Schofield v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 July 2011 |
| Neutral Citation | [2011] UKUT 306 (TCC) |
| Date | 27 July 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 306 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Warren J (President), Judge John Clark.
David Goldberg QC (instructed by PricewaterhouseCoopers Legal) 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 decision:
Barclays Mercantile Business Finance Ltd v Mawson (HMIT) TAXELR[2004] BTC 414; [2005] 1 AC 684
Campbell v IR Commrs SCD(2004) Sp C 421
Carerras Group Ltd v Stamp Commissioner UNKTAX[2004] UKPC 16; [2004] BTC 8,077
Citibank Investments Ltd v Griffin (HMIT) TAX[2000] BTC 324
Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46
Craven (HMIT) v White TAXELR[1988] BTC 268; [1989] AC 398
Drummond v R & C Commrs TAX[2009] BTC 312
Furniss (HMIT) v Dawson TAXELR[1984] BTC 71; [1984] AC 474
IR Commrs v Burmah Oil Co Ltd TAX[1982] BTC 56
IR Commrs v HIT Finance Ltd ENR[2007] FACV No 8 and 16
IR Commrs v Scottish Provident Institution UNKTAX[2004] UKHL 52; [2004] BTC 426
MacNiven v Westmoreland Investments Ltd UNKTAXELR[2001] UKHL 6; [2001] BTC 44; [2003] 1 AC 311
R & C Commrs v Mayes UNKTAX[2011] EWCA Civ 407; [2011] BTC 261
R & C Commrs v McGuckian TAXWLR[1997] BTC 346; [1997] 1 WLR 991
R & C Commrs v Tower MCashback LLP 1 TAX[2011] UKSC 19; [2011] BTC 294
Whittles v Uniholdings Ltd (No. 3) TAXTAX[1996] BTC 399; 68 TC 528
WT Ramsay Ltd v IR Commrs TAXELR(1982) 54 TC 101; [1982] AC 300
Capital gains tax - Allowable loss - Options - Gilts - Tax avoidance scheme - Scheme involving options - Options interlinked with no separate commercial existence and part of indivisible process - Whether composite transaction giving rise to loss within statutory provisions - Whether Ramsay principle applicable - Whether exemption for options over gilts applicable - Taxpayer's appeal dismissed - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 2 section 16 section 115 section 144ss. 2, 16, 115, 144.
This was an appeal by the taxpayer against a decision of the First-tier Tribunal ([2010] UKFTT 196 (TC); [2010] TC 00498) that the capital loss claimed by a taxpayer in his 2002-03 tax return arising from certain option transactions was not an allowable loss within the meaning of the Taxation of Chargeable Gains Act 1992.
In November 2000 the taxpayer sold his shares in PL Schofield Ltd to Cattles plc for consideration of £11,840,000 in the form of bank guaranteed loan notes redeemable in December 2002. On 31 December 2002 the taxpayer redeemed the loan notes realising a chargeable gain of £10,726,438. The taxpayer, in his 2002-03 return, claimed an allowable loss of £11,305,017 offsetting the chargeable gain arising from the redemption of loan notes. The taxpayer was both resident and ordinarily resident for tax purposes in the UK for the year of assessment 2002-03. After 29 March 2003 the taxpayer was resident in Spain. He was not resident or ordinarily resident in the UK for any year of assessment from and including 2003-04.
The claimed loss arose from a scheme prepared by PwC and involving the sale and purchase of options from a bank. The taxpayer entered into a security agreement andan ISDA master agreement with the bank. Pursuant to the ISDA master agreement the taxpayer entered into four option contracts with the bank. The taxpayer granted to thebank European style put and call options over £333m of Treasury Stock (options 3 and4). The premiums paid for those two options were used to purchase two cash settled FTSE options (options 1 and 2).The purchase price included an additional £110,000 which represented the bank's fee for making the various arrangements in connection with the scheme. In addition, PwC charged fees for selling the arrangement to the taxpayer. The strike prices of the options were such that taken together each pair (thetwo cash-settled FTSE options and the two gilts options) formed a "digital collar" so that if, on the expiry date, the FTSE 100 Index had moved below the digital collarthe put options would be in the money, whilst the call options would be out of the money; the converse would apply if the FTSE 100 Index was above the digital collar on the expiry date. If, as occurred, the FTSE 100 Index was above the digital collar, the out-of-the-money options would be closed out before 6 April 2003, whilst the in-the-money options would be exercised on the agreed date of 7 April 2003. That would produce an allowable loss of about £12m in 2002/03 (subject to any payments on close out) on one of the cash-settled FTSE options, the gain on the corresponding gilt option being exempt, with the taxpayer incurring no capital gains tax consequences from the expiry of the options in the subsequent tax year because of his non-resident status.
The taxpayer's return for the year ended 5 April 2003 showed an allowable loss of £11,305,017, arising from disposal of the cash settled put option which he had purchased for £12,153,834 and surrendered on 4 April 2003 for £732,600. 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). The FTT found that the incorporation of a potential actual small profit or loss within the structure of the scheme by allocating marginally different strike prices between the set of cash-settled FTSE options and the gilts options was contrived to give the scheme an illusory aura of commerciality. It held that the scheme served no commercial purpose. The contrived profit and loss only occurred when the FTSE 100 Index moved outside the collar, giving rise to either a £49,961 profit or a £45,335 loss which did not vary on subsequent movements in the Index. The pursuit of that relatively small profit made no commercial sense having regard to the size of the fees charged for the scheme. The taxpayer appealed. HMRC's case was that the Ramsay principle (see WT Ramsay Ltd v IR Commrs [1982] AC 300; 54 TC 101) applied to treat the scheme, in effect, as a fiscal nullity and there was no "loss" within s. 2 of TCGA 1992. The taxpayer argued that each step in the overall transaction in the present case was to be viewed in isolation and that there was no room for the application of the Ramsay principle on the facts. He questioned whether, considering the subsequent decided cases, there was anything left which could properly be called the Ramsay principle: everything was simply a matter of statutory construction; but, whatever there might be left of the principle, it was not permissible to ignore what had actually happened. The issues therefore were whether the loss claimed by the taxpayer in his 2002-03 return was an allowable loss within the meaning of TCGA 1992; and secondly, if the claimed loss was held to be an allowable loss, whether two of options over gilts fell within the exemption under s. 115 of TCGA 1992.
Held, dismissing the taxpayer's appeal:
1.Whether the scheme was effective turned on whether the loss which, viewing option 1 in isolation, was occasioned when option 1 was closed out on 4 April 2003 was an allowable loss, in the context of the scheme as a whole, within the meaning of s. 2(2)(a) of TCGA 1992. In the present case, the question whether there was a gain or loss could, at a high level, be considered in relation to the scheme as a whole. The precise outcome of the scheme could not be known in advance. It was possible that there would be a modest profit or a modest gain for the taxpayer and it was certain that he would have to bear the fees of the exercise but there was no real risk to him. He was not required himself to fund the scheme; and the prospect of his being able to fund out of his own assets the purchase of the gilts which, in the events which happened, he had to acquire was fanciful. It was a racing certainty that he would become non-resident prior to and for the tax year 2003-04 and the scheme was entered into in the hope of mitigating the taxpayer's tax liability. The findings of the tribunal went further in that it found that the sole aim of the transactions was to avoid tax and the transactions were bereft of a commercial purpose. Viewing the scheme at that high level, the taxpayer suffered no real commercial loss.
2.The statutory code in relation to options (TCGA 1992, s. 143-148) was all part and parcel of a wider statutory scheme concerning disposals, gains and losses. That code was necessary to deal with the unique nature and attributes of an option as an asset and the consequences of its grant, disposal, exercise and lapse. Accordingly, the unique nature of options, and the existence of a special code dealing with them in thecontext of capital gains tax, did not require, or permit, a court or tribunal to conclude that the grant, exercise, surrender or lapse of options could not, as a matter of principle, be disregarded in the context of the capital gains tax consequences of a composite transaction; it would be wrong to conclude that options must always be recognised and fell to be dealt with according to the special code.
3.On the facts of the present case, the options code was to be ignored in deciding whether there was a loss within the meaning of TCGA 1992, s. 2 when option 1 was closed out on 4 April 2003. The composite transaction, the grant of all four options and, in the events which happened, their exercise or closing out, was to be seen as the relevant transaction. That was the transaction in relation to which it was appropriate to ask whether it satisfied the requirements of the statute. Moreover, the composite transaction in the present case was not a transaction having the nature of a transaction to which TCGA 1992, s. 2 applied so as to generate a loss. Whichever analysis one chose to apply, the options code did not fall to be applied to each option separately...
To continue reading
Request your trial
- Schofield v HMRC
-
Blumenthal v Revenue and Customs Commissioners
...be ignored. 92.Mr Eicke also referred to the decision of the Upper Tribunal (Warren J and Judge Clark) in Schofield v R & C CommrsTAX[2011] BTC 1800. The Upper Tribunal decided that the four options in that case should not be viewed independently but rather as part of a composite transactio......
-
Explainaway Ltd v R & C Commissioners
... ... TC 580 IR Commrs v Scottish Provident InstitutionUNKTAXWLR [2004] UKHL 52; [2004] BTC 426; [2004] 1 WLR 3172 Schofield v R & C CommrsUNKTAX [2012] EWCA Civ 927; [2012] BTC 226 WT Ramsay v IR CommrsELRTAX [1982] AC 300; (1981) 54 TC 101 ... 2, 143 ... These were an appeal by the taxpayers and a cross-appeal by HMRC from a decision of the First-tier Tribunal ([2011] UKFTT 414 (TC); [2011] TC 01267 ) relating to a capital gains tax mitigation scheme. A ... ...
-
Andrew Chappell v The Commissioners for HM Revenue and Customs
...a scheme of this sort, to point to the money going round in a circle. Closer analysis is required’, see [77]. 23. In Schofield v HMRC [2011] UKUT 306 (TCC), [2011] STC 1920 at [51] the Upper Tribunal (Warren J (P) and Judge Clark) suggested a further description of the type of transaction w......