Schofield v HMRC
| Jurisdiction | England & Wales |
| Judge | Lady Justice Hallett,Lord Justice Patten,The Chancellor |
| Judgment Date | 11 July 2012 |
| Neutral Citation | [2012] EWCA Civ 927 |
| Date | 11 July 2012 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2011/2383/OTTRF |
[2012] EWCA Civ 927.
Court of Appeal (Civil Division).
Sir Andrew Morritt C, Hallett and Patten L JJ.
David Goldberg QC (instructed by PricewaterhouseCoopers Legal LLP) for the appellant.
Julian Ghosh QC and Raymond Hill (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Aberdeen Construction Group Ltd v IR CommrsELRTAX [1978] AC 885; 52 TC 281
Craven (HMIT) v WhiteTAXELR [1988] BTC 268; [1989] AC 398
Drummond v R & C CommrsUNKTAX [2009] EWCA Civ 608; [2009] BTC 312
Furniss (HMIT) v DawsonTAXELR [1984] BTC 71; [1984] AC 474
Garner v Pounds Shipowners and Shipbreakers LtdTAXWLR [2000] BTC 190; [2000] 1 WLR 1107
IR Commrs v Burmah Oil Co LtdTAX [1982] BTC 56
IR Commrs v Scottish Provident InstitutionUNKTAXWLR [2004] UKHL 52; [2004] BTC 426; [2004] 1 WLR 3172
MacNiven v Westmoreland Investments LtdUNKTAXELR [2001] UKHL 6; [2001] BTC 44; [2003] 1 AC 311
R & C Commrs v MayesTAX [2011] BTC 261
Whittles v Uniholdings Ltd (No. 3)TAXTAX [1996] BTC 399; 68 TC 528
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300; (1981) 54 TC 101
Capital gains tax - Allowable loss - Options - Tax avoidance scheme - Scheme involving four option transactions - One option giving rise to loss to be set off against gain arising from redemption of loan notes - First-tier Tribunal finding that option transactions interdependent and preordained and to be considered as composite transaction under principle in WT Ramsay v IR Commrs [1982] AC 300 - No allowable loss arising on that basis - Options not to be considered separately - Application of Ramsay principle - Taxpayer's appeal dismissed - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 1 section 2ss. 1, 2.
The taxpayer appealed against a decision of the Upper Tribunal ([2011] UKUT 306 (TCC); [2011] BTC 1800) that a capital loss claimed by him in his 2002-03 tax return arising from certain option transactions, which formed part of a tax avoidance scheme, was not an allowable loss within the Taxation of Chargeable Gains Act 1992.
In December 2002 the taxpayer incurred a liability to capital gains tax in respect of the gain in the sum of £10,726,438 accruing to him on the redemption of loan notes issued to him as consideration for his disposal of shares in a company. The taxpayer (on the advice of accountants) entered into transactions with a private bank (KBPB) as part of a scheme to avoid that tax liability, which depended on his becoming non-resident.
The taxpayer and KBPB entered into four options, consisting of two pairs: the first pair (options 1 and 2) were bought by the taxpayer from KBPB and were to be settled in cash, the second pair (options 3 and 4) were sold by the taxpayer to KBPB and were to be settled by physical delivery of the underlying stock. On 4 April 2003, options 1 and 3 were closed out giving rise to a loss on option 1 of £11,305,017 and a gain on option 3 of £11,416,239. The loss, if allowable, was available to be set off against the gain which had accrued on redemption of the loan notes. At that stage the closure payments passing between the parties resulted in a balance in favour of the taxpayer of £4,995. On 7 April 2003 option 2 was exercised by the taxpayer and option 4 by KBPB. Option 2 yielded a profit to the taxpayer of £7,354,759. In respect of option 4 the taxpayer was obliged to deliver stock to KBPB which was acquired by him from another company in the same group resulting in a loss to him of £7,522,570. The gain was not chargeable if, as assumed, the taxpayer, who had moved to Spain, was not resident in the UK for tax purposes in the year 2003/04.
The overall result of the acquisition and closure/exercise of all four options was, in cash terms, that the taxpayer had paid out £65,589 more than he had received, representing in part the fee payable to KBPB for implementing the scheme. In his self-assessment tax return for the year 2002/03 the taxpayer claimed to be entitled to deduct the loss of £11,305,017. HMRC amended the return on the basis that the options scheme was ineffective.
The First-tier Tribunal dismissed the taxpayer's appeal ([2010] UKFTT 196 (TC); [2010] TC 00498) holding that the dealings in the four options were inextricably linked with each other to form a continuous process which could be viewed commercially as a single or composite transaction. The arrangements consisted of a series of interdependent and linked transactions with a guaranteed outcome of a capital loss at least equivalent to the chargeable gain. The combined effect of the option transactions ensured that the taxpayer did not bear the burden of paying any premium at all for options 1 and 2, and did not suffer the economic consequences of either the grant or the exercise of the options. At the end of the planned arrangements the taxpayer's financial position was precisely the same as it was at the beginning, except for the fees paid to the accountants and KBPB. Applying WT Ramsay Ltd v IR Commrs [1982] AC 300 to the composite transaction, there was no real loss. The Upper Tribunal dismissed the taxpayer's appeal against that decision ([2011] UKUT 306 (TCC); [2011] BTC 1800). The taxpayer appealed, arguing that both the First-tier Tribunal and the Upper Tribunal had erred in not treating each option as a separate transaction giving rise to four separate assets.
Held, dismissing the appeal:
In the present case, the First-tier Tribunal had concluded, as matters of fact, that the four options were parts of an overall preordained scheme designed to produce neither a gain nor a loss. In those circumstances it was wrong to adopt the step by step approach for which the taxpayer contended and consider only option 1. The relevant transaction was the four options together and such a transaction did not constitute a disposal to which TCGA 1992, s. 1 and 2 applied. (WT Ramsay Ltd v IR Commrs [1982] AC 300 applied; Aberdeen Construction Group Ltd v IR Commrs (1978) 52 TC 281, Whittles v Uniholdings Ltd (No. 3) [1996] BTC 399 and Garner v Pounds Shipowners and Shipbreakers Ltd [2000] BTC 190 considered.)
Sir Andrew Morritt C: Introduction
[1]On 31 December 2002 the appellant, Howard Schofield, incurred a liability to capital gains tax in respect of the gain in the sum of £10,726,438 accruing to him on the redemption of loan notes issued to him as consideration for his disposal of his shares in PL Schofield Ltd. On 9 January 2003 representatives of PricewaterhouseCoopers advised Mr Schofield of a tax avoidance scheme whereby he might defer or avoid such liability by the creation of an allowable capital loss in an amount equivalent to or greater than his chargeable gain. Mr Schofield accepted such advice, later confirmed by a letter dated 13 February 2003, and entered into the transactions with Kleinwort Benson Private Bank Ltd ("KBPB"), which I describe in the next paragraph, on the assumption that he would cease to be resident in the UK for tax purposes before 6 April 2003.
[2]The relevant transactions were the following:
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(2) On 17 January 2003 Mr Schofield and KBPB entered into an International Swap Dealers Association Master Agreement. It provided, so far as relevant, that:
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(a) "all transactions are entered into in reliance on the fact that this Master Agreement and all confirmations form a single agreement between the parties …" (clause 1(c)), and
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(b) with certain limited exceptions, neither party might transfer any interest or obligation thereunder to a third party without the consent of the other party (clause 7).
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(3) On 7 February 2003 Mr Schofield and KBPB entered into four European Style options, expiring on 7 April 2003, consisting of two pairs. The first pair (Options 1 and 2) were bought by Mr Schofield from KBPB and were to be settled in cash, the second pair (Options 3 and 4) were sold by Mr Schofield to KBPB and were to be settled by physical delivery of the underlying stock. The basic terms of the options were:
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(a) a put option over £333m FTSE 100 Index at a strike price of 3389.91 at a premium of £12,037,617 ("Option 1");
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(b) a call option over £333m FTSE 100 Index at a strike price of 3390.4 at a premium of £12,141,846 ("Option 2");
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(c) a put option over £333m 7.25% Treasury Stock 2007 at a strike price indicated by a formula related to the movement of the FTSE 100 index at a premium of £12,153,834 ("Option 3"); and
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(d) a call option over £333m 8.5% Treasury Stock 2007 at a strike price indicated by the like formula at a premium of £11,915,073 ("Option 4").
The difference of £110,556 payable by Mr Schofield to KBPB was the fee payable by the former to the latter.
[3]The letter of advice from PricewaterhouseCoopers to Mr Schofield dated 13 February 2003 explained:
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1.The first possibility is that the index does not move sufficiently for any Option to be exercisable, in which case both cash Options are closed out on 4 April and you will have lost £11.8 x 2 = £23.6 million. This amount will be a capital loss available to set against your current gain leaving £11.8 million to be set against future gains. The exempt options are both closed out at the same time giving rise to a non-taxable gain of £23.6 million.
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2.The second possibility is that the FTSE index falls below 94.2 per cent. The put options become valuable and exercisable, but the call options are not exercisable. You will close out the call option showing the loss on 4 April i.e. in this tax year, thus generating a loss of £11.8 million for tax purposes. You will close out at the same time the equal and opposite call over the gilts which will give rise to a non taxable gain of the same amount. On 7 April, which is in the new tax year the other two put options expire. These give rise to a taxable gain and non-allowable loss. However, as you will be non-resident and outside...
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