© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
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N2-6. Realistic view and substance
Determining the terms of the documents​
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- Ordinarily express terms not overridden except by fraud, mistake or sham
"[218] Pankhania was a case involving joint ownership of property. The claimant sought an order for sale of a residential property registered in the joint names of himself and his aunt. The transfer to them contained an express declaration of trust to the effect that they were tenants in common in equal shares. The aunt claimed that there was a family understanding that she was to be the sole beneficial owner, and that the claimant was included as a joint purchaser only so that his salary could be taken into account for mortgage purposes. The Court of Appeal held that the existence of the express trust precluded any finding that there was a constructive trust of the kind discussed in Stack v Dowden [2007] UKHL 17. Patten LJ referred at [17] to the possibility of a declaration of trust being set aside for fraud, mistake or undue influence, but said that nothing of that kind had been alleged. There was no evidence that the express trust was inserted by mistake or that the parties intended to execute a transfer in different terms.
[219] Patten LJ also considered the concept of sham as described in Snook, saying “what is, I think, clear is that it must be shown both that the parties to the trust deed…never intended to create a trust and that they did intend to give that false impression to third parties or to the court”. In this case there was no deception, and the fact that the parties and their family subjectively intended something different was not sufficient to prevent the express trust taking effect simply on the basis that it did not accurately record what they intended to achieve ([22]). Mummery LJ agreed that there was no room for inserting a constructive trust in the absence of a vitiating factor such as fraud or mistake ([27]).
[220] We disagree with [HMRC] that Pankhania has no relevance because it concerns whether there was a trust rather than what its terms were: there was clearly a trust on both parties’ cases. In our view Pankhania illustrates the point made in Autoclenz that subjective intentions are not determinative, and that ordinarily the express terms of a document, whether a contract or a trust, are not to be overridden except in certain circumstances, in particular fraud, mistake or sham." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Trust discretion real even if not presently intended to be used
"[229] In response to a question from the Tribunal, [HMRC] accepted that in order to determine that there was a bare trust the witnesses would need to have believed that the discretions apparently conferred on the Trustee did not actually exist. But we have accepted the evidence of the witnesses that they understood that the Trustee had discretion as a matter of law, even if in practice their expectations were that those discretions would be exercised in a particular way. Similarly, in the case of the loans the parties would need to have believed that the provision purporting to allow the Trustee to require repayment was not effective and could not be enforced. Again, we have accepted the evidence of the witnesses that they did understand that repayment could be required, even though in practice there was no present intention to call in the loans. We agree with Mr Ewart that in the circumstances of this case it is hard to see how Mr Vallat’s submission could succeed in the absence of dishonesty." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Not to ignore contractual terms simply on the basis they were inserted to avoid statutory consequence
"[230] As already discussed, Lord Templeman in Antoniades and Arden LJ in Bankway relied on a different approach in reaching their conclusions, namely that the relevant provisions amounted to an attempt to contract out of a mandatory statutory scheme. Arden LJ referred at [43] to a number of other examples in different contexts, but concluded that the key question was what was the “substance and reality” of the transaction. [HMRC] submitted that the same principle applied to tax legislation: the parties could not avoid the tax consequences of their arrangements by inserting terms which were intended to avoid statutory consequences and which they did not seriously intend to have effect.
[231] We do not agree. [HMRC] was unable to refer us to any case where this approach has been applied to tax legislation. If it was correct then it is highly surprising that it has never been applied in any of the many tax avoidance cases that the tribunals and courts have decided in recent years. In principle, it is clearly possible for taxpayers to arrange their affairs so that they enter into transactions that give rise to less tax than other transactions they might have entered into, and in that sense it is incorrect to say that taxpayers may not “contract out” of tax legislation. Clearly tax legislation will be interpreted purposively, and as is well known a realistic view of the facts must be taken to see whether the particular statutory provisions in question apply. But this is what is generally referred to as the Ramsay approach. Importantly, and in the absence of sham, that approach respects the general legal effects of the transactions that the parties have entered into, even in circumstances where it is concluded on a purposive interpretation that the particular tax advantage sought by the taxpayer is not available." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Sham
"[120]...Ms Brown’s submission is that what Ms McCarthy put to Mr Northwood was that the documents were artificial, which is not the same as putting that it is a sham or dishonest, referring to Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63 at [67] where Arden LJ said:
“the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.”
[121] Both parties referred to the decision in Hockin. With regard to the issue of sham in that case, the UT stated:
“24. We agree with Mr Prosser that the FTT's finding of sham is a finding of fact and that we may interfere with it only on Edwards v Bairstow grounds (see Edwards v Bairstow [1956] AC 14 itself and the long line of authority following it). We are, however, conscious that a finding of sham, even if it does not imply dishonesty in the ordinary sense, necessarily requires the fact-finding tribunal to be satisfied of an intention to deceive or, at least, to make things appear other than as they are. This is a point to which we shall need to return; for the moment we merely observe that, because of this consideration, we have examined the detail of the FTT's findings with particular care.
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29. Mr Bremner is correct to say that the FTT did not make any finding of dishonesty; on the contrary, it described Mr Hardy, at [34], as "basically honest". We do not, however, and despite the note of caution we have sounded, consider that a finding of sham necessarily implies dishonesty. The pretence here was that 96 or 99 might have been spent on research, but the parties did not go further by pretending that it had in fact been spent on research. This was a tax avoidance, or deferral, scheme, and not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up. One might disapprove of what was done; but we do not consider it could be said to have crossed the threshold into dishonesty.”
[122] Ms Brown expressed great difficulty with the distinction between an intention to deceive and an intention to make things appear other than as they are. Ms Brown’s submission is that what was alleged and found in Hockin was that the document was drafted with an intention to make things appear other than as they were, namely that one of two things might happen when it was really only possible that one thing might happen, which is far from what is being alleged in this case. Ms Brown submits that Hockin found there to be two sorts of sham, an intention to deceive, which must require dishonesty, or an intention to make things appear other than they are and that can be described as not requiring dishonesty in the ordinary sense. Ms Brown contends that HMRC's case is clearly one of dishonesty. It is not a case of half concealment, which was the case in Hockin. Ms Brown submits that HMRC make a number of statements as to what the alleged real purpose of Mr Northwood's arrangements were, such as that the whole thing was a work of fiction, the only purpose of the arrangements was tax avoidance, the only person who was intended to benefit was Mr Northwood, contrary to the appearances of various documents such as the trust deed, Mr Northwood retained control of the funds at all relevant times and that the funds were never subject to the trust, were never held or intended to be held by anyone in a fiduciary capacity and remained Mr Northwood's property and in his control. This therefore is not an allegation that Mr Northwood said “well, we might do this or we might do that” when Mr Northwood clearly only intended to do one thing. The allegation, Ms Brown submits, is that Mr Northwood created documents to give one appearance and then did something completely different. Ms Brown contends that is an allegation of dishonesty and it is not open to the Tribunal to make a finding of dishonesty, because those allegations of dishonesty have neither been properly pleaded nor properly put to Mr Northwood in cross-examination.
[123] I have considered Ms Brown’s arguments regarding pleading sham at [42] to [49] above. I do not accept Ms Brown’s submission that the way in which HMRC have put their case requires proof of dishonesty. It is clear that HMRC do not consider Mr Northwood to have been honest. However, in my view, this case falls within the category described in Hockin as a pretence that does not cross the threshold into dishonesty. My finding is that the RT documentation was dressed up to achieve a tax benefit but this was “not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up”.
[124] I also do not agree that HMRC did not put the sham allegation to Mr Northwood in cross-examination. The questions put to Mr Northwood did not simply suggest the situation where parties made an agreement which was unfavourable to one of them, or artificial. The questions were put in the context of a situation where the parties intended some other arrangement. I therefore find that the allegations were put fairly and squarely to Mr Northwood and that he was given an opportunity to rebut them." (Northwood v. HMRC [2023] UKFTT 351 (TC), Judge Sukul)
"[201] In our view the sham principle, as explained in Snook, Hitch v Stone and now Brain Disorders, has no application in this case. The principle requires a common intention to create different rights and obligations from those set out in the documents, and an intention to give a false impression to third parties. We have found that the parties did not intend to create different legal rights or obligations, and did not intend to give a false impression. Our overall assessment of the evidence is that the relevant parties understood and intended that the trusts were discretionary trusts, and that the loan agreements documented loans which could be required to be repaid. The situation in this case is very different from that considered in Brain Disorders, where what was being disregarded as a sham was a provision which neither party intended to operate and which had been inserted to give an incorrect impression of the nature of the arrangements. We agree with Mr Ewart that in this case the parties purported to, and did, operate the terms of the discretionary trusts that HMRC seeks to strike down, and that loans were in fact made under the terms of the written loan agreements, which included provision under which repayment could be required by the Trustee." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Not a sham even though some obligations undischarged
"[74] Whilst we understand the Respondents’ scepticism in this regard, given the events which have occurred, we do not agree that the documents give rise to rights and obligations in law which differ from their terms.
[75] We have found as a fact that the parties did intend the scheme documents to have the effects which they purported to have. We say that notwithstanding the fact that there are various obligations under the scheme documents which still remain undischarged or the fact that the events which have occurred are inconsistent with those obligations. As we have already said, we do not attribute those matters to any intention on the part of the parties that the documents should not have the effects which they purported to have. Moreover, no allegation of sham has been made.
[76] As such, we have concluded that the true legal effect of the scheme documents was in accordance with their form and that they gave rise to the rights and obligations set out in them.
[77] For instance, we think that it is incorrect to say that the position in relation to ownership of the Property was unaffected by the execution of the Sale Agreement. Mrs Elborne’s executors, when they received the sale proceeds of the Property from Mr and Mrs Machin, did not hold the sale proceeds for the Children as beneficiaries under the will. Instead, for reasons which we will rehearse in the section of this decision which follows, we believe that the sale proceeds, when they were received, were impressed with a constructive trust and held by the executors for the trustees of the Life Settlement. The Sale Agreement therefore had a meaningful and lasting legal effect." (Executors of Elborne v. HMRC [2023 UKFTT 626 (TC), Judge Beare)
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Realistic view of the facts
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- Look at overall effect​ and disregard artificial steps
"[11] The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax. This is not because of any principle that a transaction otherwise effective to achieve a tax advantage should be treated as ineffective to do so if it is undertaken for the purpose of tax avoidance. It is because it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance. As Judge Learned Hand said in Gilbert v C om missioner of Internal Revenue (1957) 248 F 2d 399, 411, in a celebrated passage cited (in part) by Lord Wilberforce in Ramsay [1982] AC 300, 326:
“If … the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; for we cannot suppose that it was part of the purpose of the Act to provide an escape from the liabilities that it sought to impose.”
See also Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, paras 112-113 (Lord Millett NPJ).
[12] Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to a transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose. In some of the cases following Ramsay, reference was made to a series of transactions which are “pre-ordained”: see eg Inland Revenue Comrs v Burmah Oil Co Ltd [1982] STC 30, 33 (Lord Diplock); Furniss v Dawson [1984] AC 474, 527 (Lord Brightman). As a matter of principle, however, it is not necessary in order to justify taking account of later events to show that they were bound to happen - only that they were planned to happen at the time when the first transaction in the sequence took place and that they did in fact happen: see Inland Revenue Comrs v Scottish Provident Institution [2004] UKHL 52; [2004] 1 WLR 3172, para 23, where the House of Lords held that a risk that a scheme might not work as planned did not prevent it from being viewed as a whole, as it was intended to operate.
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[49] In our view, Parliament cannot sensibly be taken to have intended that “the person entitled to possession” of an unoccupied property on whom the liability for rates is imposed should encompass a company which has no real or practical ability to exercise its legal right to possession and on which that legal right has been conferred for no purpose other than the avoidance of liability for rates. Still less can Parliament rationally be taken to have intended that an entitlement created with the aim of acting unlawfully and abusing procedures provided by company and insolvency law should fall within the statutory description." (Hurstwood Properties (A) Ltd v. Rossendale BC [2021] UKSC 16)
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"[64] This approach has proved to be particularly important in relation to tax avoidance schemes as a result of two factors identified in Barclays Mercantile at para 34. First, “tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said, ‘in the real world’”. Secondly, tax avoidance schemes commonly include “elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge”. In other words, as Carnwath LJ said in the Court of Appeal in Barclays Mercantile, [2002] EWCA Civ 1853; [2003] STC 66, para 66, taxing statutes generally “draw their life-blood from real world transactions with real world economic effects”. Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.” Accordingly, as Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 52; (2003) 6 ITLR 454, para 35, where schemes involve intermediate transactions inserted for the sole purpose of tax avoidance, it is quite likely that a purposive interpretation will result in such steps being disregarded for fiscal purposes. But not always.
[65] As was noted in Barclays Mercantile at para 35, there have been a number of cases since Ramsay in which it was decided that elements inserted into a transaction without any business or commercial purpose did not prevent the composite transaction from falling within a charge to tax, or bring it within an exemption from tax, as the case might be. Examples include Inland Revenue Comrs v Burmah Oil Co Ltd 1982 SC (HL) 114, Furniss v Dawson [1984] AC 474, Carreras Group Ltd v Stamp Comr [2004] UKPC 16; [2004] STC 1377, Inland Revenue Comrs v Scottish Provident Institution and Tower M Cashback LLP 1 v Revenue and Customs Comrs [2011] UKSC 19; [2011] 2 AC 457. In each case the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in MacNiven v Westmoreland Investments Ltd [2001] UKHL 6; [2003] 1 AC 311 and Barclays Mercantile itself.
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[68] Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application." (UBS AG v. HMRC [2016] UKSC 13)
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"[85] I also agree. My only surprise was that the appeal was argued on both sides as though Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 ("Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle.") had never been decided." (JTI Acquisition Company (2011) Limited v. HMRC [2024] EWCA Civ 652, Lewison, Newey, Baker LJJJ)
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"[28] If Khan had not been decided, the analysis does not seem to me to pose any great difficulty. It is true that, viewed in isolation, the payment by Winn Yorkshire of £200,001 was not a payment to the Appellants; it was a payment to Winn Scarborough, as to £1 for the par value of the A share, and as to £200,000 as a premium on that share. But the whole basis of the Ramsay principle is that it can be an error to view steps in an overall scheme in isolation. This is especially true where the step in question is one of a series of pre-planned steps in a tax avoidance scheme, as explained by Lords Briggs and Leggatt in Rossendale at [12]:
"Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. "
[29] If one considers the scheme as a whole, I think there is little doubt that Judge Morgan in the FTT was entirely justified in her conclusion. The payment by Winn Yorkshire to Winn Scarborough was simply the first step in a scheme designed to distribute the majority of the money to the Appellants. The money was being distributed to them because they were the owners of Winn Yorkshire and wished to extract profits from the company into their own pockets. Everything else was just a means of enabling that to happen. That is clear from the factual finding of Judge Morgan, not challenged on this appeal, that "the sole purpose of the relevant parties in implementing the arrangements … was to enable Winn Yorkshire to provide its shareholders with the funds they received as a return on their investment in shares in Winn Yorkshire" (see paragraph 9 above). In those circumstances the conclusion that the money they ended up receiving (£98,465 each[1]) was a distribution by Winn Yorkshire out of its assets to the Appellants as holders of its shares seems to me not only one that was open to Judge Morgan, but obviously right.
[30] Indeed the present case would seem to be a paradigm case for the application of the Ramsay principle. As explained by Lords Briggs and Leggatt in Rossendale at [15], the first stage of the requisite analysis is to "ascertain the class of facts … intended to be affected by the charge" (see paragraph 24 above). That requires a purposive construction of the statute. Subject always to the argument based on Khan, I see no reason to think that Parliament, which used widely expressed language ("any other distribution … in respect of shares in the company") intended by these words to charge only a distribution by a company directly to its shareholders and not a distribution intended to reach, and which in fact reached, its shareholders by a more circuitous route via steps inserted into the overall transaction that "have no business purpose and have as their sole aim the avoidance of tax": see Rossendale at [11]. As Lords Briggs and Leggatt there explain, such steps are often disregarded..." (Clipperton v. HMRC [2024] EWCA Civ 180, Nugee, Lewison, Newey, LJJJ)
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"[139] ...(8) in the circumstances, we can see no meaningful distinction between the facts in the present case and the facts in Furniss and Carreras. This means that, although it is not necessary to decide the point given the conclusion which we have already reached, we are inclined to agree with Mr Macklam that the reality of the arrangements in this case is that the Appellant paid the £55,316 which was paid to the companies in respect of the issue of the Loan Notes not in order to acquire the Loan Notes himself but instead to procure the issue of the Loan Notes directly to the two Settlements and that the Appellant never acquired the Loan Notes at all so that, on a purposive construction of paragraph 2 of Schedule 13, no loss arose from the transactions for a quite separate reason from the reason given above – i.e. there simply was no acquisition of the Loan Notes by the Appellant at all; and
(9) we note that this was an analysis which appealed to the First-tier Tribunal in Bretten at paragraphs [136] to [148], in relation to similar facts."
(Pitt v. HMRC [2022] UKFTT 222 (TC), Judge Beare)
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- Existence of 'payment' depends on practical, business reality, including any composite transaction
"[82]...The question whether a "payment" is made for these purposes should be answered by looking at the practical, business reality of the transaction, including any composite transaction of which the payment forms part. If the intended purpose and effect of the transactions is that money leaves the scheme and is placed at the free disposal of the member, the mere fact that the money may be subject to an equitable obligation to restore it to the scheme will not prevent it from being a "payment" in the ordinary sense of that word. To conclude otherwise would deprive the charge to tax of effect in many of the most egregious cases where it is most needed." (Clark v. HMRC [2020] EWCA Civ 204, Henders, Bean, Nicola Davies LJJJ)
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- Tax advantage motive does not make contractual arrangements artificial
"[57] For the reasons set out in paras 36-44 above, I consider that the contractual documentation supports the notion that Med was an intermediary, and, in the light of the discussion in paras 45-50 above, it seems to me that "economic reality" does not assist a contrary view. Further, one aspect of economic reality is that it is the hotelier, not Med, who owns the accommodation and it is the customer, not Med, to whom it is ultimately supplied: that does not, of course, prevent the hotelier supplying the accommodation to Med for supply on to the customer, but it makes it hard to argue that Med's analysis that it is no more than an agent is contrary to economic reality. Further, one must be careful before stigmatising the contractual documentation as being "artificial", bearing in mind that EU law, like English law, treats parties as free to arrange or structure their relationship so as to maximise its commercial attraction, including the incidence of taxation – see RBS Deutschland, cited in para 24 above." (Secret Hotels2 Ltd v. HMRC [2014] UKSC 16)
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- Not about sham
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"[5] It is common ground that the schemes have no business or other “real world” purpose and that their sole purpose is to avoid liability to pay business rates. But, subject to one new point, dealt with below, it is also now common ground that the leases granted to the SPVs were not shams so that, as a matter of the law of real property, they conferred an entitlement to possession upon the SPVs. An argument that the leases were shams was rejected at first instance and has not been resurrected on appeal.
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[51] We emphasise that this conclusion is not founded on the fact that the defendant’s only motive in granting the lease was to avoid paying business rates, although that was undoubtedly so. If the leases entered into by the defendants had the effect that they were not liable for business rates, their motive for granting the leases is irrelevant. Nor does it illuminate the legal issues to use words such as “artificial” or “contrived” to describe the leases, when it is now accepted that they created genuine legal rights and obligations and were not shams. Our conclusion is based squarely and solely on a purposive interpretation of the relevant statutory provisions and an analysis of the facts in the light of the provisions so construed." (Hurstwood Properties (A) Ltd v. Rossendale BC [2021] UKSC 16)
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"[67] References to “reality” should not, however, be misunderstood. In the first place, the approach described in Barclays Mercantile and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian at p 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements." (UBS AG v. HMRC [2016] UKSC 13)
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- Applies to VAT
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"[24]...It is nothing to the point that the present case is not about tax avoidance, or that it is about VAT rather than taxes on income or gains. This principle of statutory construction is of general effect, as Lord Drummond Young rightly observed in the Inner House, at para 13." (Balhousie Holdings Ltd v. HMRC [2021] UKSC 11)
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- Look for the real reason for a payment, not just what the documents say
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"[62] We have decided that the FTT was correct in its construction of section 225 ITEPA 2003. The payments had to be for the restrictive undertakings. This requires the court to consider the “real reason” for the payment. This question cannot be approached as one purely of construction of the deed. The critical question is: “What is the reality?”, and not simply, “What does the deed say?” " (The First de Sales Limited Partnership v. HMRC [2018] UKUT 396 (TCC), Carr J and Judge Sinfield)
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Circular, self-cancelling steps ignored
"[132] We agree with HMRC that the evidence was clear that a licence fee of this magnitude, put to this purpose, was not a regular feature of property development projects. It conferred a tax advantage on the individual investors by converting the interest cost into capital expenditure on which BPRAs could be claimed in the first year of the scheme.
[133] That feature alone would not prevent the arrangements from achieving their aim. However, the Interest Account mechanism was devoid of any real commercial purpose. Although (as with the Capital Amount) there was a real transfer of funds into an account in OVL's name and a charging of those funds by OVL, the arrangement was entirely circular and in substance self-cancelling. The fact that the LLP could have achieved the same economic result by holding onto the money itself and depositing it with the Co-op as security is relevant in undertaking a realistic appraisal of the facts because it highlights the circularity and self-cancelling nature of the arrangements and the lack of a strong and close nexus with the conversion works. These points serve to underline the lack of any real benefit to OVL from the Interest Amount." (London Luton Hotel BPRA Property Fund LLP v. HMRC [2023] EWCA Civ 362, Whipple, Falk, Lewison LJJJ)
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Look at arrangements as they were intended to operate
"[51] In the pithy words of Ribeiro PJ, the "ultimate question" is "whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically". Where, as in the present case, the issue is whether, construing the TCGA "purposively", linear transactions should "realistically" be seen as constituting a "disposal" within the meaning of the Act, Furniss v Dawson shows that "a pre-ordained series of transactions" or "one single composite transaction" is required. If, as was the case in Craven v White, there is real doubt, for reasons unrelated to a desire to escape the Ramsay approach, as to whether a tax-saving scheme will be put into effect, it is easy to understand why the requisite "pre-ordained series of transactions" or "single composite transaction" should not be considered to exist. In such circumstances, inability to identify an ultimate purchaser and price is symptomatic of uncertainty as to whether the sale will happen at all.
[52] It by no means follows that the Ramsay approach should be incapable of applying wherever the ultimate purchaser and price cannot be identified. Lord Jauncey, moreover, noted in Craven v White that there could be circumstances in which a transaction was considered interdependent without a final price or a specific buyer having been identified. He cited sale by auction, but it seems to me that it must also be possible for the Ramsay approach to apply to schemes under which assets are sold in the market. If, for instance, the plan were for an asset to be re-sold in the market immediately and arrangements for that had been made by the time of the first transaction in the series, I do not think it could matter that the buyer and price could not yet be determined. The transactions could nonetheless be "realistically" seen as constituting a "disposal" within the meaning of the TCGA. If Vinelott J thought otherwise in News International plc v Shepherd, then I respectfully disagree with him on this point." (Trustees of Morrison 2002 Maintenance Trust v. HMRC [2019] EWCA Civ 93, Newey LJ)
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- Some provisions focussed only on specific transaction
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"[52] In Khan, it was held that on a purposive reading of identical words in a different provision of legislation, focus had to be on the particular transaction under which the distribution arose, and not on the connected transactions considered as a composite whole [52]. The same applies here, and the focus must be on the transaction giving rise to the income in question. I do not understand that approach to be disputed in principle although there is a dispute about the way it is applied and with what result." (Good v. HMRC [2023] EWCA Civ 114)
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"[73] On the face of it, therefore, s.385(1) is not a statutory provision that is concerned with the overall economic outcome of a series of commercially interlinked transactions, but only with the question of who was entitled to the distribution or who actually received it. In this case, the distribution was the money that was payable by the Company in respect of the 98 shares under the buyback agreement, the OMPA. The agreements in this case did not resemble the cross-cancelling option arrangements entered into in the Scottish Provident case. Mr Khan did not have a "bare legal entitlement" to the distribution. He had a contractual entitlement to the price for the shares he had sold to the Company under an agreement that was last in time to be executed. That price was to be paid by means of a taxable distribution. He had not created a charge or trust over the price in favour of someone else, or assigned it to someone else. No-one had a better right to that money than he did." (Khan v. HMRC [2021] EWCA Civ 624, Andrews LJ - taxpayer seeking to rely on Ramsay approach, unsuccessful)
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"[35] We do not think that there was any disagreement between the parties as to the principle that certain statutory provisions may require a series of steps to be looked at as a composite whole whereas others are only interested in specific transactions. The dispute here is how that applies in relation to s385 ITTOIA.
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[71] We, accordingly, reject Mr Sykes’ submission that, for the purposes of s385 properly construed, it is necessary to have regard to the whole of any interlinked transactions viewed as a composite. Having concluded, for the reasons above, that the purpose of s385 ITTOIA is the identification of the person from whom HMRC can seek to recover the tax, all that we need to do is determine whether, on the facts, Mr Khan was either the actual recipient of the distribution or, if not, he was entitled to the 15 distribution." (Khan v. HMRC [2020] UKUT 168 (TCC), Judge Raghavan and Judge Andrew Scott)
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Distinction between what is the distribution and who is entitled to/received it
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"[49] The question in the present case arises at an earlier stage of the analysis, which is what the relevant distribution was, and whether it was a distribution in respect of shares, and hence a taxable distribution, at all. For reasons that I have given earlier I think that does require a purposive construction of the statute in accordance with the Ramsay principle, and I do not think that what Andrews LJ quite rightly says in the context of identifying the recipient or person entitled for the purposes of s. 385(1)(b) can be transposed to the prior question as to what sort of distributions were intended by Parliament to be taxable. That was not a question before her either expressly or implicitly. It was not for example argued that the distribution in Khan was really the prior payment of £1.95m to the vendors for their shares. I do not propose to consider whether such an argument could have been made – there would appear to be certain difficulties with it – but if it had been, the Court would have had to grapple with the question of what the distribution in question was, and whether it was the earlier payment of £1.95m in respect of the vendors' 99 shares, or the later payment of £1.95m in respect of Mr Khan's 98 shares. But those were not the issues before the Court, and I do not think Andrews LJ meant to say, or did say, anything about how to identify the distribution." (Clipperton v. HMRC [2024] EWCA Civ 180, Nugee, Lewison, Newey, LJJJ)
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- Legislation applying snapshot may not be concerned with subsequent events
"[93] In the light of the conclusion we have just expressed, the relevant question for the FTT, given the way in which HMRC chose to put their Ramsay argument, was whether the appellants lost legal and beneficial ownership of the Assets when they sold them to SGLJ. The FTT answered that question in the appellants’ favour at [258]. In the light of that finding, it should have concluded that the requirement of s61(1)(a) was satisfied. The FTT wrongly considered that its findings as to the composite nature of subsequent transactions, and the appellants’ purpose in effecting those transactions, led to a different result. The problem with the FTT’s conclusion was not that its factual findings in this regard were wrong. Rather, they were not relevant to the enquiry that s61(1)(a), construed purposively, required.
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[95] In Scottish Provident, the House of Lords was considering the interpretation of the word “entitlement” whereas in this case we are concerned with the question of whether a person “ceases to own” plant and machinery in circumstances where other parties may be affected by the answer to that question, with a corresponding need for it to be “capable of a ready answer” as Lord Browne-Wilkinson put it in Melluish. In any event, the nature of the analysis in Scottish Provident was very different. In that case, the two cross options were both exercisable at the same points of time. Any gilts that Citibank sought to acquire on exercise of its option could immediately be taken away from it by the exercise of Scottish Provident’s option. The House of Lords held that, once commercially irrelevant contingencies were ignored, there was no point in time at which Citibank had an “entitlement” to the gilts. Our case is different. For a period of three or four weeks, the appellants did not have legal or beneficial ownership of the Assets, but SGLJ did. HMRC’s argument is that the sale of the Assets should not be treated as falling within s61(1)(a) because a later sale back of those Assets on exercise of the Put Option was pre-ordained. We see no reason why the very different analysis in Scottish Provident should apply in our case given the different statutory provisions with which we are concerned.
[96] It follows that we determine Issue 1 in the appellants’ favour. We understand that some readers of this decision may find it surprising that an artificial series of transactions which, on the unchallenged findings of the FTT, were devoid of business purpose and effected only to achieve a “magical” increase in qualifying expenditure should survive a challenge based on the Ramsay line of cases. We stress that we have reached our conclusion based on the Ramsay argument that HMRC chose to put forward. Just as with Issue 4, it is not for us to comment on other ways in which the Ramsay argument could have been advanced, or the conclusions we might have reached if different arguments had been put forward." (Altrad Services Limited v. HMRC [2022] UKUT 185 (TCC), Falk J and Judge Jonathan Richards)
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Substance over form
"[60] Lest it be thought that this produces an unfair result because the question whether a payment is taxable or not depends on the structure of the settlement agreement and the label put on the payment, I would emphasise that the question whether a payment is taxable is a matter of substance, not form. If in substance the agreement involves an obligation on the part of the employer to make payment or reimbursement of costs or expenses which are unconnected with the payee's services as an employee, that element will not be taxable as "earnings". But in this case the parties chose to enter into an agreement by which only part of the settlement sum fell into that category, and the rest represented payments which, had they been made when it was alleged they fell due, would have been taxable as part of the employees' income.
[61] Those payments did not cease to be taxable in full because the recipients had to use some of the money to pay the balance of what they owed their own lawyers and the premium due to the insurers. I do not regard this as giving rise to any unfairness. Moreover, there was evidence that the amount of the settlement was increased by £200,000 in recognition of the fact that the Principal Settlement Sum would be taxable. Whilst that does not affect the legal analysis, and played no part in my conclusion, it does provide a degree of comfort that the end result has not disadvantaged Mr Murphy." (HMRC v. Murphy [2022] EWCA Civ 1112, Andrews, Lewison, Newey LJJJ)
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"[126] I consider that as a matter of law I must take a realistic view of the payments made, by reference to their substance and not their form. The existence of the Image Rights Agreement is not conclusive evidence that payments said to be made pursuant to that agreement are consideration for the acquisition of Geovanni’s overseas image rights. The burden is on the appellant to show that viewed realistically, in substance the payments were made to acquire Geovanni’s image rights and not earnings of Geovanni.
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[129] These are all facts which, viewed realistically, tend to suggest that the sums payable by the Club to Joniere were actually paid to secure Geovanni’s services as a footballer and not to obtain the right to commercially exploit his overseas image.
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[132] I am not making a finding that the Image Rights Agreement was a sham. The Image Rights Agreement did as a matter of contract grant rights to the Club to exploit Geovanni’s overseas image rights. I do not accept that those rights had any commercial value. I am satisfied that the Club viewed the sums payable under the Playing Contract and the Image Rights Agreement as an overall package which Geovanni required and the Club was willing to pay for him to sign for the Club. In reality payments to Joniere were a reward for Geovanni’s services as a footballer and formed part of his earnings." (Hull City AFC (Tigers) Limited v. HMRC [2019] UKFTT 227 (TC), Judge Cannan)
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- Relevant to consider alternative arrangements in determining substance
"[113] While we accept that the correct tax treatment must depend on the arrangements actually entered into rather than alternative arrangements that might have been entered into, it is relevant in undertaking a realistic appraisal to recognise that the substantive effect of the mechanism was really no different to the LLP retaining the Capital Amount, using it to support its borrowing by placing it on deposit in an account with the Co-op and agreeing that in certain circumstances it would pay deferred consideration to OVL. The LLP's case amounts to saying that it makes all the difference that the deposit was in the name of OVL rather than the LLP, and that that is so despite the fact that, at least for the first three years, it was the LLP (or its lender) and not OVL that could benefit from the funds." (London Luton Hotel BPRA Property Fund LLP v. HMRC [2023] EWCA Civ 362, Whipple, Falk, Lewison LJJJ)
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- Not bound by parties' labels/characterisation of transaction
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"[128] In reaching the above conclusion, we are reminded of the words of Arden LJ in Bankway Properties Limited v Pensfold-Dunsford [2001] 1 WLR 1369 (“Bankway”) in a different context, which were set out in Audley at paragraph [63], to the effect that the question in each case is “what was the substance and reality of the transaction entered into by the parties? The court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them” (see Bankway at paragraph [43], quoting Lord Ackner in Antoniades v Villiers [1990] 1 AC 417 at 466). In this case, the Appellant and the companies may have said in the document effecting the subscription that the entire £750,000 was being paid in respect of the issue of the Loan Notes but, viewed realistically in the light of the relevant legislation construed purposively, £694,684 of that amount was capital contributions to the companies and only £55,316 was attributable to the issue of the Loan Notes.
[129] In Tower, in the High Court (Tower MCashback LLP 1 and another v The Commissioners for Her Majesty’s Revenue and Customs [2008] STC 3366 (“Tower HC”)), Henderson J (as he then was) stated that “[in] order to say that the wrong label has been attached to a transaction, it is first necessary to identify with clarity the transaction which is said to have been misdescribed” (see Tower at paragraph [82] and Audley at paragraph [88]). In this case, as in Audley, we consider that to be straightforward – in reality, the transaction involved aggregate capital contributions to the companies of £694,684 and the payment of £55,316 in respect of the issue of the Loan Notes..." (Pitt v. HMRC [2022] UKFTT 222 (TC), Judge Beare)
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- Not to fix taxpayer with contract to which they did not agree
"[78] There are limits to the application of the Ramsay doctrine. As Patten LJ stated in Brain Disorders Research Limited Partnership v. HMRC [2018] STC 2382 at [32]: “Although the Ramsay approach to construction has undoubtedly involved the courts in looking at the commercial realities of the transaction and ignoring financial components of a scheme which are circular or have no purpose other than to produce a tax loss in order to identify whether and, if so, which parts of the transaction engage the relevant tax provisions, it does not enable the courts to fix the taxpayer with a contract which under the scheme it does not have. The actual transactions remain the same.”
[79] We consider that to bring the PIP within the profit-sharing arrangements of the Partnership would go beyond those limits in the present case. It would be necessary to fix the taxpayer, in this case the Partnership, with a contract to which its members did not agree. In our view, the correct contractual analysis is that the individual partner has no right to share in the profits of the Partnership at the time when allocations were made to the Corporate Partner and that the terms of the Partnership Deed which allocated those profits to the Corporate Partner must be respected. It is also our view that the contractual effect of the PIP and the way in which it was operated in practice do not change that position. When profits were allocated between the partners under the Partnership Deed, each individual partner had a legitimate expectation that his or her provisional PIP Award would be made final unless they failed to meet the eligibility conditions. Individual partners only had a right or entitlement to receive their PIP Awards once they were entitled to withdraw the Special Capital. Even adopting a purposive construction of section 850 of ITTOIA 2005, the PIP did not form part of the profit-sharing arrangements of the Partnership. We therefore dismiss Ground 1 of the PIP Appeals." (HMRC v. Bluecrest Capital Management LLP [2022] UKUT 200 (TCC), Leech J and Judge Herrington)
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Wrong to assume that economically equivalent transactions taxed in the same way
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"There is no doctrine of UK tax law that economically equivalent structures should be taxed the same. The appellant was a stand-alone company in the contested period, which is in a different position to a company that has a dormant subsidiary as it is considered for tax purposes to be a group of companies. There may be tax advantages and disadvantages to both structures. Groups of companies are often treated differently for tax purposes to stand-alone companies (e.g., in the treatment of transfers/disposals within groups)." (M Group Holdings Limited v. HMRC [2023] UKUT 213 (TCC), Green J and Judge Ramshaw)
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"[35] However, in our judgment, the discussion of these scenarios does not establish any “special statutory context”. At most they establish that economically similar transactions might be taxed differently if the phrase “by him or on his behalf” is held to be limited to situations involving agency. However, that is not a particularly startling outcome. Economically similar transactions are not infrequently taxed in different ways. More generally, scenarios (i) to (iii) are products of the ingenuity of lawyers litigating a particular issue arising out of s38(1)(b). They do not address the more “mainstream” situation where a person owning an asset incurs expenditure either directly, or through an agent, on the improving of that asset and so are less capable of establishing a “special statutory context” that displaces the ordinary and natural meaning of the words." (Lowe v. HMRC [2022] UKUT 84 (TCC), Marcus Smith J and Judge Jonathan Richards)
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"[32] The process of statutory construction will thus reveal, among other things, the relevance or otherwise of the economic effect of transactions. It is wrong, however, to assume that economically equivalent transactions should be taxed in the same way. As Lord Greene MR said in Inland Revenue Commissioners v Wesleyan and General Assurance Society (1946) 30 TC 11, 16: 9
"In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable.”
[33] [The taxpayer] sought to depict Wesleyan as out of date, pointing to Viscount Simon’s endorsement in the House of Lords of Lord Greene MR’s statement by reference to Duke of Westminster v IRC 19 TC 490 and suggesting things had moved on since that case. However, as [HMRC] pointed out, Wesleyan was expressly approved by Lord Wilberforce in Ramsey and we consider that it clearly remains good law." (Khan v. HMRC [2020] UKUT 168 (TCC), Judge Raghavan and Judge Andrew Scott)
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- But principle that taxpayers in objectively similar situations should receive similar tax treatment
"[75] We test that conclusion by asking ourselves what the outcome would be if the opposite view were taken and a broad meaning were adopted. Two problems come into view. First, that would open the door to an obvious risk of abuse and avoidance of tax because BPRA could be claimed on expenditure of all sorts, even where the connection with the conversion (or renovation or repair) works was tenuous. Secondly, that could lead to unfairness between taxpayers, because the position could differ fundamentally between cases where the property comes into use for the purposes of the taxpayer's own trade (or, as in this case, that of a related party) and where it is let or available for letting to a third party tenant; it could also differ between cases where a structured arrangement is put in place as it was in this case and other cases where works are funded more conventionally. The desirability of construing tax legislation in a way that leads to fairness as between taxpayers was emphasised by Lord Wilberforce in Ben-Odeco v Powlson. He referred at p. 1098 B-C to "the principle of the laws of taxation … that, in the absence of clear contrary direction, taxpayers in, objectively, similar situations should receive similar tax treatment". Lord Hailsham made a similar point at p. 1100 G. We do not consider that Parliament can be taken to have intended this legislation to be construed in a way which leads to the sort of perverse outcomes we have identified." (London Luton Hotel BPRA Property Fund LLP v. HMRC [2023] EWCA Civ 362, Whipple, Falk, Lewison LJJJ)
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Construe contract against relevant background
"[117] Both parties referred to the Upper Tribunal decision in Sjumarken v HMRC [2017] STC 239 (“Sjumarken”). Both relied on paragraph 38 where Judges Berner and Falk (as she then was), having reviewed the authorities, found that it is clear that the question of what constitutes consideration, and what consideration is given for, depends “on the correct construction of the relevant agreement”.
[118] [The taxpayer] also relied on Sjumarken because at paragraphs 38 and 39 Aberdeen Construction Group Limited v IRC [1978] STC 127 (“ACG”) was described as the leading case and [the taxpayer] argues that it bears a close analogy with this case. Judges Berner and Falk explained that in ACG shares had been sold for £250,000 but subject to conditions. The most important of those conditions required the seller to waive a loan of £500,000. The House of Lords concluded that the shares had little value without the waiver so the price paid was for both the shares and for the waiver of the loan. That conclusion was reached by interpreting the contract “as any contract must be, against its background”.
[119] Judges Berner and Falk went on to cite with approval Lightman J at page 136 in Spectros International plc v Madden [1997] STC 114 (“Spectros”) where he said, under the heading “Principle”, that:-
“What is the relevant consideration may depend upon the terms and form of the transaction adopted by the parties. The parties to a proposed transaction frequently can achieve the same practical and economic result by different methods…. The law respects the freedom of the parties to a transaction to frame and formulate their agreement as they wish and to suit their own legitimate interests (taxation and otherwise) and, so long as the form adopted is genuine, and not a sham, honest, and not a fraud on someone else, and does not contravene some established principle of public policy, the court will give effect to the method adopted. But as a corollary to this freedom, where the parties have chosen one method, it is not open to them to invite the court to treat as adopted some other method because it is more advantageous to them, because it leads to the same practical and economic result and because it is the more obvious and sensible method to have adopted. If the question is raised what method has been adopted and the transaction is in writing, the answer must be found in the true construction of the document or documents read in the light of all the relevant circumstances. If the terms of the documents are clear, that is the end of the question. If however there is any doubt or ambiguity upon the language used read in its proper context, it may be possible to resolve that doubt or ambiguity by reference to the inherent probabilities of businessmen entering into the transaction in one form rather than another.”
[120] At paragraphs 41 and 42, they pointed out that that quotation had been cited with approval by Henderson J in Revenue and Customs Commissioners v Collins [2009] STC 1077 who had also referred to Lightman J’s summary of principles derived from ACG which included that:-“… any written contract must be read as a whole construed in the light of all relevant circumstances which include the value of the assets disposed of and business sense”.
[121] I have added emphasis because in his Skeleton Argument Mr Sykes had correctly pointed out that Chartbook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 is often cited as authority for the proposition that pre-contractual negotiations should not be taken into account for the purposes of contractual construction. He relied on Lord Hoffmann at paragraph 42 where he said:-
“42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.”
[122] He then went on to argue about that in the context of valuation but I am not concerned with that in this decision. The point I make is that when I consider the history, the Terms, the emails, the draft SPAs and the Open Issues I am doing so in order to consider all relevant circumstances." (Moore v. HMRC [2023] UKFTT 399 (TC), Judge Scott)
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However
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"[33] As is made clear by the authorities, the subjective views of those who were involved about what was intended here is not relevant. The only “context” which is relevant is what was in the minds of both of the parties to the operative documents, in this case the trustees of the pension fund and the Employers.
[34] Second, as stated in Abbot “the clearer the natural meaning, the more difficult it is to justify departing from it” [18]. It is impossible to avoid the conclusion that the wording in these operative documents is clear and refers to a single thing; a domain name." (Morgan Lloyd Trustees Limited v. HMRC [2023] UKFTT 355 (TC), Judge Short)
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