W.T. Ramsay Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
Judgment Date12 March 1981
Date12 March 1981
CourtChancery Division

HIGH COURT OF JUSTICE (CHANCERY DIVISION)- (1) RAMSAY-

HIGH COURT OF JUSTICE (CHANCERY DIVISION)- (2) RAWLING-

COURT OF APPEAL- (1) RAMSAY

COURT OF APPEAL- (2) RAWLING-

HOUSE OF LORDS- (1) RAMSAY (2) RAWLING-

(1) W.T. Ramsay Ltd
and
Commissioners of Inland Revenue Eilbeck (H.M. Inspector of Taxes) v Rawling

New point - No notice given - Whether remission to Commissioners for fresh findings necessary - RSC Ord 91, r 4.

(1) Ramsay

The Appellant Company carried on the business of farming. In the accounting period ended 31 May 1973 the Appellant sold the freehold of the farm, and made a chargeable gain of £187,977 (before deducting any allowable losses). The Appellant wished to create a capital loss to set against this gain and therefore purchased an "off-the-peg" tax avoidance scheme, pursuant to which the following transactions were carried out.

The Appellant acquired the whole of the share capital of CM Ltd., a newly formed investment company; the total cost of this acquisition was £185,034. The Appellant then offered to make two loans (L1 and L2) to CM Ltd. Each loan was of £218,750. The terms of the loans were that L1 was repayable at par after 30 years, and that L2 was repayable at par after 31 years; but CM Ltd. was entitled to repay the loans earlier and was obliged to do so if it went into liquidation. If either of the loans was repaid earlier, then it had to be repaid at its face value or at its market value, whichever was the higher.

Both loans carried interest at 11 per cent., but the lender had the right, on one occasion only, to decrease the interest rate on one loan and to increase the interest rate on the other. CM Ltd. accepted this offer orally. No formal document was issued by CM Ltd. to the Appellant; but the oral acceptance was evidenced in a statutory declaration made by a director of CM Ltd

CM Ltd. then agreed to purchase the whole of the share capital of CR Ltd., another newly formed investment company; the total cost of this acquisition was £394,663. One week later (having received an interest payment from CM Ltd. in respect of L1 and L2) the Appellant reduced the interest rate on L1 to zero, and increased the interest rate on L2 to 22 per cent. The Appellant then sold L2 to MF Ltd. for £391,481 : this price reflected L2's market value. MF Ltd. then sold L2 to CR Ltd. for £394,673. CR Ltd. later resolved to go into liquidation. At this stage CM Ltd. owed L2 to CR Ltd., but also owned all the shares in CR Ltd.; and the distribution in CR Ltd.'s liquidation was accordingly effected by extinguishing L2. CM Ltd. then resolved to go into liquidation and (as it was obliged to do) repaid L1 to the Appellant at par (i.e., £218,750). The Appellant then entered into further transactions, during the course of which it disposed of its shares in CM Ltd. to an outsider purchaser, and received £9,387.

The Appellant thus made a loss on its holdings of shares in CM Ltd. (of £185,034 minus £9,387). It made no loss and no gain on L1, but it made a gain on L2 (of £391,481 minus £218,750). The gain on L2, however, (by virtue of Sch 7, para 11(1), Finance Act 1965) was not a chargeable gain for corporation tax purposes unless the debt was "a debt on a security".

Before the Special Commissioners it was contended on behalf of the Appellant (i) that the Appellant had made a loss for capital gains tax purposes as a result of the transactions involving the shares in CM Ltd. and (ii) that L1 and L2 were not debts on a security so that no chargeable gain arose on their disposal. It was contended on behalf of the Crown (i) that the tax avoidance scheme was created to manufacture a loss for capital gains tax purposes and was ineffective for tax purposes; (ii) that the consideration paid for the shares in CM Ltd. was not a consideration given wholly and exclusively for the shares (within Sch 6, para 4(1), Finance Act 1965) but was given either wholly or partly for the implementation of the tax avoidance scheme and (iii) that L1 and L2 were debts on a security so that a chargeable gain arose on the disposal of L2.

The Special Commissioners held that each step in the scheme should be taken at its face value and that the money paid by the Appellant for the acquisition of the shares in CM Ltd. had been wholly and exclusively so paid. They found, however, that L1 and L2 were intended to, and did, form part of the permanent loan and capital structure of CM Ltd. and were investments and could be the subject of a conversion. They also held that the issue of a document of title is not decisive in deciding whether a debt is a debt on a security. They concluded that L1 and L2 were "loan stock or similar security" within Sch 7, para 5(3)(b), Finance Act 1965, and held that the disposal of L2 to MF Ltd. for £391,481 was the disposal of a debt on a security. This disposal thus gave rise to a chargeable gain and they upheld an assessment to corporation tax made upon the Appellant for the period ended 31 May 1973. The Appellant demanded a Case.

(Note: The Crown's contentions (i) and (ii) before the Special Commissioners were not argued in the Chancery Division or Court of Appeal, but were reserved for argument in the House of Lords.)

The Chancery Division, allowing the taxpayer company's appeal, held that the essential requirement of a debt on a security was the issue by the debtor of some kind of document of title or certificate which would represent a marketable security. In the present case L2 lacked this essential requirement, so that a disposal of L2 could not be the disposal of a debt on a security. The Crown appealed.

In the Court of Appeal the Crown's contentions (i) and (ii) were again not argued in the light of Floor v. Davis 52 TC 609;[1978] Ch 295. Lord Scarman, however, expressed the hope that the relevant decision of the Court of Appeal in that case would be reviewed by the House of Lords "in the not too distant future".

The Court of Appeal, unanimously allowing the Crown's appeal, held on the basis of the Crown's contention (iii), that the loan L2 was similar in most respects to loan stock, and that the statutory declaration which evidenced it represented a marketable security in that it enabled the debt to be assigned; it was similar to a loan certificate. L2 was accordingly a "debt on a security".

(2) Rawling

The Respondent, during the fiscal year 1974-75, made chargeable gains of £355,094 from the sale of shares. With the intention of eliminating those gains for capital gains tax purposes, he purchased from T Ltd., a Jersey company, an "off-the-peg" scheme designed to create an allowable loss to match the gains. Pursuant to the scheme, and between 24 March and 3 April 1975: (i) the Respondent purchased from P Ltd. for its market value (£543,600) the reversionary interest in a Gibraltar settlement, borrowing the funds to do so from T Ltd.; (ii) he requested the Gibraltar trustees to transfer to the trustees of a Jersey settlement specially created by the Respondent's brother £315,000 out of the Gibraltar trust funds. In the Jersey settlement the Respondent held the reversionary interest; (iii) he sold the reversionary interest in the Gibraltar trust (reduced in value because of transaction (ii)) to G Ltd. for £231,130; (iv) he sold his reversionary interest in the Jersey settlement to T Ltd. for £315,100. The transactions were so arranged that, apart from fees or sums representing fees paid by the Respondent to T Ltd., all funds necessary to effect the transactions emanated from and eventually returned to T Ltd.

Although the loss on sale of the reversionary interest in the Gibraltar settlement was matched by the gain on the sale of the reversionary interest in the Jersey settlement, the Respondent contended that the latter gain was an exempt gain for capital gains tax purposes since it arose to the person for whose benefit the interest was created by the terms of the settlement (Finance Act 1965, Sch 7, para 13(1)). The Respondent was assessed to capital gains tax on the footing that the admitted gains of £355,094 were not matched by the alleged or any loss.

The General Commissioners, allowing his appeal and holding that the scheme suceeded, found, inter alia, (a) that all the six Jersey companies involved in the operation of the scheme were part of the same organisation; (b) that all the steps taken to implement the scheme were part of a contract entered into between the Respondent and T Ltd. on or about 24 March 1975 for which the Respondent paid fees totalling £9,985 and by which "It was understood that T Ltd. would procure that each step would proceed in its due order". The Crown appealed.

In the High Court, although no notice had been given pursuant to RSC Ord 91, r 4, the Crown was given leave to take a new point, viz., that the gain on the sale of the reversionary interest in the Jersey settlement was not an exempt gain. In granting leave the Judge indicated that if the new contention had raised any matters of fact on which, if the contention had been raised before the Commissioners, the Respondent might have wished to call additional evidence or the Commissioners might have made additional findings of fact, he would, before giving leave, have remitted the case to the Commissioners for their findings of fact and law in relation to the new contention.

The Chancery Division, allowing the Crown's appeal, held (1) that transactions (i) to (iv) above, albeit designed as a single scheme, were nevertheless real and not sham transactions and could not accordingly be disregarded for tax purposes merely by comparing the end result with the beginning; (2) that the fact that the payments passed in a circle did not destroy the reality of the transactions, since the circular payment, were not designed to conceal what really happened; (3) that the £543,600 paid to P Ltd. by T Ltd. on the Respondent's b ehalf (transaction (i)) did not represent consideration "wholly and exclusively given" for the...

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