proceeds of sale of the dividends, would be capital. However, the Crown submits that, by virtue of the Ramsay principle [1982] A.C. 300, the sum falls to be regarded for tax purposes as income. This is the central issue in the dispute.

13

(3) The taxpayer (or his or her spouse) has power to enjoy the income of the non-resident. It is agreed that this requirement is satisfied.

14

(4) It is by virtue or in consequence of the transfer, or the transfer with associated operations, that the taxpayer has power to enjoy the income. Again, it is accepted that Mr. and Mrs. McGuckian had power to enjoy the income under the settlement by virtue or in consequence of the transfer of the shares by them to Shurltrust.

15

(5) The taxpayer cannot take advantage of the defence in section 478(3) afforded to transactions which did not have a tax avoidance objective. It is agreed that this defence is not open to the taxpayer.

16

The crucial question, therefore, is whether in the present case the moneys received by Shurltrust as consideration for the assignment of the right to the dividends from Ballinamore fall to be treated as "income" of Shurltrust. Prima facie those moneys, being the price of the sale by Shurltrust of its right to the future dividends of Ballinamore, constitutes capital not income. However, the Crown argue that, applying the Ramsay principle, that sale of the right to the dividends by Shurltrust to Mallardchoice, though not a sham, has to be disregarded for tax purposes. The sale was an artificial transaction inserted for the sole purpose of gaining a tax advantage: the reality of the transaction was the payment of a dividend by Ballinamore to the shareholder, Shurltrust, which received it as income.

17

My Lords, in my judgment nothing in this case turns on the exact scope of the Ramsay principle. The case falls squarely within the classic requirements for the application of that principle as stated by Lord Brightman in Furness v. Dawson [1984] A.C. 474, 527D-E:

"First, there must be a pre-ordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end … Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax—not 'no business effect.' If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied."

18

In the present case, since the Ramsay principle was not invoked before the special commissioner there is no express finding on those issues of fact. However, there...

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