Explainaway Ltd & Ors v Revenue & Customs [2011] UKFTT 414 (TC)

FTT-Tax
Explainaway Ltd & Ors v Revenue & Customs
[2011] UKFTT 414 (TC) · 2011-06-24
[1]These appeals concern the tax consequences of a number of derivative transactions undertaken by the Appellants, Explainaway Limited (“Explainaway”), Quartfed Limited (“Quartfed”) and Parastream Limited (“Parastream”), in connection with a scheme for the mitigation of corporation tax on chargeable gains for which a company, Paul Rackham Limited (“PRL”) would otherwise have been liable if it had made a taxable disposal of shares it held in Waste Recycling Group Limited (“WRG”).[2]In the accounting period ended 31 December 2001 Explainaway, a wholly-owned subsidiary of PRL, acquired the WRG shares from PRL and sold those shares to purchasers in the open market, realising a chargeable gain of £8,595,731. In the same period Explainaway undertook two derivative transactions, on the closure of one of which, in September 2001, it claimed an allowable capital loss of £8,804,846. It also claimed a loan relationship debit of £120,708.[3]In the accounting period ended 31 December 2002, Quartfed and Parastream, along with a fourth company, Quoform Limited (“Quoform”), all of which were wholly-owned subsidiaries of Explainaway, each entered into other derivative transactions, on the closure of which in June 2002 net allowable capital losses were claimed. In the same 2002 accounting period Explainaway sold its shares in Quoform to an unconnected third party, and claimed an allowable capital loss of £8,864,992 on that disposal. Explainaway also claimed a further loan relationship debit of £281,993 and a claim was made for a net allowable capital loss of £209,115 in respect of closure of derivative contracts in February 2002.[4]In the case of each of the Appellants HMRC issued closure notices on 27 May 2008. In the case of Explainaway,(1) For the period ended 31 December 2001 the results of the conclusions were: (a) The gain of £8,595,731 that Explainaway realised on the disposal of the shares in WRG was chargeable to corporation tax; (b) Explainaway did not incur a capital loss of £209,115 in the period and the capital losses carried forward became nil; and (c) Explainaway had a credit of £17,682 in respect of non-trade loan relationships for the period.(2) The results of the conclusions for the period ended 31 December 2002 were: (a) Explainaway did not incur a capital loss of £177,347 in the period and the capital losses carried forward became nil; (b) Explainaway had a credit of £3,292 in respect of non-trade relationships for the period; and (c) The maximum amount available to Explainaway to surrender as group relief for the period was reduced to £5,171.[5]The conclusions in the case of each of Quartfed and Parastream were that no chargeable gain or allowable loss arose on or with respect to the 2002 derivative transactions. As a result, for neither company was there any capital loss in the accounting period to 31 December 2002 and the capital losses carried forward became nil.[6]It is against the conclusions and amendments made by those closure notices that the Appellants now appeal. The issues, put shortly are:(1) (a) Whether the respective derivative transactions undertaken by Explainaway (in 2001) and by Quoform, Quartfed and Parastream (in 2002), followed by the disposal of Explainaway’s shares in Quoform gave rise to the chargeable gains and losses as claimed by the Appellants; or (b) Whether, as HMRC contend, either (i) all of the relevant derivative transactions are outside the scope of the Taxation of Chargeable Gains Act 1992 (“TCGA”) altogether, so that chargeable gains and allowable losses do not arise as the Appellants contend, or even if such gains and losses do arise (ii) whether, applying the Ramsay [1] principle, the loss arising on the disposal by Explainaway of the Quoform shares was an allowable loss within the meaning of TCGA.(2) Whether the interest cost for borrowings undertaken by Explainaway to effect the various transactions are relievable for corporation tax purposes, or whether, as HMRC contend, such relief is denied by reason of para 13, Sch 9 Finance Act 1996 (“FA 1996”).[7]Julian Ghosh QC and Elizabeth Wilson appeared for the Appellants. HMRC were represented by Malcolm Gammie QC. The facts[8]We were helpfully provided with a statement of facts not in dispute, which we reproduce below. We also heard oral evidence from two witnesses, each of whom provided a witness statement. The first was Stephen Stuteley, a director and the company secretary of PRL, and at the material times a director of each of the Appellant companies and Quoform. The second was George Atterbury, a tax partner at Deloitte & Touche, responsible for the tax planning in 2001 and 2002 that is the subject of this appeal. As well as the witness evidence we had a number of bundles of documents. Statement of facts not in dispute 1. Paul Rackham Limited (“PRL”) was incorporated on 20 th October 1989. At all material times PRL was a UK resident company carrying on the business of agriculture, together with property investment, dealing and development. The directors of PRL throughout the period with which these appeals are concerned were Messrs Paul Anthony Rackham (Snr), Paul Anthony Rackham (Jnr) and Stephen Russell Stuteley and Mrs Sheila Rackham. Mr Stuteley was also the company secretary. 2. On 29 th January 2001 Deloitte & Touche gave a presentation entitled “Capital Gains Tax Mitigation Scheme” to Stephen Stuteley and Michael Fulcher. 3. Explainaway Limited (“Explainaway”) was incorporated on 20 th February 2001. Its authorised share capital comprised 1000 shares divided into 1000 shares of £1.00 each. The issued share capital comprised 1 ordinary £1 share. 4. PRL acquired Explainaway from the formation agents, York Place Company Services Limited on 1 st March 2001. Messrs Stuteley, Rackham Snr and Rackham Jnr were appointed directors on 1 st March 2001. 5. On 1 st March 2001 the directors of Explainaway resolved to increase the authorised share capital from £1,000 to £500,000 divided into 500,000 shares of £1.00. 6. As at 1 st March 2001 PRL was the beneficial owner of four million shares in Waste Recycling Group plc (“WRG”). 7. On 1 st March 2001 PRL agreed to sell and Explainaway agreed to buy two million shares in WRG for £9,700,000 (“the Consideration”). The sale was completed on the same day. The Consideration was left outstanding with interest payable at 1.5% over Lloyds TSB base rate on the unpaid amount until payment. 8. On 7 th March 2001 the directors of Explainaway resolved that an application having been received for 300,000 ordinary shares of £1 each in the share capital of the company and the pre-emption rights of the company have been complied with, the said shares be allotted fully paid for cash at par to PRL. PRL had on the 6 th March 2001 advanced £300,000 as an intercompany debt to Explainaway. 9. On 4 th April 2001 Explainaway sold all of its shares in WRG to purchasers in the open market for £9,400,000 based on a market value of £4.70 per share. A net chargeable gain accrued to Explainaway on the sale of the WRG shares in the sum of £8,595,731. 10. On 24th April 2001 Explainaway repaid PRL £9,324,000 of the loan advanced on 1 st March 2001. 11. On 25 th April 2001 Deloitte & Touche provided to Mr Stuteley details of three companies with capital losses which had shown an interest in acquiring Explainaway. 12. At a board meeting held on 4 th July 2001 the directors of Explainaway, being Paul Rackham, Steve Stuteley and Paul Rackham Jnr resolved as follows: ‘1. The directors of the company confirm that they will be entering into transactions with Kleinwort Benson involving derivatives.(i) The directors of the company approve the terms of the agreement letter issued by KB on 3 rd July and the transactions contemplated by the agreement.(ii) Any two directors are authorised officers of the company who are able to execute the agreement with Kleinwort Benson.(iii) Any two directors are authorised officers of the company who can sign/despatch all documents required under the agreement with Kleinwort Benson.’ 13. On 5 th July 2001 Steve Stuteley and Paul Rackham as directors of Explainaway signed a Client Agreement Letter with Kleinwort Benson Private Bank (“KBIM”). 14. On 17 July 2001 the directors of Explainaway gave irrevocable instructions to KBIM to acquire an over the counter (OTC) long position over a notional value of c. £174 million. The underlying market was the March 2002 FTSE 100 LIFFE contract and the counter party was KBIM (“the 17 th July 2001 Long Contract”). The key terms were as follows: (i) The Trade date was 17 th July 2001. (ii) The Payment Date was 18 th July 2001. (iii) The Maturity Date was 15 th March 2002.(iv) The Nominal Amount was £174,011, 400.(v) The market was the London Stock Exchange.(vi) Counterparty A was KBIM.(vii) Counterparty B was Explainaway.(viii) The upfront amount was £174,000 of which £87,000 was attributable to the accounting period ended 31 December 2001, and £87,000 to the accounting period 31 December 2002.(ix) Futures Price was 5545.55.(x) Initial Price was 5540. The Settlement terms were as follows:-(xi) The Settlement Price was the Official Settlement Price of the Exchange Traded Contract as published by the LIFFE at the Valuation Time on the earlier of the Maturity Date or the Early Termination Date.(xii) The Cash Settlement Amount was {Nominal Amount x (the difference between the Settlement price and the Futures Price divided by the Initial Price} plus an Additional Amount where applicable.(xiii) If the Cash Settlement Amount was positive KBIM would make a payment to Explainaway. If negative, Explainaway would make a payment to KBIM. 15. On 17 July 2001 the directors of Explainaway gave irrevocable instructions to KBIM to transact 3141 contracts of the March 2002 FTSE 100 LIFFE futures at a market price of 5540 (equivalent to a notional price of c. £174 million) (“the 17 th July 2001 Short Contract”). 16. On 6 th September 2001 Explainaway gave irrevocable instructions to KBIM to close out the 17 th July 2001 Long Contract. (i) The Settlement price was 5268. (ii) The Cash Settlement Amount was £174,011,400 x (5268-5545.55/5540) x 0.00 = (£8,717, 845.50). (iii) Since the Cash Settlement Amount was a negative number Explainaway was required to pay the absolute value of that sum on the earlier of the Cash Settlement Payment Date. (iv) On 7 th September 2001 £8,717,845.50 was debited to Explainaway’s bank account number 910633/32B with KBIM. 17. On 6 th September 2001 Explainaway issued irrevocable instructions to KBIM to acquire an OTC long position over a notional value of £165,467,880. The underlying market was the March 2002 FTSE 100 LIFFE contract at 5268. The counterparty was KBIM (“the 6 th September 2001 Long Contract”). The key terms were as follows: (i) The Trade Date was 6 th September 2001. (ii) The Payment Date was 11 th September 2001. (iii) Counterparty A was KBIM. (iv) Counterparty B was Explainaway. (v) Initial Price was 5268. (vi) The Nominal was £165,467,880. (vii) The upfront amount was £30,000 payable by Explainaway to KBIM on the Payment Date. (viii) The Maturity Date was 15 th March 2002. (ix) The market was the London Stock Exchange – this being a March 2002 Futures Contract of the FTSE 100 Index (“the Exchange Traded Contract”). The Settlement Terms were as follows:- (x) The Settlement Price was the Official Settlement Price of the Exchange Traded Contract as published by the LIFFE at the Valuation Time on the earlier of the Maturity Date or the Early Termination Date. (xi) The Cash Settlement Amount was {Nominal Amount x (the difference between the Settlement price and the Initial Price divided by the Initial Price} plus an Additional Amount where applicable. (xii) If the Cash Settlement Amount was positive KBIM would make a payment to Explainaway. If negative, Explainaway would make a payment to KBIM. 18. On 12 th September Mr Stuteley held a meeting with Deloitte & Touche who outlined an alternative planning arrangement they were working on. 19. By letter dated 22 October 2001 Deloitte & Touche informed Mr Stuteley that a third party plc had made an interim offer for the purchase of Explainaway. It was said that the third party plc had sufficient losses to cover the capital gains on the second derivative contract “when it is closed out and ultimately realised”. The letter stated that the terms of the offer required negotiation and were subject to 5 conditions laid down by the third party. 20. The negotiations with the third party plc did not come to fruition and instead Mr Rackham Snr, Mr Rackham Jnr and Mr Stuteley resolved to pursue an alternative idea mentioned by Deloitte’s. In order to implement the alternative idea Explainaway established three companies on 16th November 2001: (i) Parastream Limited was incorporated as a company limited by guarantee and not having a share capital. Its directors were Paul Rackham, Steve Stuteley and Paul Rackham Jnr. Mr Stuteley was the company secretary. (ii) Quartfed Limited was incorporated as a private company limited by shares. Quartfed’s authorised share capital was £10,000,000 divided into 10,000,000 shares of £1 each. Its directors were Paul Rackham, Steve Stuteley and Paul Rackham Jnr. Mr Stuteley was the company secretary. (iii) Quoform Limited was incorporated as a private company limited by shares. Quoform’s authorised share capital was £10,000,000 divided into 10,000,000 shares of £1 each. Its directors were Paul Rackham, Steve Stuteley and Paul Rackham Jnr. Mr Stuteley was the company secretary. 21. On 23 rd November 2001 Deloitte & Touche sent a letter to Mr Stuteley saying that “we have set up the following• three new companies (S1, S2 and Xco as detailed on the appendix attached)• we have agreed the financing of £17.4m with Ansbacher Private bank at a cost of £50,000• we have now agreed the cost of the derivative contracts with KB (see below the summary of costs, exclusive of financing)”. 22. On 19 th December 2001 Paul Rackham, Steve Stuteley and Paul Rackham Jnr met to consider the financial and tax consequences of proposed trades in derivatives they were about to enter into. In their capacity as directors of Quoform, Quartfed and Parastream they resolved to instruct Kleinwort Benson (Channel Islands) Limited (“KBCI”) and KBIM to close out their respective investment positions simultaneously. It was acknowledged by the directors that extensive guarantees and indemnities had been given to the banks for the loan obtained by Explainaway and in connection with open positions held by Quoform, Quartfed and Parastream. As directors of Parastream, Quoform and Quartfed they resolved that those companies would undertake to cross support each other in the context of their respective liabilities to the banks. It was also noted that the directors of Explainaway had resolved that funds received from its subsidiaries would be properly applied to settle liabilities with KBIM while its debts remained outstanding. 23. By letter dated 20 th December 2001 Deloitte & Touche wrote to Mr Stuteley in the terms set out therein. 24. On 9 th January 2002 Explainaway subscribed in cash for 165,000 Ordinary £1 shares at par in each of Quoform and Quartfed. 25. On 18 th January 2002 Explainaway subscribed for a further 8,700,000 ordinary shares at par in each company. The minutes of the board’s resolutions for this and the subscription of 9 th January 2002 are dated 9th January 2002 . 26. On the 28 th January 2002 a £130,000 intercompany loan was advanced to Parastream by Explainaway. 27. On 31 January 2002 Explainaway as sole member of Quartfed Ltd approved by special resolution that the company enter into the forthcoming transactions and the agreements to give them effect. 28. On 31 January 2002 Explainaway as sole member of Quoform Ltd approved by special resolution that the company enter into the forthcoming transactions and the agreements to give them effect. 29. The board of Explainaway met on 31 January 2002 and resolved to enter into the loan facility and associated agreements with KBIM. 30. The Boards of Quofrom, Quartfed and of Parastream also met on the 31 st January 2002 and resolved to enter into the necessary agreements to effect the forthcoming transactions. 31. By letter dated 7 th February 2002 KBIM placed at the disposal of Explainaway a cash loan facility for an aggregate principal sum not exceeding £17.4 million to assist with the formation and capitalisation of subsidiary companies. Explainaway, Quoform, Quartfed and Parastream acknowledged receipt of the letter and accepted the Facility on 13 th February 2002. 32. On the 11 th February Parastream and Quartfed signed a Client Agreement letter with KBCI. They were originally signed on 20 th December 2001. 33. On 13 th February 2002 the Board of Directors of Quoform and Quartfed met to approve certain documents relating to the proposed subsidiaries guarantees to KBIM to secure the repayment by Explainaway of the loan. Explainaway as shareholder of Quoform and Quartfed also signed a special resolution on the 13 th February 2002 approving the provision of financial assistance by these subsidiaries. 34. On 13 th February 2002 PRL guaranteed and indemnified Explainaway against any liabilities which it may incur which were in excess of its financial resources. 35. On 13 th February 2002 Quoform, Quartfed and Parastream provided guarantees and indemnities to KBIM in respect of the loan facility to Explainaway. 36. On 13 th February 2002 Quoform, Quartfed and Parastream signed ISDA Master Agreements and Schedules with KBIM to enter into derivative transactions. On the same day Parastream provided a guarantee to KBIM for the obligations and liabilities of Quoform and Quartfed under the ISDA agreements. Quoform and Quartfed also provided a guarantee to KBIM for the obligations and liabilities of Parastream under the ISDA agreements. 37. On 13 th February 2002 Quartfed and Parastream provided cross guarantees to KBCI for all monies, obligations and liabilities due to the bank in consideration of the benefit derived from entering into the Client Agreement letters. 38. On 19 th February 2002 Quartfed and Parastream entered into an Inter-Company Side Agreement with KBCI. Quartfed and Quoform each entered into Inter-Company Support Agreements with Parastream dated 13 th February 2002 . 39. On 25 th February 2002 Explainaway drew down £17.4 million. On the following day it transferred £8.7 million to each of Quoform and Quartfed to pay for the shares subscribed for on 18 th January 2002. 40. On 26 th February 2002 Explainaway gave irrevocable instructions to KBIM to close the 17 th July 2001 Short Contract by buying 3141 contracts of the March 2002 FTSE 100 LIFFE futures at market at 5540. £13,192,000 was credited to its bank account no 910633/32B on 1 st March 2002. 41. Also, on 26 th February 2002 Explainaway closed the 6 th September 2001 Long Contract. £4,648,680 was debited to its bank account no 910633/32B on 1 st March 2002. 42. On 26 th February 2002 Quoform purchased a long FTSE 100 futures contract. The counterparty was KBIM. The maturity date was 21 st June 2002. The underlying market was the June 2002 Futures Contract of the FTSE 100 Index (“the Quoform Long Contract”). (i) The Trade date was 26 th February 2002. (ii) The Payment Date was 27 th February 2002. (iii) The Maturity Date was 21 st June 2002. (iv) The Nominal Amount was £174,040,400. (v) The underlying market was the June 2002 Futures Contract of the FTSE 100 Index (“the Exchanged Traded Contract.”) (vi) Counterparty A was KBIM. (vii) Counterparty B was Quoform. (viii) The upfront amount was £115,000 payable by Quoform to KBIM. (ix) Futures Price was 5143.4. (x) The Initial price was 5140. (xi) The market was the London International Financial Futures Exchange. The Settlement terms were as follows:- (xii) The Settlement Price was the Official Settlement Price of the Exchange Traded Contract as published by the London Stock Exchange at the Valuation Time on the earlier of the Maturity Date or the Early Termination Date. (xiii) The Cash Settlement Amount was {Nominal Amount x (the difference between the Settlement price and the Futures Price divided by the Initial Price} plus an additional amount.(xiv) If the Cash Settlement Amount was positive KBIM would make a payment to Explainaway. If negative, Explainaway would make a payment to KBIM. 43. On 26 th February 2002 Parastream gave irrevocable instructions to KBIM to acquire an over the counter (OTC) short position over a notional value of c. £174 million. The underlying market was the June 2002 Futures Contract of the FTSE 100 Index. The counter party was KBIM (“the Parastream Short Contract”). The key terms were as follows:- (i) The Trade date was 26 th February 2002. (ii) The Payment Date was 27 th February 2002. (iii) The Maturity Date was 21 st June 2002. (iv) The Nominal Amount was £174,040,400. (v) The underlying market was the June 2002 Futures Contract of the FTSE 100 Index (“the Exchanged Traded Contract.”) (vi) Counterparty A was KBIM. (vii) Counterparty B was Parastream. (viii) The upfront amount was £77,240 payable by Parastream to KBIM. (ix) Futures Price was 5137.70. (x) The Initial price was 5140. (xi) The market was the London International Financial Futures Exchange – this being a June 2002 Futures Contract of the FTSE 100 Index (“the Exchange Traded Contract.”) The Settlement terms were as follows:- (xii) The Settlement Price was the Official Settlement Price of the Exchange Traded Contract as published by the London Stock Exchange at the Valuation Time on the earlier of the Maturity Date or the Early Termination Date. (xiii) The Cash Settlement Amount was {Nominal Amount x (the difference between the Settlement price and the Futures Price divided by the Initial Price}. (xiv) If the Cash Settlement Amount was positive KBIM would make a payment to Explainaway. If negative, Explainaway would make a payment to KBIM. 44. Parastream gave irrevocable instructions to KBCI to purchase the appropriate number of contracts of June 2002 FTSE LIFFE futures at market to open a long position in a notional value size of c. £174 m (“the Parastream Long Contract”). 45. On 26 th February 2002 Quartfed gave irrevocable instructions to KBCI to sell the appropriate number of contracts of the June 2002 FTSE 100 LIFFE futures at market to open a short position equivalent to the notional amount of £174 million (“the Quartfed Short Contract”). The counterparty was KBCI. The associated cost to Quartfed of entering into the transaction was £33,020. 46. As at 7 th June 2002, the Quoform Long Contract was standing at a loss. On 7 th June 2002 Quartfed entered into a tripartite novation agreement with Quoform and KBIM under which Quoform paid Quartfed to acquire the Quoform Long Contract in consideration of £8,715,564. 47. Parastream gave irrevocable instructions on 7 th June 2002 to close the Parastream Long and Short Contracts. The contracts were settled on 10 June 2002. On 13th June 2002 £8,599,802 was credited to Parastream’s bank account 01A/CV/060493/01 and £8,600,440 debited to the same account. 48. Quartfed gave irrevocable instructions to KBIM on 7 th June 2002 to close the Quoform Long Contract. The contract was settled on 10 June 2002. On 13th June 2002 £8,600,564 was debited to its bank account 01A/CF/060491/01. 49. Quartfed gave irrevocable instruction to KBCI on 7 th June to close the Short Contract by acquiring 3886 of contracts of June 2002 FTSE LIFFE futures at market. On 13 th June 2002 £8,600,440 was credited to its bank account 01A/CF/060491/01. 50. On 20 th June 2002 the directors of Quartfed Limited resolved “That…an interim dividend amounting to £8,550,000…is hereby declared payable forthwith to the shareholders registered in the books of the Company at the close of business on 19 th June 2002”. Also on 20 th June 2002 the sum of £8,550,000 was debited to Quartfed’s Collateral Call Deposit account with KBIM numbered 01A/CF/060491/01 with the description “TO EXPLAINAWAY LIMITED”. 51. On 20 June 2002, £1 share in Quartfed Limited was transferred to Paul Rackham (Jnr). 52. On 20 th June 2002 Paul Rackham Jnr by deed declared that he held one ordinary £1.00 share in Quartfed Limited as nominee for the directors of Explainaway. 53. On 20 th June 2002 the directors of Quartfed Limited passed the following resolution as a special resolution: ‘1. That the Company be re-registered as an unlimited company. 2. That the name of the Company be changed to Quartfed. 3. That the Memorandum and Articles of Association be amended to state that the Company is an unlimited liability company and as necessary to conform in all requirements to be accepted under the Companies Act Regulations 1985. 4. That the attached new Memorandum and Articles of Association be adopted.’ 54. On 21 st June 2002 the Members of Quartfed passed a Special Resolution ‘That £8,865,001 Ordinary £1 shares be now redeemed at par.’ 55. On 21 st June 2002 Quartfed redeemed £8,865,001 Ordinary £1.00 shares at par. 56. On 24 th June 2002 the directors of Quartfed resolved “That… an interim dividend amounting to £41,798…is hereby declared payable forthwith to the shareholders registered on the books of the Company at the close of business on 23 rd June 2002”. On 24 th June 2002 the sum of £8,906,798.63 was debited to Quartfed’s Collateral Call Deposit account with KBPB numbered 01A/CF01A/CF/060491/01 with the description “TRF TO EXPLAINAWAY LIMITED. 57. On the 20 th June 2002 Explainaway paid £8,550,000 to KBIM and on 24 th June £8,850,000, repaying in full the loan drawn down by it on 25 th February 2002. 58. On 20 th December 2002 Explainaway sold Quoform to Mr & Mrs Austin for £10. Mr and Mrs Austin are not connected with any of the persons involved in this appeal. Witness evidence[9]From the witness evidence we find the following further material facts.[10]In the latter part of 2000, Mr Stuteley and Mr Michael Fulcher, a chartered accountant and retired partner of BDO Stoy Hayward, were requested by the board of PRL to address the tax implications of a possible sale of part of PRL’s holding of shares in WRG. They met Mr Atterbury and one of his colleagues of Deloitte & Touche on 29 January 2001. At that meeting a capital gains tax mitigation plan known as a “Company Derivative Plan” was explained to them, in the following way:(1) PRL would form a new subsidiary (subsequently, Explainaway) using debt and equity, and the subsidiary would buy the WRG shareholding from PRL with its accrued gain.(2) The subsidiary would sell the asset and repay its debts before buying two futures. One future would produce a loss and the other a profit, but the quantum and timing was unknown.(3) It was hoped that one of the contracts would be closed prior to the financial year end (to be 31 December 2001) with the aim of creating a loss equal to the capital gain on the sale of the WRG shares. Any additional profit on the second contract would be offset by taking out a further future.(4) The subsidiary would then be sold to a third party capital loss company which could shelter the gain.[11]We find it convenient to describe this first proposal as Plan A.[12]Mr Stuteley described the “material” or “significant” risks that were outlined by Deloitte & Touche and understood by Mr Stuteley and Mr Fulcher. We find that these were the ability to find a suitable capital loss company (in the event, there was no such sale to a capital loss company) and the risk that the futures would not generate the required gains and losses if the market did no achieve the necessary movement.[13]The proposal document itself explains Plan A in a little greater detail. The two futures contracts to be initially acquired by the subsidiary were designed not to be reciprocal for the purposes of s 143(5) TCGA, but would produce corresponding gains and losses on a predetermined movement in the FTSE. Effectively, the proposal was for broadly matching (though not equal and opposite) contracts, one long and one short, to be entered into, with the aim that a FTSE movement (in whatever direction) would give rise to a loss on one, substantially matched by a gain on the other. Once sufficient putative loss had arisen on one of the contracts, that contract would be closed out, with the aim of giving rise to an allowable loss to shelter the gain in the subsidiary on the sale of the WRG shares. The potential corresponding gain on the other contract would be locked in by the acquisition of another future, and that gain would in turn be sought to be sheltered by a sale of the subsidiary to a capital loss company.[14]We find that, although there was a risk that there would be insufficient movement on the FTSE in the relevant period so that the full amount of the loss sought to be generated might not arise, and that since the amount of the loss depended entirely on movement in the FTSE there was nothing that Explainaway or any other person could do to engineer or affect the position, there was no, or no material, risk that no loss at all would be generated. It was inevitable that there would be some movement in the FTSE in the relevant period. The amount of the loss was simply a question of the timing of the closing out of one of the contracts. We find that one or other of the contracts was bound to be closed out at some stage in the relevant period, either when the desired amount of loss had crystallised on one of the contracts, or at a time when some lesser loss had arisen, but it was determined that no further risk should be taken of the FTSE moving in a way that would reduce the loss.[15]The Deloitte & Touche proposal concludes:
“In the final analysis it would seem that the actual consequence of entering this type of transaction will be confined to the professional costs and the cost paid for loss utilisation.”
We find that under Plan A there was no exposure to any real financial loss. The only risk was that the scheme would not generate sufficient allowable losses within the period so as to eliminate the whole of the subsidiary’s (that is, in the event, Explainaway’s) liability to corporation tax on its chargeable gain.[16]Plan A was put into effect as described in the statement of agreed facts. Explainaway bought the WRG shares from its parent company, PRL, for consideration left outstanding. As that was an intra-group transfer, no chargeable gain arose to PRL; Explainaway inherited PRL’s base cost for capital gains purposes. Explainaway then sold those shares into the open market (at a commercial loss to itself, but thereby triggering the capital gain on the shares) and repaid to PRL a large part of the outstanding purchase price. Explainaway then, on 17 July 2001, acquired an over the counter (OTC) long derivative contract and sold a short derivative contract. Each was a standard International Swaps & Derivatives Association (ISDA) contract (master agreement) and each had a notional value of £174 million. Both contracts were to mature on 15 March 2002, and overall the two contracts would (because they were not entirely equal and opposite) produce a small gain or loss.[17]The 17 July 2001 Long Contract was closed out on 6 September 2001 at a loss of £8.8 million. A further long position, locking in the chargeable gain on the 17 July 2001 Short Contract, was entered into on the same date. It was that chargeable gain that Plan A envisaged would be sheltered by selling Explainaway to a capital loss company.[18]Deloitte & Touche engaged in negotiations with possible capital loss companies, but became concerned at the level of fees sought by, and the commitment of, those companies. A meeting was held on 12 September 2001, at which possible amendments to the plan were discussed. This was followed by a letter from Deloitte & Touche to Mr Stuteley of 22 October 2001 in which D&T refer to an “interim offer” received from a company, Northgate Plc, which had sufficient losses to cover the capital gains on the 17 July 2001 short contract. Mr Stuteley was advised by this letter that, subject to negotiation on the level of fees sought by Northgate, “we do not appear at this stage to be too far away from agreement”.[19]The 22 October letter also sets out details of an extended scheme which had been discussed with Mr Stuteley at the September meeting. This extended scheme, with modifications, which we shall refer to as Plan B, was what was subsequently implemented.[20]The letter goes on to summarise the position at that time. Explainaway had through Plan A generated a loss sufficient to cover the gain on the WRG shares. There would be a corresponding gain on the 17 July 2001 Short Contract. An offer had been received (from Northgate) for the purchase of Explainaway, which might prove acceptable, and it was considered that this should deal with the gain on the short contract. Plan B could proceed. For this to succeed in full, there would need to be a loss of £8.7 million generated, which would require a movement of around 3% in the FTSE. Because of concerns as to possible legislative changes, it might be the case that the relevant contract would have to be closed out by 31 December 2001. However, if it appeared that the new legislation would not adversely affect the contracts in question, closing out could possibly be deferred until after that time, up to the end of Explainaway’s own accounting period.[21]The letter also makes clear that the result of Plan B was dependent on factors outside the control of the companies and Deloitte & Touche, namely the question of the movement of FTSE and the draft legislation. We find in respect of the FTSE movement that the risk was again on the quantum of the loss. There was no, or no material, risk that no loss at all would be obtained.[22]In early November 2001 Mr Stuteley was advised that Northgate plc were seeking increased fees. Although the board was aware of the commercial risk that Plan B would not produce the required loss (and matching gain) by the maturity date of the new derivatives to be acquired, Plan B was adopted, with certain modifications, including the introduction of a guarantee company (this became Parastream) and a further bank.[23]There was some delay in implementation, largely due to certain Financial Services Act issues. The derivatives were entered into on 26 February 2002 by each of Quartfed, Quoform and Parasteam. Those contracts were standard ISDA contracts each with a maturity date of 21 June 2002. These transactions were financed by Explainaway having, on 25 February 2002, borrowed £17.4 million from KBIM Limited to pay for shares subscribed in Quartfed and Quoform. On 26 February 2002 Explainaway closed its 17 July 2001 short and 6 September 2001 long positions realising a net gain of £8.7 million.[24]The Quoform Long Contract and the Quartfed Short Contract were broadly (but not exactly) equal and opposite in their effect in relation to their relative values to each other. Any movement on the FTSE index from the nominated futures price would give rise to a loss on one contract, largely matched by a corresponding gain on the other.[25]The evidence of Mr Stuteley was that, over the ensuing three to four months, staff at Deloitte & Touche provided him with regular updates on the movement of the FTSE 100 Liffe index. He and his fellow directors were aware that there was what he described as a “real and material commercial risk” that the index would not produce the requisite movement by the maturity date which would make the whole or at least a part of the planning ineffective. Mr Stuteley referred in his evidence to an e-mail dated 27 April 2007 (so some time after the events in question) from Mr Atterbury, which summarises the movements in the FTSE index between March and June 2002. This shows, as might be expected, movements upwards or downwards on almost all days. Due to these fluctuations, the potential amount of losses and gains on the Plan B contracts fluctuates upwards and downwards. As the e-mail describes, until the index moved significantly in one direction (downwards) after 27 May 2002, the contracts would not have produced the full hoped-for amount of loss to shelter the gain on Explainaway’s 17 July 2001 short contract, although there were occasions when a material loss (and corresponding gain) would have been generated if the contracts had been closed at that time, such as on 22 February 2002, when the amount of the loss and gain would have been in excess of £6 million.[26]The reference to risk in this evidence is essentially to the risk that, because of an inadequate movement in the FTSE over the allotted period, the tax planning could have been ineffective to produce the full amount of the loss required. We accept that there was such a risk. However, the evidence of Mr Atterbury’s e-mail confirms our finding that there was no, or no material, risk that no loss would be obtained, and that the only risk was the amount of the loss that would, in the event, be realised.[27]We do not accept that, except in the broadest sense, the risk of the Appellant in this respect was a commercial risk. The factor that gave rise to the risk, namely the movement of the FTSE itself, is affected by economic and commercial influences, but we find that the Appellant was exposed to no commercial risk as such, apart from the fees it had to pay for the tax planning. Its risk that the tax planning would not fully succeed in its aim was not a commercial risk. Furthermore, it was a risk that the boards of the relevant companies were fully aware of, and accepted, in their decision to proceed with the scheme.[28]Mr Atterbury’s evidence was directed solely at the final step of Plan B, namely the sale of the company that, in the event, would give rise to the allowable loss. That, as Mr Atterbury described, depended on which of the two relevant companies, Quartfed or Quoform, would realise that loss, and the quantum of the loss, both of which, at the onset of Plan B, were at large. It made no sense for any potential purchaser to be identified before the loss had crystallised.[29]Notwithstanding this uncertainty, Mr Atterbury confirmed, and we find, that a small market of potential purchasers existed. There was an expectation that the relevant company would be capable of being sold.[30]In the event, it was the value of the Quoform Long Contract that gave rise to a loss as a result of the FTSE index movement. That contract was novated by Quoform to Quartfed, with Quoform paying Quartfed £8,715,564 to accept the novation. Quartfed used those funds to meet its inherited obligation on the Quoform Long Contract, and itself closed out the Quartfed Short Contract so as to realise (broadly) an equal and opposite (taxable) profit to the loss on the Quoform Long Contract.[31]The effect of the obligation to meet the loss on the Quoform Long Contract depressed the value of the shares in Quoform owned by Explainaway. Explainaway sold its shares in Quoform to Mr and Mrs Austin, third party purchasers introduced by Deloitte & Touche, for £10, and claimed an allowable capital loss of £8,864,992 for the accounting period ended 31 December 2002, which is the subject of this appeal. The law[32]Section 2 TCGA contains provision for the persons and gains chargeable to capital gains tax, and allowable losses. So far as material, it provides:
“(2) Capital gains tax shall be charged on the total amount of chargeable gains accruing to the person chargeable in the year of assessment, after deducting— (a) any allowable losses accruing to that person in that year of assessment, and (b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous year of assessment, any allowable losses accruing to that person in any previous year of assessment (not earlier than the year 1965–66).”
[33]A company is subject to corporation tax on its chargeable gains. In this respect, s 8 TCGA provides [2] :
“(1) Subject to the provisions of this section and section 400 of the Taxes Act, the amount to be included in respect of chargeable gains in a company's total profits for any accounting period shall be the total amount of chargeable gains accruing to the company in the accounting period after deducting— (a) any allowable losses accruing to the company in the period, and (b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous accounting period, any allowable losses previously accruing to the company while it has been within the charge to corporation tax. (2) For the purposes of corporation tax in respect of chargeable gains, “allowable loss” does not include a loss accruing to a company in such circumstances that if a gain accrued the company would be exempt from corporation tax in respect of it. … (3) Except as otherwise provided by this Act or any other provision of the Corporation Tax Acts, the total amount of the chargeable gains to be included in respect of chargeable gains in a company's total profits for any accounting period shall for purposes of corporation tax be computed in accordance with the principles applying for capital gains tax, all questions— (a) as to the amounts which are or are not to be taken into account as chargeable gains or as allowable losses, or in computing gains or losses, or charged to tax as a person's gain; or (b) as to the time when any such amount is to be treated as accruing, being determined in accordance with the provisions relating to capital gains tax as if accounting periods were years of assessment.”
[34]Section 143 TCGA provides for gains and losses in the course of dealing in financial futures to be within the scope of chargeable gains and losses. It provides:(1) If, apart from section 128 of the Taxes Act, gains arising to any person in the course of dealing in commodity or financial futures or in qualifying options would constitute, for the purposes of the Tax Acts, profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, then his outstanding obligations under any futures contract entered into in the course of that dealing and any qualifying option granted or acquired in the course of that dealing shall be regarded as assets to the disposal of which this Act applies.(2) In subsection (1) above— ( a ) “commodity or financial futures” means commodity futures or financial futures which are for the time being dealt in on a recognised futures exchange; and ( b ) “qualifying option” means a traded option or financial option as defined in section 144(8).(3) Notwithstanding the provisions of subsection (2)( a ) above, where, otherwise than in the course of dealing on a recognised futures exchange— ( a ) an authorised person ... enters into a commodity or financial futures contract with another person, or ( b ) the outstanding obligations under a commodity or financial futures contract to which an authorised person ... is a party are brought to an end by a further contract between the parties to the futures contract, then, except in so far as any gain or loss arising to any person from that transaction arises in the course of a trade, that gain or loss shall be regarded for the purposes of subsection (1) above as arising to him in the course of dealing in commodity or financial futures.(4) ...(5) For the purposes of this Act, where, in the course of dealing in commodity or financial futures, a person who has entered into a futures contract closes out that contract by entering into another futures contract with obligations which are reciprocal to those of the first-mentioned contract, that transaction shall constitute the disposal of an asset (namely, his outstanding obligations under the first-mentioned contract) and, accordingly— ( a ) any money or money's worth received by him on that transaction shall constitute consideration for the disposal; and ( b ) any money or money's worth paid or given by him on that transaction shall be treated as incidental costs to him of making the disposal.(6) In any case where, in the course of dealing in commodity or financial futures, a person has entered into a futures contract and— ( a ) he has not closed out the contract (as mentioned in subsection (5) above), and ( b ) he becomes entitled to receive or liable to make a payment, whether under the contract or otherwise, in full or partial settlement of any obligations under the contract, then, for the purposes of this Act, he shall be treated as having disposed of an asset (namely, that entitlement or liability) and the payment received or made by him shall be treated as consideration for the disposal or, as the case may be, as incidental costs to him of making the disposal.(7) Section 46 shall not apply to obligations under— ( a ) a commodity or financial futures contract which is entered into by a person in the course of dealing in such futures on a recognised futures exchange; or ( b ) a commodity or financial futures contract to which an authorised person ... is a party.] 1(8) In this section “authorised person” means a person who— ( a ) falls within section 31(1)( a ), ( b ) or ( c ) of the Financial Services and Markets Act 2000, and ( b ) has permission under that Act to carry on one or more of the activities specified in Article 14 and, in so far as it applies to that Article, Article 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.[35]It was accepted that the derivative transactions subject to this appeal had to fall within the scope of s 143 TCGA, and that to do so they must fall within s 128 of the Income and Corporation Taxes Act 1988 (“ICTA”). Section 128, at the material time, provided as follows:
“Any gain arising to any person in the course of dealing in commodity or financial futures or in qualifying options, which is not chargeable to tax in accordance with Schedule 5AA and apart from this section would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, shall not be chargeable to tax under Case V or VI of Schedule D. In this section “commodity or financial futures” and “qualifying options” have the same meaning as in section 143 of the 1992 Act, and the reference to a gain arising in the course of dealing in commodity or financial futures includes any gain which is regarded as arising in the course of such dealing by virtue of subsection (3) of that section.”
[36]We shall set out the text of para 13, Sch 9, FA 1996, in the part of this decision where we consider the issue of the relievability for corporation tax purposes of interest costs incurred on borrowings taken out by Explainaway to effect the relevant transactions. Were the derivative transactions within the scope of TCGA?[37]Issue (1) is concerned with the transactions in the derivatives themselves, in so far as they are within the scope of this appeal. Primarily this concerns Explainaway’s dealings, but it also covers the amendments made by closure notices in respect of the corporation tax returns of Quartfed and Parastream. It does not relate to the allowable loss claimed by Explainaway on the disposal of the Quoform shares.[38]It is common ground that the derivative transactions must fall within s 128 TA. That requires that, but for that section, gains arising in the course of dealing with the derivatives (in this case financial futures) would be chargeable under Schedule D. In this case the Appellant says that the gains would have been chargeable to tax under Schedule D, Case VI.[39]Mr Ghosh submitted that the profits on the derivatives would all have been “annual profits and gains not falling under any other Case of Schedule D” within s 18(3) ICTA. They represent the result of speculative transactions by each of Explainaway, Quartfed and Parastream (and, it may be noted, Quoform). It is accepted that Explainaway hoped for a loss on one of the derivatives it took out in July 2001, and on one or other of the derivatives taken out by Quoform or Quartfed in February 2002. But any loss arising out of one of those speculative transactions would be matched by a profit on another derivative.[40]Mr Ghosh argued that any such profit could not aptly be described as an accretion to capital; the profit would arise as the result of the fluctuations of the FTSE index over a period, which gives a constantly changing right to receive an amount of cash or a fluctuating liability to pay an amount of cash.[41]Mr Ghosh relied on Cooper v Stubbs 10 TC 29 and Townsend v Grundy 18 TC 140. Each of those cases concerned speculative dealings in commodity futures, and in each case it was found that the transactions were not the carrying on of a trade, but that the profits arising from the transactions were annual profits or gains assessable to income tax under Case VI of Schedule D. In Cooper v Stubbs , it had been found by the special commissioners, firstly that the speculation was not in the nature of a trade; that was a decision of fact with which the majority of Court of Appeal declined to interfere. But secondly, the special commissioners had found that the transactions were in truth gambling transactions, and thus outside the scope of Case VI. The court (by majority) held that on the evidence the transactions in question were real transactions, giving rise to real contractual rights. It was plain that the transactions were not mere bets; for there to be a bet there had to be two parties, both of whom had entered into the wager. There was nothing to prevent the profits arising from being annual profits or gains.[42]We have referred in particular to Cooper v Stubbs , as it highlights an element of Mr Gammie’s case as it was put to Mr Stuteley, namely that the decision to go ahead with the scheme was a bet. For essentially the same reasons as the Court of Appeal found in Cooper v Stubbs , we find that these transactions were not gambling transactions. True it is that whether the full amount of the loss would be crystallised could, in common parlance, be described as a gamble, but there was no counterparty to a bet to enable that to be regarded as gambling or wagering in the legal sense. The derivative contracts were real and enforceable contracts, speculative in nature, with a third party bank.[43]Mr Gammie submitted that the essential question in determining whether a receipt fell within Case VI is whether, in the particular circumstances of the case, a cash receipt or payment has the character of income. He argued that receipts and payments of cash in transactions entered into without commercial motivation, and solely as part of a self-cancelling tax planning strategy, could not properly be characterised as “income profits” or “income losses” within Case VI, and were instead simply receipts and payments of cash and no more. In support of this submission he relied on a line of cases including FA & AB Lupton [1972] AC 634 , and on application of the Ramsay principle. We shall address the Ramsay argument later; in this section we consider whether, leaving Ramsay aside, the profits from the derivative transactions would fall within Case VI of Schedule D.[44]In FA & AB the appellant company was trading as a dealer in stocks and shares. It entered into certain dividend-stripping transactions, including one under which it purchased the whole of the share capital of a company, and received an undertaking from the vendors that profits would be sufficient to pay a net dividend in a certain amount. Those dividends were received, and the value of the company diminished. The appellant company claimed a trading loss. It was held that the transaction was not a share dealing transaction coming within the area of trade of a dealer in shares. The shares in the company were not bought as stock-in-trade of a dealer in shares but as pieces of machinery with which a dividend stripping operation might be carried out.[45]What is made clear in FA & AB is that, following Griffiths vJP Harrison (Watford) Ltd [1963] AC 1, trading transactions do not cease to be such merely because they are entered into in the hope of later taking advantage of the revenue law by making a claim for recovery of tax (per Lord Morris of Borth-y-Gest at p 646D). Motive does not alter or transform the essential and factual nature of the transaction; it is the transaction itself and the form and content which must be examined and considered (p 646G). The distinction drawn in FA & AB was that, as in Finsbury Securities Ltd v IRC [1966] 1 WLR 1402 , certain fiscal arrangements were inherently and structurally part of the transactions sought to be described as trading transactions In FA & AB , the appellant company purchasing the shares gave an undertaking to the vendors that they would make a “loss”. The vendors were directly and financially interested in the result of the loss claim. These “truly strange” arrangements were not, it was held, the arrangements of a trading transaction of a dealer in shares (p 650D-F).[46]In relation to this issue we are concerned only with the derivative transactions themselves. Those transactions it seems to us were real transactions of a nature commonly transacted in the market. There were no fiscal arrangements inherently and structurally built into the derivative transactions themselves. Any claim for a loss arose as a consequence of the result of those transactions, and was separate from them. In this connection it is in our view of no consequence that the derivative transactions were all in essence matched, nor that settlement was by way of set-off. We find that there is nothing in FA & AB that could lead to the conclusion that profits and losses on the transactions were not of an income nature. Accordingly, and subject to the Ramsay argument to which we shall now turn, as those transactions were not trading transactions, the profits and losses were, but for s 128 ICTA, within Case VI of Schedule D, and as a result the derivatives fell within the scope of s 143 TCGA. Ramsay[47]Here we consider the application of the Ramsay principle to both the losses on the derivative transactions, and the loss on the disposal of the Quoform shares. In each case the question is whether the losses that arose were allowable losses within the scope of TCGA.[48]At its essence the Ramsay principle is one of construction. The basic principles were clarified by the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (“BMBF”) [2005] STC 1 , a case recently described by Mummery LJ in Revenue and Customs Commissioners v Mayes [2011] EWCA Civ 407 as a significant judicial stocktaking of the “new approach”. The position is summarised at paragraphs 26 – 42 of the Appellate Committee’s unanimous report, from which we extract what Lord Nicholls said at [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. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven ( Inspector of Taxes ) v Westmoreland Investments Ltd [2001] UKHL 6 at [8], [2001] STC 237 at [8], [2003] 1 AC 311 : 'The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.'”
[49]It is not simply a case of disregarding transactions or elements of transactions which have no commercial purpose. It is necessary, as Lord Nicholls describes at [36], to decide, on a purposive construction of the statutory provision in question, exactly what transaction will answer to the statutory description, and whether the transaction in question does so. Lord Nicholls then refers, with approval, to what Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 (at [35]):
“[T]he 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.”
[50]In Ramsay itself the taxpayer acquired the whole of the issued shares of C Ltd. The taxpayer offered and C Ltd accepted two loans (“loan L1” and “ loan L2”) to C Ltd in the same amount, at the same interest rate of 4% and repayable at par after 30 and 31 years respectively. Shortly thereafter, the taxpayer reduced the interest on loan L1 to nil and increased the interest rate on loan L2 to 22%, and sold loan L2 to M ltd at a profit. Loan L1 was in due course, after further loan and share transactions, repaid at par and the taxpayer incurred a capital loss on the sale of the shares in C Ltd.[51]It was held by the House of Lords that it was the task of the courts to ascertain the legal nature of any transactions to which it was sought to attach a tax or tax consequence and that if the legal nature was that which emerged from a series or combination of transactions which were intended to operate as such, it was the series or combination of transactions rather than the individual transactions to which regard must be had. The courts are not limited to considering the genuineness of each individual step or transaction in the scheme, but can consider the scheme as a whole. If it is found that the scheme was a composite transaction rather than a number of independent transactions that produces neither a gain nor a loss, and does not appreciably affect the taxpayer’s beneficial interest, it can be treated as a nullity for tax purposes.[52]In respect of pre-arranged, composite transactions of the nature under consideration in Ramsay , Lord Wilberforce pointed out that this was not a new principle. It was simply an application of the power and duty of the courts to determine the nature in law of the transactions in question and to relate those transactions to existing legislation. Lord Wilberforce then said (at p182a):
“To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the court to arrive at a conclusion which corresponds with the parties' own intentions.”
[53]Lord Wilberforce went on the analyse the particular scheme in Ramsay and said (at p 183c-g): “Of this scheme, relevantly to the preceding discussion, the following can be said— 1. As the tax consultants' letter explicitly states 'the scheme is a pure tax avoidance scheme and has no commercial justification in so far as there is no prospect of T [the prospective taxpayer] making a profit; indeed he is certain to make a loss representing the cost of undertaking the scheme'. 2. As stated by the tax consultants' letter, and accepted by the Special Commissioners, every transaction would be genuinely carried through and in fact be exactly what it purported to be. 3. It was reasonable to assume that all steps would, in practice, be carried out, but there was no binding arrangement that they should. The nature of the scheme was such that once set in motion it would proceed through all its stages to completion.[4]The transactions regarded together, and as intended, were from the outset designed to produce neither gain nor loss: in a phrase which has become current, they were self cancelling. The 'loss' sustained by Ramsay, through the reduction in value of its shares in Caithmead, was dependent on the 'gain' it had procured by selling loan 2. The one could not occur without the other. To borrow from Rubin v United States (1962) 304 F 2d 766 approving the Tax Court in MacRae v Comr of Internal Revenue (1961) 34 TC 20 at 26 , this loss was the mirror image of the gain. Ramsay would not have entered on the scheme if this had not been so. 5. The scheme was not designed, as a whole, to produce any result for Ramsay or anyone else, except the payment of certain fees for the scheme. Within a period of a few days, it was designed to and did return Ramsay except as above to the position from which it started. 6. The money needed for the various transactions was advanced by a finance house on terms which ensured that it was used for the purposes of the scheme and would be returned on completion, having moved in a circle. On these facts it would be quite wrong, and a faulty analysis, to pick out, and stop at, the one step in the combination which produced the loss, that being entirely dependent on, and merely a reflection of the gain. The true view, regarding the scheme as a whole, is to find that there was neither gain nor loss, and I so conclude.”[54]In Ramsay the question of statutory construction before the court was, as it is in this case, concerned with the nature of gains and losses within the scope of capital gains tax (and, we may add, corporation tax on chargeable gains). In that regard Lord Wilberforce said (at p182b-c):
“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] 1 All ER 962 , [1978] AC 885 , [1978] STC 127 , 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, 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.”
[55]Where Ramsay was, apart from the payment of fees, an example of a self-cancelling series of transactions where the taxpayer ended up back where it started (but with a claim for an allowable capital loss), Furniss v Dawson [1984] STC 153 concerned a pre-ordained series of transactions which had a legitimate commercial end, namely the sale of shares in certain operating companies. But there were steps inserted into the series of transactions that had no commercial or business purpose apart from the avoidance of liability to tax. It was held that those steps could be disregarded for tax purposes.[56]In reaching this judgment the House of Lords applied Ramsay . Lord Fraser held that, whilst the cases differed in that Ramsay was self-cancelling and in Furniss v Dawson the scheme had what Vinelott J in the High Court had described as “enduring legal consequences” (see [1982] STC 267 at p288), that was not a sufficient ground for distinguishing Ramsay . The true principle of the decision in Ramsay was that the fiscal consequences of a pre-ordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately (see the speech of Lord Fraser at p155e).[57]The leading speech in Furniss v Dawson was given by Lord Brightman, with whom all the other law lords agreed. However, in the recent Supreme Court decision in Revenue and Customs Commissioners v Tower MCashback LLP 1 and another [2011] UKSC 19 (which was released after the hearing of this appeal, and in respect of which we did not receive any submissions), Lord Walker described Lord Brightman’s opinion, in which he had appeared to lay down a detailed and fairly inflexible prescription of how the Ramsay principle works, as one of those decisions after Ramsay that in his view had rather obscured the clarity of Lord Wilberforce’s insight in Ramsay itself. Lord Walker said (at [43]):
“The need to recognise Ramsay as a principle of statutory construction, the application of which must always depend on the text of the taxing statute in question, was clearly recognised in Craven v White [1989] AC 398: see especially, in the House of Lords, Lord Keith of Kinkel at p 479 and Lord Oliver of Aylmerton at pp 502-503. The House was split three-two, the dissenters being Lord Templeman and Lord Goff of Chieveley, who gave the only two full opinions in the House of Lords’ unanimous decision in Ensign four years later. The drawing back from the rigidity of Furniss v Dawson was continued by the important decisions in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991 (discussed by Lord Hoffmann in MacNiven at paras 51 to 57) and MacNiven itself. There are also many helpful insights in the judgments in the Court of Final Appeal of Hong Kong in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 .”
[58]In Craven v White [1989] AC 398 the House of Lords considered the nature and scope of the principle that had emerged from Furniss v Dawson as an advance from what had been laid down in Ramsay . The case concerned three appeals by separate taxpayers, including IRC v Bowater Property Developments Ltd and Baylis v Gregory along with Craven v White itself. In Craven v White the taxpayers owned shares in Q Ltd. In early 1976 they began to negotiate with C Ltd for a merger of the two companies and steps were taken to establish an Isle of Man holding company to act as a vehicle for the taxpayers’ shares should the merger materialise. Later in that year the taxpayers were approached regarding the possibility of a sale of Q Ltd to J Ltd. The merger negotiations with C Ltd ceased during negotiations to sell Q Ltd. Later, amid fears that the sale to J Ltd would not materialise, those merger talks were resumed and M Ltd, an Isle of Man company, was incorporated. However, talks then started up again with J Ltd, and the taxpayers exchanged their shares in Q Ltd for shares in M Ltd. Following further negotiation, J Ltd purchased the shares in Q Ltd from M Ltd.[59]On appeal by the Crown to the House of Lords, by a majority (Lord Keith of Kinkel, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle; Lord Templeman and Lord Goff of Chieveley dissenting as regards Craven v White ), it was held that in determining whether a number of transactions of which at least one (the intermediate transaction) had no purpose other than tax avoidance should be treated for fiscal purposes not as independent but as forming part of one composite linear transaction from which tax consequences flowed within the Ramsay principle, as extended by Furniss v Dawson , it had to be shown, for the principle to be applicable, that:(1) the series of transactions in question was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result;(2) the series of transactions had no purpose other than tax mitigation;(3) there was at that time no practical likelihood that the pre-ordained events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life; and(4) the pre-ordained events did in fact take place. On this basis, the majority held that the share exchange in Craven v White could not be disregarded and that the Crown’s appeal was dismissed.[60]A critical factor in Craven v White was the extent to which transactions had to be pre-ordained in order not to constitute a composite whole. The view of the majority was encapsulated by Lord Oliver (at p516H – 517D):
“Another identifying feature is that all the stages of what is claimed as the composite transaction are pre-ordained to take place in an orchestrated sequence and, in my opinion, that must mean more than simply 'planned or thought out in advance'. It involves to my mind a degree of certainty and control over the end result at the time when the intermediate steps are taken. That does not, I think, mean absolute certainty in the sense that every single term of the transaction which ultimately takes place must then be finally settled and agreed. But it does seem to me to be essential at least that the principal terms should be agreed to the point at which it can be said that there is no practical likelihood that the transaction which actually takes place will not take place. Nor is it sufficient, in my opinion, that the ultimate transaction which finally takes place, though not envisaged at the intermediate stage as a concrete reality, is simply a transaction of the kind that is then envisaged, for the underlying basis of the Ramsay doctrine is that it must, on the facts, be possible to analyse the sequence as one single identifiable transaction and if, at the completion of the intermediate disposition, it is not even known to whom or upon what terms any ultimate disposition will be made, I simply do not see how such an analysis is intellectually possible. It is an essential part of the analysis that there is but one disposal and not two and that the transfer to the intermediate company is not a 'disposal' within the meaning of the statute.”
[61]Lord Oliver had earlier referred (at p515B) to the need for the end result of the scheme to be “so certain of fulfilment that it is intellectually and practically possible to conclude that there has indeed taken place one single and indivisible process”. An essential part of the analysis required in Craven v White was whether there was only one disposal (ignoring the intermediate share exchange) and not two, and that the share exchange was not a “disposal” within the meaning of the statute. Lord Oliver held that, on the facts in Craven v White , on no analysis could it be said that at the stage of the share exchange, when two mutually exclusive sets of negotiation were in progress, there was a pre-ordained series of transactions, for it was not even known what the ultimate transaction would be, if it eventuated at all.[62]Lord Oliver expressly rejected a wider view of Furniss v Dawson that would interpret “pre-ordained” as simply preconceived or planned to take place in the future, and that intermediate transactions should be construed as part of, and indivisible from, the ultimate disposition whether or not, at the time of the transaction in question, the ultimate disposition was certain, uncertain, or merely hoped-for. The test in Ramsay is whether realistically, in looking at all the circumstances as a whole, those transactions constitute a single and indivisible whole and whether it is intellectually possible so to treat them.[63]Craven v White was distinguished in IRC v Scottish Provident Institution [2005] STC 15 . In that case a scheme had been devised to take advantage of a proposed new regime for taking advantage of a proposed new regime for taxing derivative contracts based on gilts and bonds. Two options (option A and option B) were granted; option A from SPI to C plc, and option B from C plc to SPI. Both options were exercised on the same day, and SPI claimed a loss, even though all sums due were netted off and neither stock nor money changed hands. The special commissioners allowed SPI’s appeal, and held that options A and B, along with a collateral agreement, could not be regarded as a single composite transaction since there were various circumstances in which the options might not be exercised together and the collateral agreement consisted of a genuine loan or deposit whose purpose was to provide C plc with security and to remove the incentive for C plc to exercise option A only. The Court of Session had upheld the special commissioners’ decision.[64]It was held by the House of Lords that it would destroy the value of the Ramsay principle of statutory construction if the composite effect of transactions had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned. The uncertainty in SPI arose from the fact that the parties had carefully chosen to fix the strike price for the option B at a level which gave rise to an outside chance that the option would not be exercised. There was no commercial reason for choosing that strike price.[65]SPI relied upon the “no practical likelihood” test from the speech of Lord Oliver in Craven v White to which we have referred. However, Lord Nicholls, giving the opinion of the House of Lords, pointed out that in Craven v White important parts of what was there claimed to be a single composite scheme did not exist at the relevant date. No composite transaction had been put together. In SPI , by contrast, the uncertainty arose from the fact that the parties had chosen the particular strike price. Lord Nicholls concluded: (at [22]):
“Here, the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the SPI option at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. From the point of view of the money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.”
[66]In Astall and another v Revenue and Customs Commissioners [2010] STC 137 the taxpayers had entered into the tax avoidance schemes designed to generate a loss from the discount on a deep gain security. The terms of issue of the securities included a condition (“the market change condition”) which if satisfied would enable the holder to transfer the security to a third party and the third party could redeem the security at 5% of its issue price or redeem after 65 years. No steps were taken to identify a purchaser until after the securities were issued. The market change condition occurred and the securities were transferred to a bank purchaser. The taxpayers claimed relief for the loss on the transfer of the securities.[67]In the Court of Appeal it was held that the mere fact that the parties intended to obtain a tax advantage was not of itself enough to make a statutory relief inapplicable. However, no account should be taken of artificially contrived possibilities that were irrelevant to the transaction. The transaction, viewed realistically, had as its primary objective the devaluation of the security in order to create a tax loss. The finding of the special commissioner that a purchaser of the securities was a practical certainty could not be challenged.[68]In her judgment Arden LJ posed the question whether a purposive interpretation of the relevant statutory provisions was possible. She said (at [44]):
“Is a purposive interpretation of the relevant provisions possible in this case? In my judgment, there is nothing to indicate that the usual principles of statutory interpretation do not apply and accordingly the real question is how to apply those principles to the circumstances of this case. In my judgment, applying a purposive interpretation involves two distinct steps: first, identifying the purpose of the relevant provision. In doing this, the court should assume that the provision had some purpose and Parliament did not legislate without a purpose. But the purpose must be discernible from the statute: the court must not infer one without a proper foundation for doing so. The second stage is to consider whether the transaction against the actual facts which occurred fulfils the statutory conditions. This does not, as I see it, entitle the court to treat any transaction as having some nature which in law it did not have but it does entitles the court to assess it by reference to reality and not simply to its form.”
[69]In looking at the second stage of the process of construction Arden LJ referred to SPI and said (at [49]):
“It is clear from SPI , in particular [23] (set out in para [32] of this judgment), that the court should not at the second stage of purposive interpretation assume that the insertion of a condition that has a real possibility of operating is necessarily relevant to the transaction. Here, the special commissioner's finding that the parties were willing to take the risk of the market change condition not occurring means that for practical purposes that risk could be ignored. The transaction, viewed realistically, had as its primary objective the devaluation of the security in order to create a loss for income tax purposes.”
[70]Griffin v Citibank Investments Ltd [2000] STC 1010 concerned put and call options which, subject to the argument that the options constituted a single composite transaction (and that the options transactions were a loan), would have fallen within s 143 TCGA as qualifying options. The return on the options was linked to the FTSE 100 index such that a greater or lesser amount would be payable on the exercise of the call option and the put option respectively depending on the FTSE 100 index movement. However, the combined amount payable to the taxpayer company on simultaneous exercise of the options would always be a predetermined sum consisting of the purchase price and an additional amount. The taxpayer had capital losses and the aim of the transactions was to realise a capital gain.[71]The special commissioners allowed the taxpayer company’s appeal, holding that the two option contracts did not constitute a composite transaction. There had been no artificial steps which could subsequently be disregarded for tax purposes. They also found, as a matter of fact, that there was always the possibility that one option could have been assigned before exercise (with the consent of the counterparty – a member of the taxpayer’s group) and that each option did have an independent existence. The Revenue’s appeal was dismissed in the High Court. Given the finding of the special commissioners that one option could have been assigned before exercise, it could not be said that there was no practical likelihood that the pre-planned events would not take place.[72]Before the judge, Patten J, the Revenue argued that, in finding that there was always a possibility that an option could be assigned before exercise, and thus that each option had an independent existence, the special commissioners had failed to answer the question whether there was no practical likelihood that the pre-planned events would not have taken place in the order ordained. Although whichever option had been deep in the money could have been assigned, this was no more than a theoretical possibility. Mr Justice Patten did not accept this. Furthermore, he held that even if the two options were a composite transaction, then – like the loans in Ramsay – they would nonetheless retain their individual identity as part of a larger transaction. Consolidation of the put and call options into a single composite transaction would make no difference to its legal effect. The composite transaction could not be converted into something different from its legal nature.[73]We were referred to the judgments of the Court of Appeal in Mayes , to which we made brief reference earlier. That case concerned a scheme involving the purchase by a non-resident company of non-qualifying life assurance policies and the payment of additional premiums, followed, very shortly afterwards, by their partial surrender and a withdrawal of funds. The issue was whether, as the special commissioner found, the additional payment of premiums and the partial surrender were to be disregarded, applying the Ramsay principle, as a single composite scheme to which the relevant statutory provisions could have no application, or whether, as Proudman J had decided in the High Court, the tax avoidance purpose and self-cancelling nature of the steps did not mean that those steps should be disregarded, when there was nothing in the statutory provisions in question indicating or contemplating that, as a matter of construction, such steps were not to count.[74]Dismissing HMRC’s appeal from Proudman J, Mummery LJ, with whom Thomas and Toulson LJJ agreed, said (at [78]):
“… it would be an error, which the judge did not fall into, to disregard the payment of a premium at Step 3 and the partial surrender at Step 4, simply because they were self-cancelling steps inserted for tax advantage purposes. It was right to look at the overall effect of the composite of the composite Step 3 and Step 4 in the seven step transaction in the terms of ICTA to determine whether it answered to the legislative description of the transaction or fitted the requirements of the legislation for corresponding deficiency relief. So viewed, Step 3 and Step 4 answer the description of premium and partial surrender. On the true construction of the ICTA provisions, which do not readily lend themselves to a purposive commercial construction, Step 3 was in its legal nature a withdrawal of funds in the form of a partial surrender within the meaning of those provisions. They were genuine legal events with real legal effects. The court cannot, as a matter of construction, deprive those events of their fiscal effects under ICTA because they were self-cancelling events that were commercially unreal and were inserted for a tax avoidance purpose in the pre-ordained programme …”
[75]The basis for this conclusion was Mummery LJ’s finding (at [77]) that on the proper construction of the ICTA provisions for the taxation of life policies, the statutory requirements as to the transactions to which the provisions were intended to apply were far removed from the kind of case, such as Ramsay , in which the focus is on an end result, such as a loss. What Mayes emphasises therefore is the need to consider the legal analysis of the transactions in the context of the proper construction of the statutory provisions at issue. Discussion[76]In this appeal we are concerned with the application of two particular statutory provisions, namely, in relation to the derivative transactions, s 128 ICTA and, in relation to both the derivative transactions and the sale of the Quoform shares, s 2 TCGA. In each case, in contrast to what was found in Mayes , those provisions are concerned with an end result, namely a profit or gain, or a loss. In the case of s 2 TCGA, it is clear from Ramsay that, applying a purposive construction, the transaction in question must give rise to a real loss, and not merely an arithmetical difference.[77]We find that the same analysis should be applied to s 128 ICTA, and that the reference in that section to profits and gains chargeable to tax under Schedule D otherwise that as the profits of a trade, and in this case therefore the requirement that the profits and gains on the derivative transactions be within Case VI of Schedule D, are properly construed as referring to real profits and gains. This is not a case, such as Mayes , where the statutory provisions do not admit of a purposive commercial construction.[78]We turn therefore to the issue whether the losses incurred by Explainaway, in the first place on the disposal of the 17 July 2001 Long Contract, and secondly on its disposal of the shares in Quoform, were losses within the relevant statutory provisions.[79]Mr Gammie invited us to conclude that the disposal of the 17 July 2001 Long Contract was part of a self-cancelling, and composite, transaction which included the 17 July 2001 Short Contract and the acquisition by Explainaway of the 6 September 2001 Long Contract, which had locked in the gain on the Short Contract. Mr Ghosh argued that the 17 July 2001 Short Contract could not aptly be described as part of any sort of self-cancelling scheme when viewed alongside the 17 July 2001 Long Contract. The Short Contract remained in existence well after the July Long Contract was closed out. Explainaway put itself into a position where it hoped for a loss on one or other of the July Long Contract or the Short Contract (which would give rise to a broadly corresponding gain on the other) without any reassurance that any such loss would arise or that the quantum of the loss would be sufficient to reduce the chargeable gain on the WRG shares to any material extent.[80]Mr Ghosh argued that there was no transaction (composite or otherwise) which gave rise to the loss on the 17 July 2001 Long Contract on 6 September 2001. There were, he submitted, no transactions that were “designed” to give rise to a loss. The derivatives could not be so designed. The loss was a result of the movement in the FTSE index, and nothing more. Any loss on either of the derivatives arose out of an event that was not a transaction at all, and was outside the control of any party. He submitted further that the Ramsay principle has never been applied to deny such a loss. The movement in the FTSE index which allowed Explainaway to realise a loss on the 17 July 2001 Contract is no part of any composite transaction within Ramsay .[81]Mr Ghosh accepted, on the basis of SPI , that a composite transaction designed to yield a tax loss while leaving the parties whole is not prevented from being viewed as such by the insertion of self-imposed artificial contingencies; a scheme consisting of a composite transaction ignores such artificial contingencies. But, he submitted, there is no “scheme” here which produces a loss. Rather the “scheme” (if so described) put Explainaway into a position where it might (or might not) realise a loss. The movement in the FTSE index, argued Mr Ghosh, cannot be described as part of the “scheme” as it cannot be described as part of a composite transaction.[82]We have found as a fact that in this case the prospect of the scheme not producing a loss is so remote that it can be disregarded. Any movement in the FTSE index would have produced a loss. The only question was the quantum of the loss and the time at which it would be decided that the loss would be crystallised. The movement in the FTSE index which created the loss was part of the scheme and of the composite transaction, and it was so even though the precise amount of that movement could not be predicted. It is enough that movement could be predicted so that there was no practical likelihood that no loss, in the relevant period, would arise on one or other of the July 2001 derivatives. Thus, in our view, the movement in the FTSE index cannot be characterised as an external feature segregated from the derivative transactions; it was a key feature of the terms of the derivatives. Accordingly, the movement in the FTSE index was part and parcel of the overall scheme that was Plan A, even though its result in terms of the amount or timing of the loss could not be predicted.[83]It is of no consequence, in our view, that at the outset it could not be said which of the two derivatives (the 17 July 2001 Long Contract and the 17 July 2001 Short Contract) the loss would be realised. That depended on the way in which the FTSE index moved, but what was certain, as we have found, was that during the period in question a loss would arise on one or other of those derivatives. That is not, in our view, any sort of contingency of a nature that could prevent the application of the Ramsay principle.[84]In particular, having regard to the reliance placed by Mr Ghosh on Craven v White , it is not of the nature of the uncertainties which prevented Ramsay from applying in that case. There, in the case of a linear transaction involving A – B - C it was necessary for a certain transaction to be identified between B and C as the end result at the time of the intermediate transaction between A and B so that, if that intermediate transaction were ignored, a real transaction between A and C could be found as the transaction to which the statutory provisions should be applied. The same degree of precision or certainty is not required when one is required to consider the proper tax analysis of a consequence of a transaction, such as a loss. If the making of a loss is pre-ordained, leaving out of account immaterial risks which the parties themselves chose to accept, then the fact that there are two possible ways of realising the loss, but which of the two it will be is not known, and that the amount of the loss is uncertain, does not represent a bar to reaching the conclusion that it is intellectually possible, to use Lord Oliver’s formulation in Craven v White , to treat the transactions as a single and composite transaction.[85]On the basis of that analysis we turn to consider whether the 2001 transactions should together be regarded as a composite transaction, and if so whether the loss on the closing out of the 17 July 2001 Long Contract should not be treated as an allowable loss. We start by asking ourselves what, in relation to the 2001 transactions, the composite transaction could comprise. At the outset it was planned that there would be a loss, of an amount which would depend on the movement in the FTSE index as we have described, on one or other of the 17 July 2001 derivatives, with a concomitant gain on the other. The loss, it was anticipated, would be an allowable loss that would reduce or, it was hoped, eliminate the chargeable gain on the disposal of the WRG shares. The gain on the other derivative contract would, under Plan A, be a chargeable gain, and Explainaway would have a tax liability in that respect. Plan A therefore envisaged that Explainaway would be sold to a capital loss company, thus eliminating, at the cost of a substantial fee, that chargeable gain.[86]The sale to the capital loss company did not take place, and so cannot form part of the Ramsay analysis. Only transactions forming part of a scheme that have actually been carried out can fall to be considered. Furthermore, the 2002 transactions carried out as part of Plan B must also be left out of account for this purpose. Those transactions came into contemplation only after the 2001 transactions had been entered into, and indeed after the loss on the 17 July 2001 Long Contract had been realised by that contract having been closed out. Plan B cannot therefore be part of any pre-ordained transactions taken together with Plan A.[87]In relation to the 2001 transactions, therefore, we are left with those transactions that were planned and actually took place as part of Plan A. We note that it is no part of Mr Gammie’s argument that the transactions should be recharacterised as something other than their actual legal nature (such as a loan as was argued unsuccessfully in Citibank ); he simply submitted that the transactions were self-cancelling, gave rise to no commercial gain or loss, and that the loss cannot therefore be a loss within Schedule D, Case VI or an allowable loss within the TCGA.[88]We do not consider that the fact that two derivative transactions are entered into, one of which gives rise to a loss and the other a gain, even in circumstances where they have no commercial purpose and they are so closely linked as to form a pre-ordained series of transactions, is sufficient to enable the Ramsay principle to be applied so as to find that the true effect in law of those transactions is anything other than that they are, and remain, individual derivative transactions on which gains and losses separately arise. Absent any constituent part of the scheme of Plan A whereby the gain on the 17 July 2001 Short Contract was somehow eliminated, leaving a tax loss, but no material net commercial loss, we consider that the true effect is that the statutory provisions must be applied to the individual gains and losses on the two derivatives. Accordingly, the loss on the disposal of the 17 July 2001 Long Contract is an allowable loss, and the gain on the disposal of the 17 July 2001 Short Contract is a chargeable gain.[89]The same analysis applies, in our view, to the individual derivative transactions that took effect in 2002 as part of Plan B. Those derivative transactions were a means to an end – the end being the creation of a capital loss on the sale of shares in either Quoform or Quartfed – and were part of the overall tax planning scheme of Plan B, but that does not mean that they must be disregarded simply because they have no commercial purpose ( BMBF ). On the contrary, as with the transactions in the 2001 derivatives, we find that the true legal effect of the 2002 derivative transactions is that they gave rise to gains and losses on the disposals of those individual derivatives.[90]We turn now to HMRC’s case that the loss on the Quoform shares was not an allowable loss within the meaning of the TCGA. Here Mr Gammie argued that the scheme to generate that loss in essence did no more than replicate the scheme that failed in Ramsay . As we have seen, that case involved a self-cancelling transaction with a loss being generated through a reduction in the value of shares in a company (C Ltd). Here there is a reduction in the value of shares in Quoform. Mr Gammie argued that the derivative contracts in this case merely replicate the function of the loans in Ramsay .[91]In relation to the Quoform loss, Mr Ghosh essentially repeated and developed the submissions he had made in respect of the 2001 derivative transactions. The sale of the Quoform shares, he argued, had no “commercial unity” with the other transactions in Plan B, namely (ignoring Parastream) the taking out of the Quoform Long Contract and the Quartfed Short Contract, the novation of the Quoform Long Contract and the closing out of the Quoform Long Contract and the Quartfed Short Contract by Quartfed. He submitted, in similar vein to the submissions he made on the transactions in the 2001 derivatives, that there was no plan or pre-arranged scheme whereby the loss in value and novation of the Quoform Long Contract would take place subject to a contrived contingency, where an artificial loss had already been realised by a transaction effected by any of the relevant companies. The very loss itself crystallised not by reason of a “scheme” but by reason of a movement in the FTSE index. The most that could be said was that a number of steps had been taken with the (albeit expressed) purpose of putting Explainaway in a position where it hoped to realise a net allowable loss. Ramsay , he submitted, cannot treat the derivatives as never having been taken out and cannot treat the Quoform shares as not consequentially having dropped in value.[92]For the same reasons we have given in relation to the transactions in the 2001 derivatives, we do not accept that the effect of the movement in the FTSE index is not part of the scheme. As we have described, it was of the very essence of the scheme that an amount of loss, which was we accept at the outset of an indeterminate amount, would arise on one or other of the Quoform Short Contract and the Quartfed Long Contract. Once that loss, in whatever amount, had arisen, the reduction in the value of the relevant shares (in Quoform or Quartfed, depending on the way in which the FTSE index had moved) followed inexorably, and was accordingly part of the scheme. It is not necessary for a particular amount of planned loss to be identified, nor for the particular shares whose value will be reduced, to be certain at the outset. It is enough that the scheme encompasses, firstly, that an amount of loss will be realised (the prospect of no loss not being a material risk, and one that was in any event accepted by the parties), and secondly that the value of shares that are part of the scheme will be reduced accordingly. That is the only degree of certainty or pre-ordination that is required.[93]It is of no consequence that Explainaway and its advisers could not be certain of the amount of the loss, nor indeed, in our view (had it been the case here, which we have found it was not), whether a loss would be obtained at all. Application of the Ramsay principle is not, on our analysis, confined to cases where everything is planned with such certainty that all risk is eliminated. Only if the nature of the risk is such that, as in Craven v White , it precludes an intellectually sound conclusion that the events comprise a single composite transaction, will the presence of risk affect the analysis based on a realistic view of the transactions. As Astall makes clear, what matters is not the mere presence of risk, but whether that risk can be ignored as one that the parties themselves consider acceptable. Here we have found that the risk of the scheme failing to succeed in eliminating the whole of Explainaway’s chargeable gain was considered acceptable; the parties went ahead with Plan B on that basis. To the extent that any loss was realised, even if it had not been in the desired amount, there is no reason in our view why the Ramsay principle should not be applied to determine the legal analysis of that loss having regard to all the transactions which resulted in it arising.[94]We have found, as we have described, that there was no practical likelihood that no loss would be realised. It follows that there was no practical likelihood that the shares in one or other of Quoform or Quartfed would not be reduced. We also find that there was no practical likelihood that the shares in the relevant company, which in the event turned out to be Quoform, would not be disposed of. No third party purchaser had been identified at the outset of the scheme, nor at the time of the reduction in the value of the Quoform shares. However, we have found on the evidence that there was no real risk that such a disposal would not be effected. This is not, in our view, of the nature of a commercial contingency, or uncertainty, as arose in Craven v White . There, in each of the cases, it was the commercial end result of a series of linear transactions that was in doubt. Here, by contrast, the disposal of Quoform was a planned element of a self-cancelling transaction. The ultimate disposition of Quoform in some manner was in our view certain, and it was indivisible from the other transactions carried out as part of Plan B. There is no intellectual difficulty, as was encountered in Craven v White , in treating those transactions as a single indivisible whole.[95]In summary therefore we find that the transactions in question were part of an overall scheme to avoid corporation tax on chargeable gains on a disposal by Explainaway. The scheme envisaged a reduction in the value of shares held by Explainaway in one company, that in the event was Quoform, through the effect of the movement of the FTSE index on a derivative contract, which was as it turned out the Quoform Long Contract. This was matched by a corresponding (if not exactly equal) increase in the value of another company, Quartfed, and a consequential increase in the value of Explainaway’s shares in Quartfed. This corresponding decrease and increase in value of Explainaway’s shares in these two companies was pre-planned, even if the amount of the increase and decrease could not be predicted. Precisely the same result would have been achieved, in reverse, had the FTSE index moved in the opposite direction at the time the various contracts were closed out. The increased value of Quartfed was substantially realised by the closure of the Quartfed Short Contract, and was extracted in a tax-free manner by the distribution of an interim dividend by Quartfed to Explainaway. On a realistic view of the Plan B transactions, taken together, we find that the loss on the Quoform shares was not a real loss within the meaning of s 2 TCGA, purposively construed.[96]For these reasons we conclude that the loss on the disposal of the Quoform shares is not an allowable loss within the meaning of the TCGA. Unallowable purpose[97]We turn now to the question whether the interest cost for borrowings undertaken by Explainaway (which includes its interest costs on intra-group debt as well as the KBIM loan used to capitalise Quoform, Quartfed and Parasteam) to effect the various transactions are relievable for corporation tax purposes or whether, as HMRC contend, such relief is denied by reason of para 13, Sch 9 FA 1996. The law[98]At the material time, para 13, Sch 9 FA 1996 provided as follows:
“(1) Where in any accounting period a loan relationship of a company has an unallowable purpose, the debits which, for that period fall, in the case of that company, to be brought into account for purposes of this Chapter shall not include so much of the debits given by the authorised accounting method used as respects that relationship as, on a just and reasonable apportionment, is attributable to the unallowable purpose. (2) For the purposes of this paragraph a loan relationship of a company shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company— ( a ) is a party to the relationship, or ( b ) enters into transactions which are related transactions by reference to that relationship, include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company. (3) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax. (4) For the purposes of this paragraph, where one of the purposes for which a company— ( a ) is a party to a loan relationship at any time, or ( b ) enters into a transaction which is a related transaction by reference to any loan relationship of the company, is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is a party to the relationship at that time or, as the case may be, for which the company enters into that transaction. (5) The reference in sub-paragraph (4) above to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person). (6) In this paragraph— “related transaction” has the same meaning as in section 84 of this Act; and “tax advantage” has the same meaning as in Chapter I of Part XVII of the Taxes Act 1988 (tax avoidance).”
[99]Section 709(1) ICTA contained, at the material time, the definition of “tax advantage” referred to in para 13:
“In this Chapter “tax advantage” means a relief or increased relief from, or repayment of or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them, or by a deduction in computing profits or gains.”
Discussion 100.Mr Gammie submitted that paragraph 13 could apply to the debits, that is to say the interest costs on the relevant debts incurred for the purpose of the scheme in one of two ways. First, he argued that if we found that the scheme entirely failed, so as not to produce any profits or gains under the derivative contracts within the charge to corporation tax and as not involving any recognised loss on the sale of the Quoform shares, the loan relationships in question were not in respect of any part of Explainaway’s activities within the charge to corporation tax. Secondly, he submitted that in any event, the only purpose (and certainly one of the main purposes) for which Explainaway was a party to the loan relationships was tax avoidance.[100]101.As regards Mr Gammie’s first submission, we have held that the profits and gains under the derivative transactions were within the charge to corporation tax. We are concerned therefore, in this respect, only with the loan relationship of Explainaway taken out to capitalise Quoform, Quartfed and Parastream. The question therefore is whether the fact that we have found that the loss incurred by Explainaway on its disposal of shares in Quoform is not an allowable loss within s 2 TCGA has the effect of taking Explainaway’s activities out of the scope of the charge to corporation tax. We do not consider that it does. We agree with the analysis submitted by Mr Ghosh that Ramsay is concerned with the construction of the statutory provisions, in this instance s 2 TCGA. It is predicated on the relevant transactions falling within the scope of the tax; the question is not about application but about scope. The effect of Ramsay is to enable the transactions, viewed realistically, to be taxed on the basis of a purposive construction of the statutory provisions. That cannot take those transactions out of the scope of the charge to corporation tax; they must necessarily be within that scope.[101]102.Mr Gammie’s second submission turns on the scope of the meaning given to “tax advantage” when applied in the context of paragraph 13. Mr Ghosh described the two competing analyses. The first is that the expression must be confined to an advantage in respect of corporation tax on income only, and not an advantage in terms of corporation tax on chargeable gains. This is based on the importation of the meaning of “tax advantage” from the provisions concerning transactions in securities (ICTA, s 703 et seq), and what Mr Ghosh described as the “tax orthodoxy” that tax in that context includes, in relation to companies, only corporation tax on income and not corporation tax on chargeable gains. When imported into a loan relationships regime that is itself concerned exclusively with income taxation, the conclusion must be that the meaning of tax advantage is to be restricted to corporation tax on income.[102]103.The alternative analysis, and the one supported by Mr Gammie, is that the importation of the meaning of tax advantage from s 709(1) does not import the meaning to be attributed to the defined term in the context of the transactions in securities provisions, but imports only the meaning given by s 709(1) to the words “tax advantage”. On this basis, the definition would then fall to be construed in the context of paragraph 13 itself, and the tax orthodoxy attached to the meaning in connection with transactions in securities would not dictate the meaning to be given for paragraph 13 purposes.[103]104.Either of these competing analyses is intellectually defensible. The words themselves do not provide a clear answer. We consider that the right approach is to construe paragraph 13 purposively. In our view, so construed, paragraph 13 cannot be seen as confined to avoidance schemes concerned only with corporation tax on income. Whilst it is true that the effect of falling within paragraph 13 is to deny relief for loan relationship debits, which fall within the scope of corporation tax on income, that is merely the effect, and cannot confine the scope of the tax advantage which triggers the effect. Paragraph 13 is different from s 703. In that latter case it is the tax advantage itself that is counteracted, so tax advantage takes its meaning from the types of scheme at which the provisions are aimed. In the case of paragraph 13, by contrast, the counteraction is not of the tax advantage itself, but of the debits on a loan relationship to which the company is a party for the purpose of securing a tax advantage. The tax advantage is not confined to the obtaining of relief for the loan relationship debit itself.[104]105.This conclusion is, in our view, consistent with the scheme of paragraph 13 itself. Paragraph 13 does not define “tax”. That is left as the meaning found in s 832(3) ICTA, namely “except so far as the context otherwise requires, in the Tax Acts … ‘tax’, where neither income tax nor corporation tax is specified, means either of those taxes”. This excludes capital gains tax, but companies within the charge to corporation tax are not subject to capital gains tax; corporation tax in general includes tax both on income and on chargeable gains. Nor is paragraph 13 confined to a tax avoidance purpose that consists of securing a tax advantage only for the company whose loan relationship is called into question. Paragraph 13(5) provides that the relevant tax advantage may be for the company or “any other person”. That tax advantage need not therefore be confined by the nature of the debits themselves.[105]106.Accordingly, we find that the loan relationships undertaken by Explainaway in connection with the transactions that are the subject of this appeal had an unallowable purpose and that the debits on those loan relationships are, by virtue of para 13, Sch 9 FA 1996, not to be brought into account for the purposes of Chapter II of Part IV of that Act. Decision[106]107.For the reasons we have given we decide that:(1) The respective derivative transactions undertaken by Explainaway (in 2001) and by Quoform, Quartfed and Parastream (in 2002) gave rise to chargeable gains and losses.(2) The loss arising on the disposal by Explainaway of the Quoform shares was not an allowable loss within the meaning of TCGA.(3) The debits arising on the loan relationships of Explainaway entered into to effect the various transactions are not relievable for corporation tax purposes.[107]108.Accordingly, these appeals are allowed in part, as to the chargeable gains and allowable losses on the derivative transactions, but are otherwise dismissed. Right to apply for permission to appeal This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. ROGER BERNER TRIBUNAL JUDGE RELEASE DATE:24 June 2011[108][1] W T Ramsay v IRC [1982] AC 300 . [2] As amended by the Financial Services and Markets Act 2000 (Consequential Amendments) (Taxes) Order, SI 2001/3629 with effect from 1 December 2001. Nothing turns on the amendments.