“ First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case….It did not in Ramsay . Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not 'no business effect' . If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied. In the instant case the inserted step was the introduction of [IoM] as a buyer from the [taxpayers] and as a seller to [the third party]. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect….” 118. However, as set out in detail below, the House of Lords and the Supreme Court have been at pains to clarify that the view that the composite approach embodies a new jurisprudence governed by special rules of its own is a misconception. They have set out clearly that (a) Ramsay itself does not set out any such special principle, and (b) in Furniss and the other relevant cases, the courts were not laying down any such special principle or interpreting Ramsay as doing so (see, in particular, [119] to [124] and [148] to [150] below). MacNiven 119. In MacNiven v Westmoreland Investments Ltd[2003] 1 AC 311 (“ MacNiven ”), the House of Lords held that a debtor made a payment of interest within the meaning of the relevant statute which entitled him to a deduction or repayment of tax notwithstanding that it was funded by monies borrowed for that purpose from the creditor himself and was made solely to reduce the debtor’s liability to tax. The House of Lords said that the purpose of requiring interest to be “paid” is to produce symmetry; it gives a right to a deduction in respect of any payment which gives rise to a corresponding tax liability for the recipient (or which would do so if the recipient is a taxable entity.) As the payment was accepted to have had this effect, it answered the statutory description. 120. In reviewing the Ramsay line of cases, Lord Nicholls emphasised that in Ramsay “the House did not enunciate any new legal principle” but rather highlighted that, “confronted with new and sophisticated tax avoidance devices, the courts’ duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation….” (at [1]). He noted, at [2] to [5], that Ramsay brought out the following three points, in particular: (1) When seeking to attach a tax consequence to a transaction, the court may have regard to the overall effect of a series or combination of transactions intended to operate as such and: “ .. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties’ intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force”. (2) That does not mean that transactions or relevant steps are to be treated as “shams” nor does it require going “behind a transaction for some supposed underlying substance”
“For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision ?” 121. Lord Nicholls, therefore, specifically endorsed the composite approach. He then referred with approval, at [6], to the comments of Lord Steyn and Lord Cooke of Thorndon in Inland Revenue Commissioners v McGuckian[1997] 1 WLR 991 (“ McGuckian ”) at 1000 and 1005 respectively. He noted that they said that this approach (as Lord Nicholls had described it, including the composite approach) “is an exemplification of the established purposive approach to the interpretation of statutes” and “an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation”. 122. At [7], he cautioned that the observations on the Ramsay approach in some later decisions should be read in the context of the particular statutory provisions and sets of facts under consideration and that they: “cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive, Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in Ramsay .” 123. Whilst he “readily accepted”, at [8], that the factual situation described by Lord Brightman in Furniss is one where, typically, the Ramsay approach will be “a valuable aid” which may well often have the effect he set out, it really is just an aid and: “This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute …..”
“The point to hold onto is that something may be real for one purpose but not for another”
“If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be "disregarded for fiscal purposes", I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept.” 129. He emphasised at [49] that this formulation “is not a principle of construction” but is rather a “statement of the consequences of giving a commercial construction to a fiscal concept”
“ BGE already owned the pipeline and had paid for it with a loan from a syndicate of banks. After the transaction BGE was still able to use the pipeline as before, though by then it did so by virtue of the lease, sublease and Transportation Agreement, and it still owed to the banks the money which it had borrowed. Nor was the£91 million available to BGE for it to use in any other way to finance transactions or activities of its business.” 142. Park J continued that in the light of the Ramsay authorities he had to interpret and apply the statute in a wider way to ask whether BF really incurred its expenditure of£91 million on the provision of the pipeline, or on something else and he held that: “the expenditure was really incurred on the creation or provision of a complex network of agreements under which, in an almost entirely secured way, money flows would take place annually over the next 32 or so years so as to recoup to BMBF its outlay of£91m plus a profit .”
“Because of the circularity of the payments, the scheme would have worked just as well whatever price had been named in the documents and whether there had actually been a pipeline or not. ” 144. The House of Lords disagreed with this. In short, in their view, on a purposive construction, what the lessee did with the sales proceeds it received from BF for the sale of the pipeline was irrelevant to the question of whether BF was entitled to capital allowances. 145. Lord Nicholls first re-capped on the applicable principles of statutory construction. At [28], he noted that, as Lord Steyn explained in McGuckian at 999 the modern approach to statutory construction is: “to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose ”. 146. He noted that until Ramsay , however, revenue statutes were “remarkably resistant to the new non-formalist methods of interpretation”
“the amount involved was credited by LPI to the scheme current account (which was controlled by LPI) and returned to LPI on the same day for credit [LPI’s bank account]. The scheme current account was thus never in credit or debit at the close of any day and [ VP] was never in debt as a result of the scheme. The cost of the film, namely [$14 million ] was borne as to [$3.25 million ] by [VP] and as to [$10.75 million ] by LPI which was indebted to [its bank]. 165. Lord Templeman continued that the non-recourse nature of the loans meant that in fact VP was not liable for the cost of the film in excess of$3.25 million at page 234: “But the non-recourse nature of the borrowing ensured that LPI paid the whole cost of the film exceeding [$3.25 million ] and conversely that [ VP] would not be liable for the cost of the film in excess of [$3.25 million ]. By the operation of the scheme current account in accordance with the provisions of the scheme, the money of LPI, at all times under the control of LPI, was electronically transferred from Hollywood to the City of London and back again without serving any useful purpose and leaving no trace except entries on computer prints.” 166. Lord Templeman then set out a review of the authorities including Ramsay , Burmah Oil and Furniss . He said, at page 237, that Ramsay was a case where “the true legal effect of the two transactions treated as a whole was that the taxpayer made neither a gain nor a loss”
“….if LPI had been a British company, the fact that LPI borrowed$10 ¾m from Chemical Bank to enable LPI to make the film would not have denied to LPI a first year allowance equal to the sums borrowed and expended. But [ VP] neither borrowed nor spent$10 ¾m ." (emphasis added)” 168. In turning to consider HMRC’s argument that the partners were not entitled to any capital allowances at all (even on the£3.25 million of expenditure they had funded themselves), he cautioned, however, at page 241, that the principles of Ramsay and subsequent cases: “….. do not compel or authorise the court to disregard all the fiscal consequences of a single composite transaction read as a whole on the grounds that it appears that the transaction is a tax avoidance scheme .”
“My Lords, I do not consider that the commissioners or the courts are competent or obliged to decide whether there was a sole object or paramount intention nor to weigh fiscal intentions against non-fiscal elements. The task of the commissioners is to find the facts and to apply the law, subject to correction by the courts if they misapply the law…” 170. In the same passage he went on to state that the position was clear once the correct statutory question was examined. In his view, the lower courts had asked the wrong question in looking at the purpose of the transaction; the applicable provision (in s 41 FA 1971) is concerned with the purpose of the expenditure: “The facts are undisputed and the law is clear. [VP] expended capital of $[3.25m] for the purpose of producing and exploiting a commercial film. The production and exploitation of a film is a trading activity. The expenditure of capital for the purpose of producing and exploiting a commercial film is a trading purpose. By section 41 of the Act of 1971 capital expenditure for a trading purpose generates a first year allowance. The section is not concerned with the purpose of the transaction but with the purpose of the expenditure. It is true that [VP] only engaged in the film trade for the fiscal purpose of obtaining a first year allowance but that does not alter the purpose of the expenditure. The principles of Ramsay and subsequent authorities do not apply to the expenditure of $[3.25m] because that was real and not magical expenditure by [VP] ……. ” 171. Following his review of the cases on when a person is trading for tax purposes he concluded, at page 243, that: “In the present case the legal effect of the transaction, whatever its design was a trading transaction whereby [VP] expended $[3.25m] towards the production of a film in which [VP] had a 25 per cent interest. All these authorities were dealing with the identification of a trading transaction. In the present case a trading transaction can plainly be identified. [VP] expended capital in the making and exploitation of a film. That was a trading transaction which was not a sham and could have resulted in either a profit or a loss. The expenditure of $[3.25m] was a real expenditure. The receipts of$3m were real receipts. The expenditure was for the purpose of making and exploiting a film and entitled [VP] to a first year allowance equal to the expenditure . The receipts imposed on [VP] a corporation tax liability.” 172. In taking a Ramsay composite approach, Lord Goff formed the same conclusion as Lord Templeman at pages 244 to 246. He accepted that money was paid by LPI to VP when the scheme account was credited (although it was deprived of any practical effect by the immediate repayment of the sum) but said, in effect, that he had to take a purposive approach to the construction of the relevant provision, which he evidently saw as including a composite approach: “ What I have to do, however, is to stand back from the composite transaction; to look at it as a whole; and to decide, first, what is the true nature and effect of the transaction and, second, whether, on a true construction ofsection 41(1) of the Finance Act 1971 , VP is entitled to an allowance in respect of the whole of the cost of the film, viz$14m .”
“trading, though only to the extent of its investment of [$3.25 million ] and no more; and that that sum constituted, on a true construction of the statute, the only capital expenditure incurred by the partnership in the making of the film”. 174. Mr Peacock made similar submissions in relation to Ensign as those he made in relation to BMBF (see [158] and [159]) as regards the significance to the capital allowances analysis adopted by the court of the acquisition of ownership rights in respect of the relevant asset as indicating the “reality” of the expenditure on those rights. 175. He also submitted that, in his comments set out at [168] to [171] above, in effect, Lord Templeman meant that the fact that transactions are pre-ordained or can be described as a single composite transaction and that the taxpayer had fiscal motives for entering into them “is neither here nor there” in applying the correct analysis. Mr Peacock emphasised that Lord Templeman stressed that s 41 FA 1971 “is not concerned with the purposes of the transaction but with the purposes of the expenditure”
“ Ensign was not a case in which the money went round in a circle; more simply, nothing happened to the money”
“may perhaps be regarded as something of a strategic withdrawal by the House of Lords from a position which, if not untenable ("indeed perhaps something of a truism"), was likely to give rise to misunderstandings. ”
“LLP and its members owned free of any liability software which could generate a substantial proportion of an annual income which the projections showed to be approximately£38m . In Ensign Tankers , the partnership never acquired a right to more than 25% of the returns.” (3) Lord Walker commented (at [64]) that this “is a seriously oversimplified version of the facts in each case”: “The LLPs owned only rights in bits of the software which together (if the whole plan had gone through) would have brought them 13% of the clearing fees (one component in computing MCashback’s trading profit). VP did own the whole of the master negative of the film, but that ownership did not entitle VP to the whole net profits from the film, because there were also heavy distribution and exploitation costs to be incurred by other companies connected with LPI before the film earned what it had cost to make.” (4) Moses LJ set out his conclusion at [86] (referring back to [85]): “I t is this feature which to my mind is the most important ground for distinguishing Ensign Tankers and this appeal. The ownership of the software agreement was transferred to LLP 2. The question of transfer of ownership casts a clear light on the reality of the expenditure, just as it did in Ensign Tankers . It was unacceptable to contemplate that [VP] had incurred 100% of the expenditure on the film in acquiring a mere 25% of the rights. But the fact that LLP2 acquired the right to the full economic benefit of the agreement is a powerful, and, to my mind, a determinative feature of this appeal.”
“ MCashback (unlike BGE in BMBF ) really did need up-front finance in order to roll out its software and give effect to its business plan. It saw itself as parting with potentially very valuable rights indefinitely (the investor members dropped out after ten years, but the founder members did not) for only a modest part (just over 18% before fees and expenses, or just under 17% after fees and expenses) of the total capital apparently being raised. That was because 75% of the capital raised, although not simply a sham, was really being used in an attempt to quadruple the investor members' capital allowances. That is what the tough bargain which Tower struck with MCashback enabled Tower to offer to its investor members . ”
“ there was a loan but there was not, in any meaningful sense, an incurring of expenditure of the borrowed money in the acquisition of software rights. It went into a loop in order to enable the LLPs to indulge in a tax avoidance scheme ……” 194. At [76] he said that Moses LJ was right in deriving assistance from Ensign as to the relevance of the terms of the borrowing (here that it was interest free and on a non-recourse basis) but that he was wrong to concentrate on those terms as an indication of whether there was “real expenditure”
“ The transfer of ownership (or at least of rights) indicated the reality of some expenditure on acquiring those rights, but was not conclusive as to the whole of the expenditure having been for that purpose . Moses LJ was also wrong… in saying that in Ensign the loan never had to be paid, whatever success the film achieved…….”
“though it was disposed of at once under further pre-arranged transactions, those transactions were entirely for the benefit of BGE. BGE had no pressing need for upfront finance (which is not, contrary to what Park J supposed, an essential feature of a leasing scheme capable of generating capital allowances)” . (2) In Tower , on the other hand: “the borrowed money did not go to MCashback, even temporarily; it passed, in accordance with a solicitor’s undertaking, straight to [the bank] where it produced no economic activity (except a minimal spread for the two Guernsey banks) until clearing fees began to flow from MCashback to the LLPs (in an arrangement comparable, though not closely similar, to the arrangements between LPI and VP in Ensign ).”
“Both are decisions of the House of Lords and both are good law. The composite transactions in this case, like that in Ensign (and unlike that in BMBF ) did not, on a realistic appraisal of the facts, meet the test laid down by the CAA, which requires real expenditure for the real purpose of acquiring plant for use in a trade…...” 197. Mr Peacock submitted that Lord Walker’s comment at [76] ((as set out at [194] above), clearly means that the transfer of ownership of the relevant asset (or at least of rights in relation to it) is to be taken as the touchstone for indicating the reality of expenditure on a qualifying asset for allowances purposes. Mr Milne considered that this decision again supports HMRC’s stance given that Lord Walker plainly adopted a composite approach in reaching his conclusion. I have commented on this in the decision section. Scottish Provident 198. HMRC relied on the decision of the Supreme Court in Scottish Provident as authority that, in construing the relevant provisions, the transactions in this case should be viewed as they were intended to and did in fact take place. The decision in Scottish Provident was released on the same day as that in BMBF by the same panel as in BMBF . The case concerned a scheme designed to take advantage of a change in the law governing the taxation of gains and losses made by mutual life offices on the grant or disposal of options to buy or sell gilts. Under the scheme: (1) The life office, SPI, granted Citibank the option to buy a quantity of gilts from it at a “strike price” of 70, well below their anticipated market value at the time the option was exercised, in return for a premium. Under the law then in force, the premium was exempt from tax. (2) After the law had changed, Citibank exercised the option, requiring SPI to sell the gilts to it at a loss. Under the law then in force, the loss was allowable for tax purposes. In order to ensure that no real loss could be suffered by either party, the scheme also provided for Citibank to grant an option to SPI, entitling it to buy a matching quantity of gilts from the bank at a strike price of 90, calculated so that the overall movements of money between the parties were equivalent. (3) It was anticipated that both options would be exercised, but there was a possibility that they might not be. In the event, both options were exercised, and neither gilts nor money changed hands. 199. Lord Nicholls set out, at [18], that whether SPI was entitled to treat the loss suffered on the exercise of the option granted to the bank as an income loss essentially depended on whether the option gave the bank an “entitlement” to gilts within the meaning of the relevant statute. At [19], he noted that if attention was confined to that option, it “certainly gave [the bank] an entitlement, by exercise of the option, to the delivery of gilts” but “if the option formed part of a larger scheme by which [the bank’s] right to the gilts was bound to be cancelled by SPI’s right to the same gilts, then it could be said that in a practical sense [the bank] had no entitlement to gilts”
“ Since the decision of this House in [Ramsay] it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the Court to have regard to the whole of a series of transactions which were intended to have a commercial unity . Indeed, it is conceded by SPI that the Court is not confined to looking at the Citibank option in isolation. If the scheme amounted in practice to a single transaction, the Court should look at the scheme as a whole. [Counsel] for SPI, accepted before the Special Commissioners that if there was “no genuine commercial possibility” of the two options not being exercised together, then the scheme must fail.” 200. Lord Nicolls continued to note, at [20] and [21], that the taxpayer’s counsel submitted that “even if the parties intended that both options should be exercised together….the Court could treat them as a single transaction only if there was “no practical likelihood” that this would not happen”
“If the chance of the price movement occurring was similar to an outsider winning a horse race we consider that this, while it is small, is not so small that there is no reasonable or practical likelihood of its occurring; outsiders do sometimes win horse races.” 201. Lord Nicholls explained, at [21], that the test of “no practical likelihood” derived from the speech of Lord Oliver of Aylmerton in Craven v White [1989] A C 398, at page 514. However, he thought there was a distinction between that case and Scottish Provident . In Craven v White “important parts of what was claimed by the Revenue to be a single composite scheme did not exist at the relevant date” (see Lord Oliver (at page 498)); there was an uncertainty about “whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together” ([22]). On the other hand, in Scottish Provident : “…the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the [option granted to SPI] 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.” 202. At [23] Lord Nicholls held that it would “ destroy the value of the Ramsay principle of construing provisions” such as those in issue as referring to the effect of composite transactions : “if their composite effect 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. We would be back in the world of artificial tax schemes, now equipped with anti -Ramsay devices. 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 courts treated every element of a composite transaction which had an individual legal identity (such as a payment of money, transfer of property, or creation of a debt) as having its own separate tax consequences, whatever might be the terms of the statute” (citing Lord Steyn in McGuickan at p 999) 205. He continued, at [62], that the significance of the Ramsay case was “to do away with both those features”
“First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute . Thus, in Ramsay itself, the terms “loss” and “gain”, as used in capital gains tax legislation, were purposively construed as referring to losses and gains having a commercial reality. Since the facts concerned a composite transaction forming a commercial unity, with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction…..”
“Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.”
“ the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in [ MacNiven ] and [ BMBF ] itself.”
“In the first place, the approach described in [ BMBF ] and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian at p 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and [BMBF], then other transactions, although related, are unlikely to have any bearing on its application .”
“the redemption was not merely contemplated (the redemption of any debenture may be said to be contemplated) but intended by the parties as an integral part of the transaction, separated from the exchange by as short a time as was thought to be decent in the circumstances. The absence of security and interest reinforces this inference. No other explanation has been offered.” 218. He continued that in any case: “it is inherent in the process of construction that one will have to decide as a question of fact whether a given act was or was not a part of the transaction contemplated by the statute. In practice, any uncertainty is likely to be confined to transactions into which steps have been inserted without any commercial purpose. Such uncertainty is something which the architects of such schemes have to accept. ”
“sole function is to decide the case on their best understanding of the relevant transactions and the applicable law, whatever that may be. Whether or not the courts approve of the outcome is beside the point. It is not for judges to shoulder the law-making responsibilities of Parliament.” 224. He noted, at [22], that in Carreras (at [8]) Lord Hoffmann compressed the true significance of Ramsay into a single paragraph (citing the passage set out at [214] above) and, at [23], that the polarised positions of Mr Mayes and HMRC reflected the distinctions in that précis. At [38] he noted that Counsel emphasised the special nature of the regime in question in terms of: “its capability for producing results counter to commercial reality. The legislation could work in an arbitrary way unrelated to commercial gains and losses. Mr Furness describes it as a highly prescriptive way of exacting tax on the basis of a formulaic arithmetical approach to transactions…” 225. He explained, at [39], that the taxpayer’s counsel submitted that in the context of the Ramsay principle as an aid to construction, the terms “premium” and “surrender” “bear the meaning and have the actual consequences that they ordinarily have” on the basis that the language of the legislation is “paramount” and “prevails over the purpose for which those particular steps were inserted in the scheme”
“respectively a payment of a premium and a partial surrender of the policies, not just for life insurance purposes but for all purposes, including fiscal purposes. The tax avoidance purpose and self-cancelling nature of the steps did not by themselves entitle the court to disregard the steps, when there was nothing in [the provisions] indicating or contemplating that, as a matter of construction, such steps were not to count.” 227. At [57] he set out Proudman J’s conclusion that a purposive construction of the relevant provisions did not enable her to disregard the relevant steps: “44 ….This is legislation which does not seek to tax real or commercial gains. Thus it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance. 45. I sympathise with the instinctive reaction that such an obvious scheme ought not to succeed. However, I cannot extract from the legislation any underlying or overriding purpose enabling me to conclude that parts of the scheme may be ignored…. 47. In summary it seems to me that [the relevant provision] adopts a formulaic and prescriptive approach. No overriding principle can be extracted from the legislation, or from the authorities, that some types of transaction should be ignored in the application of the Chapter. To say that there is no premium and no partial surrender, that those steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self-cancelling nature of the transaction was no different and no more extreme than that in MacNiven.” 228. Mummery LJ concluded that, based on the key passages in BMBF he agreed with Proudman J and made the following main points: (1) As recognised in all the decisions set out above, Ramsay did not “lay down a special doctrine of revenue law” but rather reflected “the general principle of purposive and contextual construction of all legislation….”
“was the product of real premiums paid at an earlier stage for real life policies and real surrenders made at an earlier stage. Although the corresponding deficiency was created solely to save tax, that alone does not entitle the court to disregard the fiscal consequences of payment of premium and the partial surrender which led to its creation” (at [77]). (3) It would be an error to disregard the payment of a premium and the partial surrender “simply because they were self-cancelling steps inserted for tax advantage purposes”
“[The relevant steps] answer the description of premium and partial surrender. On the true construction of [the provisions], which do not readily lend themselves to a purposive commercial construction, Step 3 was in its legal nature a premium paid to secure benefits under the Bonds and Step 4 was in its 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….because they were self-cancelling events that were commercially unreal and were inserted for a tax avoidance purpose in the pre-ordained programme….It follows that a corresponding deficiency relief is available to Mr Mayes.” 229. Mr Peacock considered that the decision in Mayes very much embodies the approach which the tribunal should take in this case. Mr Milne said that the approach taken in Mayes is no different to that taken in the other cases. However, on a purposive approach to the highly prescribed and formulaic legislation in issue, which was held to operate on a basis and in a manner described as “artificial, unreal and uncommercial”, the court considered a composite approach was not permitted. In Mr Milne’s view, that decision has no bearing on this case given the very different nature of the provisions of the CAA under consideration. Decision Appellants’ stance 230. It was not disputed that each of the steps involved in the transactions (the sale of the assets, the leaseback and their reacquisition under the Put Options) if viewed as individual and discrete transactions, as Lord Hoffman put it in MacNiven , “involved no pretence. They were intended to do precisely what they purported to do. They had a legal reality”
“a process whereby the whole of the interest of A is transferred to B, and stays transferred for more than an imaginary moment of time, and not to a process whereby, in the twinkling of an eye, A’s interest in the land is merely reduced from a fee simple to a term of years, and B acquires no more than the fee simple subject to the term. 277. He continued to note in the same passage that “where the technicalities of English conveyancing and land law are brought into juxtaposition with” a UK taxing statute, he was “encouraged to look at the realities at the expense of the technicalities” and: “The taxpayer’s interest has, uno ictu , been merely reduced from ownership of the freehold to ownership of a lease: the whole of his interest in the land has therefore not been transferred to another ; and that is the end of the case. I respectfully agree with the common-sense approach of the General Commissioners, and merely add that common sense is not a quality wholly to be abjured in the construction even of a taxing Statute.”
“This new subsection ensures that the hire purchase rules will apply equally to alternative hire purchase arrangements , for example those developed to be Sharia compliant.”
“A hire purchase agreement provides for the asset being hired to become the property of the hire purchaser automatically at the end of the hire period or gives the hirer an option to buy the asset for a specified price.”
“(a) New subsection (2A) provides a formula for calculating the disposal value to be brought into the capital allowances computations of a lessee when the lessee’s deemed ownership of the leased asset ends, either because the lease terminates or because the plant or machinery ceases to be used wholly for the purpose of a qualifying activity. The formula deducts from the lessee’s qualifying expenditure on the plant or machinery at the commencement of the lease an amount referred to as “the qualifying amount” and adds any relevant rebate received……. (c) New subsection (2C) provides the definition of “the qualifying amount” for the lessee under a long funding finance lease. “ The qualifying amount” is the aggregate of the amounts paid to the lessor by the lessee. This amount includes any initial payment and also includes any payment made under a guarantee. It excludes the amounts mentioned in subsection (2D) [being the amounts of payments under the leases that represent finance charges, any service charges and qualifying UK or foreign tax to be paid by the lessor]”
“The proposed legislation [being that applicable to these transactions] provides an improved formula for calculating the disposal proceeds to be brought into account by the lessee under a long funding lease. The changes will mean that the relief given to a lessee under a long funding lease, by way of capital allowances and revenue deductions, does not exceed the net payments made by the lessee under or in connection with the lease .”