Timothy Watts v The Commissioners for HMRC [2025] EWCA Civ 1615

[2025] EWCA Civ 1615Case No CA-2024-002277-Y
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
JUDGE JONES AND JUDGE GREENBANK
[2024] UKUT 00168 (TCC)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 12/12/2025
Before
LORD JUSTICE LEWISONLORD JUSTICE ARNOLDLORD JUSTICE MILES
Between
TIMOTHY WATTSAppellantTHE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMSRespondent
Aparna Nathan KC and Colm Kelly (instructed by Anthony Collins Solicitors) for AppellantJonathan Davey KC and Joshua Carey (instructed by the General Counsel and Solicitor for HMRC) for the RespondentHearing Hearing date : 2 December 2025
Approved JudgmentThis judgment was handed down remotely at 10.30am on 12 December 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives..............................

Introduction

[1]This appeal concerns a claim for income tax relief on losses from discounts on gilt strips. Mr Watts, the taxpayer, appeals from the decision of the Upper Tribunal (Judges Jones and Greenbank, “the UT”) dated 12 June 2024 ([2024] UKUT 00168 (TCC)) which dismissed an appeal from the decision of the First-tier Tribunal (Judge Heidi Poon, “the FTT”) dated 7 November 2022 ([2022] UKFTT 408 (TC)).[2]The FTT substantially rejected the appellant’s grounds for appealing a closure notice and amendment to his tax return issued by HMRC for the 2003-2004 tax year. In that tax return the appellant claimed relief for income tax loss sustained in connection with the purchase and sale of a gilt strip. The claim for loss relief was made pursuant to paragraph 14A, Schedule 13 to the Finance Act 1996 as then in force. HMRC denied the appellant’s claimed losses of £1,349,600. The FTT held that the right amount was £6,300.[3]The FTT held that there was a pre-ordained tax avoidance scheme which essentially had the following steps. The appellant purchased a specified gilt strip for £1.5 million. He granted an option to purchase the gilt strip to the trustee of a newly-created trust of which he was a life tenant and beneficiary, for which the trust paid the appellant just under £1.34 million, with an exercise price of £150,400. The trustee assigned the option to Investec Bank (UK) Ltd (“Investec”) in return for £1,346,200. Investec exercised the option and paid the appellant £150,400. The result of the transactions was that Investec paid a total of £1,497,449 to acquire the strip.[4]The key issue for the FTT and the UT was the extent to which the appellant had sustained a relievable loss for the purposes of paragraph 14A. Where strips have been acquired by a taxpayer and then transferred to another person, this requires a calculation of the difference between “the amount paid by [the taxpayer]” for the gilt strips and “the amount payable on the transfer” of the strips. There was no dispute that the amount paid for the strip was £1.5 million. The issue was whether “the amount payable on the transfer” was(a) only the £150,400 Investec paid to the appellant for the exercise of the option to purchase the strip or(b) that sum of £150,400 plus the £1.347 million Investec paid to the trustee for the assignment of the option. The FTT and the UT both concluded that “the amount payable on the transfer” comprised both payments. The appellant challenges that conclusion.

The factual background

[5]In 2003 the appellant was introduced to a partner in Grant Thornton (“GT”) who explained to him that the government was having difficulty selling sufficient gilts to cover its expenditure. GT marketed to the appellant a tax scheme which involved him purchasing a gilt strip with borrowed money. GT undertook to advise the appellant and was paid a fee of £75,000 plus VAT. The appellant was assured by GT that the scheme was legitimate tax planning.[6]The following transactions took place, described by the FTT and the UT as “the scheme”: i) A letter dated 28 October 2003 from SG Hambros & Trust (Jersey) Ltd offered the appellant a loan facility of £1.5 million, with a loan period of one month subject to Hambros’ right to seek immediate repayment, bearing interest at 5% per annum. ii) By a deed dated 29 October 2003 the Timothy Watts IIP Settlement 2003 was created, of which the appellant was life tenant and a beneficiary and Timothy Watts IIP Settlement Ltd was the trustee. iii) On 29 October 2003 a payment of £150,000 was made to the solicitors who acted for the appellant in respect of the trust. iv) On or before 7 November 2003 the appellant acquired the gilt strip for a purchase price of £1.5 million, drawing on the loan facility. Hambros held the gilt strip as a nominee for the appellant. Hambros had a charge over the gilt strip. v) Following a letter dated 7 November 2003 from the appellant to Hambros, Hambros entered a deed consenting to the appellant granting an option over the gilt strip to the trustee, releasing its charge over the gilt strip, and taking a charge over the appellant’s interests under the option agreement. The deed took effect on 19 November 2003 when Hambros consented to the grant of the option. vi) On 7 November 2003 the appellant wrote to the trustee offering to grant an option to purchase the gilt strip, stating as follows: “I should like to grant an option to the trustees to purchase the UK Treasury Principal Gilt Strip 7 December 2003, nominal amount £1,504,212 SEDOL 0219055, which I currently own. I enclose for your consideration a draft option deed and would be grateful if you could [unclear] the deed for me if this is acceptable to you. I propose that the consideration for the grant of the option is £1,346,200 and I also propose an option consideration payable on exercising the option of £150,400.” vii) On or around 19 November 2003 the appellant and the trustee entered into an option agreement by deed, under which the appellant granted the trustee an option to purchase the gilt strip (“the Option”). The consideration payable for the grant of the Option was £1,338,749 and the exercise price under the Option was £150,400. viii) Hambros consented to the grant of the Option. Hambros and the trustee entered into a loan facility dated 19 November 2003 for £1,350,000 to assist with the purchase of the Option from the appellant. As security for its obligations under the loan facility, the trustee granted Hambros a charge over its rights under the Option. ix) On or around 21 November 2003 Hambros transferred £1,338,749 to the trustee and the trustee transferred the same amount to the appellant. x) On or around 25 November 2003 the trustee entered into a deed, agreeing to assign the Option to Investec for the sum of £1,347,049. xi) On or around 25 November 2003 Investec gave notice to the appellant that it was exercising the Option. xii) On or around 26 November 2003(a) Investec transferred £1,347,049 to the trustee;(b) the trustee transferred £1,338,749 to Hambros (to repay its loan); and(c) Investec transferred the exercise price of £150,400 to the appellant. xiii) On 12 January 2004 the trustee advanced an interest free loan of £128,000 to the appellant.[7]The two payments made by Investec, at stages (xii)(a) and (c) above, came to a total of £1,497,449 for the assignment and exercise of the Option. The two payments made to the appellant in respect of the grant and exercise of the Option, at stages (ix) and (xii)(c) above, came to £1,498,149.[8]On 26 June 2004 Ernst & Young submitted the appellant’s tax return for 2003/04. Box 15.8 claimed £1,349,600 for “Post-cessation expenses, pre-incorporation losses brought forward and losses on relevant discounted securities.” Box 23.5 contained the following text:
“On 4 November 2003 I purchased UK Treasury Principal Gilt Strip 7 December 2003, nominal amount £1,504,212 (SEDOL 0219055), for £1,500,000. On 19 November 2003 I granted an option to the Timothy Watts IIP Settlement 2003 Limited in their capacity as trustees of the Timothy Watts IIP Settlement 2003 of which I am settlor and life tenant. I understand that the trustees sold this option to Investec Bank (UK) Ltd who subsequently exercised the option by paying £150,400 to me. As a result of this exercise of the option I have suffered an income tax loss of £1,349,600. It is considered this loss is allowable under para 14A Schedule 13 to the Finance Act 1996 and is reflected at Box 15.8 in the attached tax return.”
[9]On 27 September 2004 HMRC gave notice of their intention to enquire into the appellant’s tax return. On 3 August 2018 HMRC issued a closure notice, amending the appellant’s self-assessment to deny his paragraph 14A loss claim.

The statutory provisions

[10]Paragraph 14A, as in force at the relevant time, provided as follows:
“(1) A person who sustains a loss in any year of assessment from the discount on a strip shall be entitled to relief from income tax on an amount of his income for that year equal to the amount of the loss. (2) The relief is due only if the person makes a claim before the end of twelve months from the 31st January following that year. (3) For the purposes of this paragraph a person sustains a loss from the discount on a strip where— (a) he transfers the strip or becomes entitled, as the person holding it, to any payment on its redemption, and (b) the amount paid by him for the strip exceeds the amount payable on the transfer or redemption (no account being taken of any costs incurred in connection with the transfer or redemption of the strip or its acquisition). The loss shall be taken to be equal to the amount of the excess, and to be sustained in the year of assessment in which the transfer or redemption takes place. (4) In sub-paragraph (3) above the reference to a transfer in paragraph (a) includes a reference to a deemed transfer under paragraph 14(4) above (and paragraph (b) shall be read accordingly). (5) This paragraph does not apply in the case of— (a) any transfer of a strip for the time being held under a settlement the trustees of which are not resident in the United Kingdom, or (b) any redemption of a strip which is so held immediately before its redemption.” (a) he transfers the strip or becomes entitled, as the person holding it, to any payment on its redemption, and (b) the amount paid by him for the strip exceeds the amount payable on the transfer or redemption (no account being taken of any costs incurred in connection with the transfer or redemption of the strip or its acquisition). (a) any transfer of a strip for the time being held under a settlement the trustees of which are not resident in the United Kingdom, or (b) any redemption of a strip which is so held immediately before its redemption.”
[11]Paragraph 4(1), (3) and (4) provided materially as follows: “(1) … in this Schedule references to a transfer, in relation to a security, are references to any transfer of the security by way of sale, exchange, gift or otherwise. (3) For the purposes of this Schedule a transfer or acquisition of a security made in pursuance of an agreement shall be deemed to take place at the time when the agreement is made, if the person to whom the transfer is made, or who makes the acquisition, becomes entitled to the security at that time. (4) If an agreement is conditional, whether on the exercise of an option or otherwise, it shall be taken for the purposes of this paragraph to be made when the condition is satisfied (whether by the exercise of the option or otherwise).[12]Paragraph 14(4) provided as follows:
“(4) A person who holds a strip on the 5th April of any year of assessment, and who (apart from this sub-paragraph) does not transfer or redeem it on that day, shall be deemed for the purposes of this Schedule‒ (a) to have transferred the strip on that day; (b) to have received in respect of that transfer an amount equal to the strip’s market value on that day; and (c) to have re-acquired the strip on the next day on payment of an amount equal to the amount for which it is deemed to have been disposed of on the previous day.” (a) to have transferred the strip on that day; (b) to have received in respect of that transfer an amount equal to the strip’s market value on that day; and (c) to have re-acquired the strip on the next day on payment of an amount equal to the amount for which it is deemed to have been disposed of on the previous day.”

The FTT’s and the UT’s decisions

[13]The FTT decided that “the amount payable on the transfer” for the purposes of paragraph 14A(3)(b) was to be interpreted as a commercial concept, and that the word “transfer” was to be given a wide practical meaning such that it included both the payment made by Investec to the trustee to acquire the Option and the payment made on exercising the Option. Both amounts had been payable to acquire the gilt strip.[14]The UT accepted some of the appellant’s criticisms of the FTT’s decision. At para 33, the UT accepted that the FTT had not clearly identified the purpose of paragraph 14A. The UT also thought that some of the FTT’s language contained echoes of earlier case law, including MacNiven v Westmoreland Investments Limited [2001] UKHL 6, [2003] 1 AC 311 (“MacNiven”), which had drawn a distinction between legal and commercial concepts. As the UT said, the legal/commercial dichotomy has been held in later decisions not to be a substitute for a close analysis of what the statute means. The UT nevertheless concluded that the FTT had not fallen into material error and it agreed with the FTT’s conclusions (see para 34).[15]At para 35 the UT concluded that the purpose of paragraph 14A can be derived from its words. It is that a person who sustains a loss from a discount on a strip should be entitled to relief from that loss. The intention was to give relief for “real commercial outcomes”, as explained by Lewison J in Berry v HMRC [2011] UKUT 81 (TCC), [2011] STC 1057 (“Berry”) at [52], or “real economic outcomes” as described in Andrew v HMRC [2019] UKFTT 177 (TC) (“Andrew”) at [93]. The term “loss” is closely defined by the statutory formula in paragraph 14(3)(b). However, the statutory purpose is material to the interpretation of the two inputs into that formula.[16]The UT concluded that the FTT had properly taken a wide, practical, approach to the wording of the provision and had correctly viewed the scheme as a composite whole rather than as a series of isolated transactions. This approach was consistent with the established caselaw. The scheme was pre-planned and was designed to effect the transfer of the entire interest in the gilt strip from the appellant to Investec. The scheme had required Investec both to accept the assignment of the Option and to exercise it. The FTT’s approach to the paragraph was consistent with its purpose, which was to give effect to real economic outcomes. This approach required both the amounts payable by Investec to be included in the calculation.[17]At para 40 the UT agreed with the FTT’s overall conclusion. When the transaction was viewed realistically and with regard to its composite and commercial unity, the entire sums paid by Investec were “payable on the transfer” of the gilt strip.[18]At paras 48 and 50 the UT concluded that the assignment of the Option was a necessary part of the transfer of the gilt strip under the scheme. The exercise of the Option was another necessary step. Looked at realistically these were the means by which the gilt strip was transferred from the appellant and acquired by Investec. A purposive construction of “the amount payable on the transfer” meant that there should not be an artificial division or separation of the transfer. Moreover, cases concerning the proprietary effects of options were of no real assistance in the interpretation of the phrase “amount payable on the transfer” under this statute.[19]At para 54 the UT said:
“The commercial reality was that the outcome of the transfer and preceding steps were pre-planned and the timing of the steps was part of a commercial unity by which the transfer of the strips from the Appellant to Investec would be effected. There was no doubt as to the transactions and outcomes that would occur at any step in the chain – all the choices as to the steps, parties and timings were circumscribed with the ultimate purpose – the eventual transfer – pre-planned.”
[20]The UT also dismissed the appellant’s contention that the FTT had wrongly followed the decision in Berry. The appellant had contended that Berry was inconsistent with the decision of the Supreme Court in UBS AG v HMRC [2016] UKSC 13, [2016] 1 WLR 1005 (“UBS”).[21]The UT also dismissed the appellant’s contention that the FTT had erred by rejecting the relevance of certain extra-statutory materials as an aid to statutory construction.[22]The appellant now challenges the decision of the UT.

The grounds of appeal and the parties’ submissions

[23]Ground 1 is that(a) the UT failed to recognise that the FTT erred in impermissibly seeking to determine whether the “loss from a discount on a strip” and the formula for determining that amount had a commercial or legal meaning; and(b) the UT erred further in interpreting the “amount payable on the transfer” as including amounts paid on the grant of the Option.[24]Ground 2 is that the UT erred in concluding that Berry was not inconsistent with the later Supreme Court judgment in UBS, was not wrongly decided, and should be followed.[25]Ms Nathan KC for the appellant submitted in summary as follows.[26]The UT erred in concluding that the FTT’s repeated references to a commercial/legal dichotomy were indicative of flaws in expression rather than representing a fundamentally flawed approach to the interpretation of paragraph 14A. The FTT erroneously sought to determine whether “loss” and “amount payable on the transfer” in paragraph 14A were either “commercial” or “legal” concepts. The appellant contended that the FTT’s reference to “loss” is itself flawed given that the relevant fiscal concept identified by paragraph 14A(1), is “loss from a discount on a strip” rather than simply the concept of “loss”. A failure to focus on the statutory words (purposively construed, having regard to the statutory scheme of Schedule 13, the legislative history and extra-statutory material) as opposed to placing a judicial gloss (viz the commercial/legal dichotomy) infected the FTT’s analysis and reasoning throughout the decision. This carried over into the UT’s approach.[27]The proper approach to the construction of statutes is set out in UBS at paras 65 to 68, and Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690, at [15]-[16] (“Rossendale”).[28]The FTT and UT should have begun with the language of paragraph 14A, construed in the context of the statutory scheme as a whole, to determine the purpose of the statutory provision. Instead, the FTT avoided that exercise by seeking an answer to another question, i.e., whether “loss” and “amounts payable on the transfer” were commercial or legal concepts.[29]The UT’s analysis of the statutory purpose of paragraph 14A was equally flawed. The UT said that the purpose was to give effect to real world outcomes of a sort that would preclude relief in this case. It had however failed to identify what aspects of paragraph 14A or the statutory scheme justified this conclusion. The statutory history of Schedule 13 showed that Parliament removed relief for relevant discounted securities generally while at the same time (through the introduction of paragraph 14A) preserving loss relief for a loss on a discount on a gilt strip. Parliament did not, in doing so, subject relief for these losses to anti-avoidance provisions. This is in contrast to other aspects of the amended Schedule 13 where anti-avoidance provisions were included by contemporaneous amendments.[30]The UT wrongly focused on the amount Investec had expended in order to acquire the gilt strip and had ignored the statutory language i.e. “the amount payable onthe transfer.” As a matter of law, there was no transfer of the gilt strip on the occasion of the grant of the Option (see George Wimpey & Co Ltd v IRC [1975] 1 WLR 995 (“Wimpey”)). The UT’s interpretation amounted to saying that the amount payable on the transfer was the amount payable on all the steps necessary in practice to effect the acquisition. That went beyond the statutory language, which is clear and precise in its terms. The UT had also erred in substituting the concept of the total consideration paid by Investec to acquire the strip for the different words of the statute (“the amount payable on the transfer”). The UT thereby took into account amounts paid otherwise than on the transfer. The UT specifically failed to give proper weight to the word “on” in the phrase “payable on the transfer”. In doing so the UT failed to pay proper respect to the statutory context, which included a clear computation provision and the absence of any anti-avoidance provisions.[31]The UT further erred in failing to apply the ejusdem generis canon of construction when interpreting “or otherwise” in paragraph 4(1) of Schedule 13. It erred in holding that the words of that paragraph favoured the approach of refusing artificially to divide a transfer into elements. This is wrong, as there were two separate transactions, the acquisition of the Option and the acquisition of the strip following the exercise of the Option.[32]As to ground 2, the appellant contended that the UT ought to have concluded that the decision in Berry was plainly wrong.[33]Mr Davey KC for HMRC submitted that the conclusions of the FTT and the UT were right. In brief summary, as to ground 1(a), he argued that the FTT did not commit the alleged error and, accordingly, the UT did not err refusing to find that the FTT committed the alleged error. Ground 1(a) is setting up a strawman, namely, that the FTT had failed to appreciate that recent case law had retreated from the idea that statutory concepts might be susceptible to a priori categorisation as either commercial or purely legal. As the UT explained, the FTT had referred to the later caselaw and had recognised that any such a priori commercial/legal categorisation carried risks. In any event the real question on this appeal is whether the UT had landed in the right place in carrying out the exercise of(a) construing the legislation and(b) deciding whether the legislation so construed applied to the facts of this case.[34]The proper approach to construction is to adopt an unblinkered and realistic approach to the analysis of the facts: see WT Ramsay Ltd v IRC [1982] AC 300 (“Ramsay”) and the subsequent line of authorities summarised in Rossendale. The UT properly applied the principles set out in those cases.[35]As to ground 1(b), Mr Davey argued that the UT was right for the reasons it gave. The purpose of para 14A can be derived from the statutory wording, namely, that a person who sustains a loss from a discount on a strip would be entitled to relief for real world losses, not notional ones. When analysing the inputs into the formula in para 14A(3) regard must be had to the reality of the facts of the case, bearing in mind that the purpose of the provision is to relieve for real losses that reflect economic outcomes. Taking a realistic, unblinkered, view of the composite scheme, the amount payable on the transfer comprised the £150,000 moving from Investec to the appellant and the £1.347 million moving from Investec to the trustee.[36]As to ground 2, Mr Davey submitted that Berry was correctly decided; that Berry was consistent with UBS; and that the UT in the present case did not disregard the extra-statutory material on which the appellant sought to rely - instead the UT had decided that the material simply did not assist the appellant’s case. Discussion Approach to statutory construction

Discussion

[37]The relevant authorities were reviewed by the Supreme Court in Rossendale, from which the following guidance may be drawn: i) The approach to the construction of taxing statutes stemming from Ramsay is well-settled. It is based upon the modern purposive approach to the interpretation of all legislation (para 9). ii) As explained in para 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 Commissioner 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).” “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.” iii) As explained in para 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.” iv) The Ramsay principle is an application of general principles of statutory interpretation (para 13). As Lord Nicholls put it in Barclays Mercantile Business Finance Limited v Mawson (Inspector of Taxes) [2004] UKSC 51, [2005] 1 AC 684 (“Barclays Mercantile”) at para 32, the essence of the approach is: “to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.” v) To like effect, in Barclays Mercantile at para 36 Lord Nicholls quoted with approval the similar statement of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, (2003) 6 ITLR 454, para 35, that: “the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.” vi) These two elements (the purposive construction of the statute and its realistic application to the facts) are two helpful analytical stages, but there is no rigid demarcation between them and an iterative approach may be required (para 15). The paramount question always is one of interpretation of the particular provision and its application to the facts of the case (para 14). vii) Both interpretation and application share the need to avoid tunnel-vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme and the identification of its purpose may require a wider view, including the history of the provision or scheme and its political or social objectives, to the extent these can reliably be ascertained (para 16). viii) Likewise the facts must be looked at in the round. It was the formalistic insistence on examining steps in a composite scheme separately that allowed tax avoidance schemes to flourish (para 17). ix) Tax operates “in the real world, not that of make-belief” (Ramsay at page 326D) and therefore where legislation employs a concept such as a gain or a loss, it is likely to mean a real gain or a real loss rather than one that is illusory in the sense of not changing the overall economic position of the parties to a transaction (see Ramsay at page 326E-327A; see also Altrad Services Limited and another v HMRC [2024] EWCA Civ 720 at para 40). x) There can, however, be no “substitute for a close analysis of what the statute means” (Barclays at [38]); “it all depends on the construction of the provision in question” (UBS at para 65). xi) The distinction between commercial and legal concepts, while “not an unreasonable generalisation”, was not intended to provide a substitute for a close analysis of what the statute means. It does not justify the assumption that an answer can be obtained by classifying all concepts a priori as either commercial or legal. That would be the negation of purposive construction (para 56).[38]One of the cases reviewed in Rossendale was the decision of the Supreme Court in UBS. We were referred to various passages of UBS. Paras 62 to 64 state:
“62. The significance of the Ramsay case was to do away with both those features. First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute. Thus, in Ramsay itself, the terms “loss” and “gain”, as used in capital gains tax legislation, were purposively construed as referring to losses and gains having a commercial reality. Since the facts concerned a composite transaction forming a commercial unity, with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction. As Lord Wilberforce said: “The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] AC 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.”
(p 326) 63. “Unfortunately”, the Committee commented in Barclays Mercantile at para 34, “the novelty for tax lawyers of this exposure to ordinary principles of statutory construction produced a tendency to regard Ramsay as establishing a new jurisprudence governed by special rules of its own”. In the Barclays Mercantile case the Committee sought to achieve “some clarity about basic principles” (para 27). It summarised the position at para 32:
“The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. ... As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: ‘The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.’”
As the Committee commented, this is a simple question, however difficult it may be to answer on the facts of a particular case. 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 46; (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.” “The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] AC 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.” (p 326) “The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. ... As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: ‘The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.’”[39]Paras 67 and 68 state:
“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 [1967] 2 QB 786. On the contrary, as Lord Steyn observed in McGuckian [1997] 1 WLR 991, 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. 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.”

Analysis of paragraph 14A and the facts of this case

[40]It is helpful to start by considering the purpose of paragraph 14A. As already explained, the UT held that the purpose of paragraph 14A was explained in two earlier decisions,(a) the decision of the UT in Berry and(b) the decision of the FTT in Andrew (Judge Greenbank), which followed Berry.[41]The appellant contended that Berry went wrong in two specific passages. The first was para 31(viii) where Lewison J said:
“viii) Although one cannot classify all concepts a priori as “commercial” or “legal”, it is not an unreasonable generalisation to say that if Parliament refers to some commercial concept such as a gain or loss it is likely to mean a real gain or a real loss rather than one that is illusory in the sense of not changing the overall economic position of the parties to a transaction: WT Ramsay Ltd v Commissioners of Inland Revenue (1981) 54 TC 101, 187; Inland Revenue Commissioners v Burmah Oil Co Ltd (1981) 54 TC 200, 221; Ensign Tankers Ltd v Stokes [1992] 1 AC 655, 673, 676, 683; MacNiven v Westmoreland Investments Ltd (§§ 5, 32); Barclays Mercantile Business Finance Ltd v Mawson (§ 38).”
[42]The second passage criticised by the appellant was paras 51 to 52, which stated: “51. As I have said, the FTT held that the purpose of para 14A was the general proposition stated in sub-para (1) viz: ‘A person who sustains a loss in any year of assessment from the discount on a strip shall be entitled to relief from income tax on an amount of his income for that year equal to the amount of the loss.’ 52. In my judgment the FTT were right to identify the purpose of the paragraph in that way. This is not a case in which Parliament has used algebra (amount A and B) to create a notional profit or loss. It has used words which have a recognised commercial meaning and it is to be expected that Parliament intended to tax (or relieve) real commercial outcomes. The FTT were right not to adopt a slavish literal ‘tick box’ interpretation of the legislation. This is precisely how the Ramsey principle is meant to operate. I thus conclude that the FTT made no error of law in identifying the purpose of the legislation.” ‘A person who sustains a loss in any year of assessment from the discount on a strip shall be entitled to relief from income tax on an amount of his income for that year equal to the amount of the loss.’[43]The appellant contended that the first passage committed the error of applying, a priori, the legal/commercial dichotomy. The appellant said that this was inconsistent with the subsequent Supreme Court statement in UBS at para 65 that “all depends on the construction of the provision in question.”[44]I do not accept the submission that in para 31(viii) Lewison J wrongly categorised the term “loss”, a priori, as a commercial rather than a legal one. Lewison J simply gave an orthodox summary of the Ramsay principles. The passage closely reflects what Lord Nicholls said in para 38 of Barclays Mercantile. It is also consistent with the later statements of the principles in UBS and Rossendale.[45]The appellant’s second criticism was that in para 52 of Berry Lewison J failed to recognise that the concept of “loss from the discount on a strip” was defined in sub-paragraph (3) as involving two inputs. In other words that there was a statutory formula. There is some force in this criticism but, as the UT explained in the present case, the inputs themselves are required to be construed in accordance with the Ramsay approach. I agree with the UT’s analysis on this point.[46]Moreover, the substantial point made by Lewison J in para 52 of Berry was that the purpose of paragraph 14A is to allow a taxpayer to claim relief where he has suffered a real commercial loss as a result of transactions in gilt strip. I agree with that conclusion. The statutory provision is concerned with transactions having real world economic effects. This is shown by the subject matter and wording of the provision. It refers to gilt strips (a recognised form of traded security), uses the concepts of transfer and redemption (both being ways of realising or disposing of value), and refers to “the amount paid for” a strip and “the amount payable on transfer or redemption”, both economic values. Applying the guidance set out above, Parliament must therefore be taken to have intended that the concept of loss and the inputs to the formula for its calculation are concerned with the identification of real losses. Adapting the words of Lord Wilberforce in Ramsay, the provision is concerned with the real world, not that of make-believe, and tax relief is to be allowed on actual losses, not on arithmetical differences. I therefore agree with the description of the purpose of paragraph 14A given in Berry.[47]In reaching this conclusion I am unpersuaded by Ms Nathan’s argument that the deeming provisions in paragraph 14(4), which are incorporated by paragraph 14A(4), show that paragraph 14A as a whole is not concerned with real world transactions, but is a self-contained code capable of yielding artificial losses. The fact that there may be deemed to be a loss (or gain) for a deemed transfer where the taxpayer holds the strip on the 5th April in a year of assessment to my mind throws no relevant light on how the loss calculation is to be carried out in the case of an actual transfer under paragraph 14A(3).[48]The second stage in the analysis is that where, as here, there is a composite transaction comprised of a number of interlinked stages, the court is required to consider whether the composite transaction considered in the round has relevant tax consequences: see para 12 of Rossendale (quoted in para 37 (iii) above). Since the transfer of the gilt strip from the appellant to Investec was effected by means of a unified, composite, transaction, having more than one stage, to apply the statute to only one of those stages would be to take an inadmissibly blinkered view.[49]Investec needed first to take the assignment of the Option and then second to exercise it. Without taking the first step, it would have had no right to take the second. The amounts payable at each step were predetermined.[50]The UT put the point well in the following passage (with which I agree):
“49. However, the grant and assignment of the option were simply two steps, necessary although insufficient, in a composite transaction effecting a transfer of the entire interest in the gilts to Investec. The assignment of the option was a part of the transfer of the gilts under the scheme. On a realistic view, the grant and assignment of an option to purchase the gilt strips, and the exercise of the option were all parts of the means by which the gilt strips were transferred from the Appellant (and eventually purchased or acquired by Investec). 50. A purposive interpretation of the payment on the ‘transfer’ means that the ‘transfer’ should not be artificially divided or separated so that only the payment in respect of the exercise of the option could be considered the amount payable on the transfer. The payment for the assignment of the option was a necessary step in a composite scheme designed to effect a transfer of the gilt strips for which a series of transactions and payments was required. The payment for the assignment of the option to Investec was properly construed to be part of the amount payable on the transfer of the gilts from the Appellant and to it.”
[51]In my judgment, Parliament cannot realistically be taken to have intended to create a regime under which a taxpayer would be able to generate a relievable loss by transferring a strip to another person in return for an amount payable by the other which matches the amount the taxpayer had paid for it, simply by dividing the amount payable for the transfer into a series of separate sums contracted to be payable by reference to earlier steps in the pre-ordained scheme.[52]Viewed realistically, both of the amounts payable by Investec to bring about the transfer fall naturally within the scope of the provision.[53]In reaching this conclusion I am not persuaded by the appellant’s argument that the preposition “on” in the phrase “amount payable on the transfer” can only denote amounts payable on the exercise of the Option, and not on the acquisition of the Option. The word “on”, like other prepositions, has very limited independent semantic content. It takes its meaning from its surrounding words. The word “on” may be used in a wide variety of ways, including as part of the description of a physical position, as a way of identifying a date or time, or to indicate a relationship between two or more things. Ms Nathan accepted that the word “on” did not require the relevant amount to be payable simultaneously with the transfer of property in the security – the amount might be payable before or after that moment. So this is not a case where the word is being used to identify a date of payment. She submitted instead that it was intended to denote amounts payable “on the occasion of the transfer”. She said that reading was narrower than (say) the amounts “payable for the transfer”.[54]I do not accept this submission. For the reasons given above, the inputs into paragraph 14A(3) are themselves to be given a purposive, practical meaning. The words on either side of the word “on” are “the amount payable” and “the transfer [of a strip]”. There is no difficulty in reading the words purposively as including the amount payable for (or in return for) the transfer. And, for the reasons already given, approaching the facts realistically, in my view it would be unduly artificial to say that Investec only had to pay £150,000 on (in the sense of in return for) the transfer of the strip, when it actually had to pay nearly £1.5 million to acquire them.[55]I am also unable to accept the appellant’s arguments based on paragraph 4 of Schedule 13 or the ejusdem generis canon of construction. I have no difficulty with the contention that a transfer of a security generally connotes a transfer of property in it. Indeed in the present case there was a transfer of the property. But the question here is not whether, or precisely when, there was a transfer of property in the strip. It is to identify “the amount payable on the transfer”. That is the issue of statutory construction addressed above.[56]For similar reasons, the principles derived from Wimpey do not assist. The question in the present case is the scope of the phrase “amount payable on the transfer” and its application to the composite transaction. For the reasons given above, paragraph 14A does not call for an examination of the precise moment at which title passed according to the principles of property law.[57]Nor does paragraph 4(3) assist. I agree with Judge Greenbank in Andrew at para 121 that this provision contains deeming provisions, designed to identify the time at which a transfer occurs. They do not assist in the interpretation of paragraph 14A(3).[58]Ms Nathan also emphasised the absence of express anti-avoidance provisions in the legislation. I do not think that this assists. Ms Nathan accepted that the absence of any anti-avoidance provisions did not as such exclude the application of the Ramsay approach to interpretation. Barclays Mercantile establishes that it may not be relevant to the construction of a taxing provision that an arrangement was designed to produce a tax advantage. It also shows that, other than where there is specific anti-avoidance wording, it may be irrelevant that a component part of an arrangement may have no commercial advantage and was only inserted for tax reasons. However, as Barclays Mercantile illustrates, the court must construe the relevant provisions purposively and decide whether they were intended to apply to the transaction, viewed realistically. For the reasons already given, following this approach, the phrase “amount payable on the transfer” applies to all the amounts payable by Investec as the transferee of the strip.[59]Ms Nathan relied on the statutory history and extra-statutory materials (an Inland Revenue Consultative Document dated May 1995 and the Explanatory Notes to the legislation). Other than to demonstrate that paragraph 14A contained no anti-avoidance provisions while other parts of Schedule 13 did, I found nothing in either the history or those materials that threw any helpful light on the purposes of the provision.[60]I return to the grounds of appeal. For the reasons I have given I agree with the conclusions of the UT and the FTT and would therefore dismiss ground 1(b). Given this conclusion, ground 1(a) does not require separate consideration but, for completeness, in my judgment neither the FTT nor the UT fell into a material error by falling into the trap of pre-categorising the concepts used in paragraph 14A as “legal” or “commercial”. As the UT explained there were some echoes of this approach in the decision of the FTT, but that did not lead it into any material error. I agree with the conclusions of the UT on this point. I have addressed the challenges to the decision of the UT in Berry above. In the light of my conclusions on ground 1(b), ground 2 requires no further elaboration.

Disposal

[61]I would dismiss the appeal.[62]I agree.[63]I also agree.

Cited in 3 later judgments