Furniss (Inspector of Taxes) v Dawson [1983] UKHL 4

House of Lords
Between
Furniss (Inspector of Taxes)AppellantDawsonRespondent
Before
Lord Fraser of TullybeltonDate 13 July 1981
Upon Report from "the Appellate Committee to whom was referred the Cause Furniss against D.E.R. Dawson, Furniss against G.E. Dawson and Furniss against E.B. Dawson, Murdoch against R.S. Dawson, That the Committee had heard Counsel on Wednesday the 14th, Thursday the 15th, Monday the 19th and Tuesday the 20th days of December last upon the Petitions and Appeals of William Furniss (Her Majesty's Inspector of Taxes) of Somerset House, Strand, London WC2R 1LB praying that the matter of the Orders set forth in the Schedules thereto, namely Orders of Her Majesty's Court of Appeal of the 27th day of May 1983 might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Orders might be reversed, varied or altered or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as also upon the Cases of Douglas Edward Rexford Dawson and Ella Bertha Dawson lodged in answer to the said Appeals; as also upon the Petition and Appeal of Ian Stuart Murdoch (Her Majesty's Inspector of Taxes) of Somerset House, Strand, London WC2R 1LB praying that the matter of the Order set forth in the Schedule thereto, namely an Order of Her Majesty's Court of Appeal of the 27th day of May 1983 might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order might be reversed, varied or altered or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as also upon the Case of Rexford Stuart Dawson lodged in answer to the said Appeal; (which said Appeals were by an order of the House of the 6th day of July last Ordered to be Consolidated); and due consideration had this day of what was offered on either side in this Cause:

HOUSE OF LORDS

FURNISS (INSPECTOR OF TAXES) (APPELLANT)

v.

D.E.R. DAWSON (RESPONDENT)

FURNISS (INSPECTOR OF TAXES) (APPELLANT)

v.

G.E. DAWSON (RESPONDENT) AND FURNISS (INSPECTOR OF TAXES) (APPELLANT)

v.

E.B. DAWSON (BY ORDER TO CARRY ON DATED 13TH JULY

1981) (RESPONDENT)

MURDOCH (INSPECTOR OF TAXES) (APPELLANT)

v.

R.S. DAWSON (RESPONDENT) (CONSOLIDATED APPEALS)

Lord Fraser of Tullybelton Lord Scarman Lord Roskill Lord Bridge of Harwich Lord Brightman

LORD FRASER OF TULLYBELTON

My Lords,I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Brightman, in these consolidated appeals and I entirely agree with his conclusion and his reasoning. The facts are fully stated in his speech and I do not repeat them. I wish to add only a few comments.The importance of this case is, in my opinion, in enabling your Lordships' House to explain the effect of the decision in W.T. Ramsay v. IRC [1982] AC 300 and to dispose of what are, I think, the misunderstandings about the scope of that decision which have prevailed in the Court of Appeal. In Ramsay the House had to consider an elaborate and entirely artificial scheme for avoiding liability to tax. Viewed as a whole, it was self-cancelling. In the present case the scheme was much simpler, and it was not self- cancelling; on the contrary, it had what Vinelott J. described as "enduring legal consequences". But while the cases differ in that respect, it is not a sufficient ground for distinguishing the present case from Ramsay. The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of

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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. The principle was stated in the speech of Lord Wilberforce in Ramsay at page 324 A-C, especially between B & C where his Lordships said this:"For the commissioners considering a particular case it is "wrong, and an unnecessary self limitation, to regard "themselves as precluded by their own finding that "documents or transactions are not 'shams', from considering "what, as evidenced by the documents themselves or by the "manifested intentions of the parties, the relevant "transaction is. They are not, under the Westminster "doctrine or any other authority, bound to consider "individually each separate step in a composite transaction "intended to be carried through as a whole." (Emphasis added).It was by applying that principle that Lord Wilberforce in the next paragraph of his speech in Ramsay approved of the approach by Eveleigh L.J. to the first stage of the transaction in Floor v. Davis [1978] 1 Ch. 295. I also attempted to apply the same principle when I expressed the opinion (Ramsay at page 339 B - C) that "it could, in my opinion, have been the ground of decision in "Floor v. Davis ... in accordance with the dissenting opinion of "Eveleigh L.J. in the Court of Appeal . . . with which I "respectfully agree." Eveleigh LJ. and Lord Wilberforce and I ail referred only to the first stage of the transaction in Floor v. Davis, and we did not rely to any extent upon the existence of the second stage, as the Court of Appeal in the present case appear to have thought. The first stage, viewed by itself, was clearly more favourable to the argument for the taxpayer than the two stages taken together; if the argument for the taxpayer failed even at the first stage, that would simply be an additional reason for reaching the decision against him. As it happens, the whole transaction in the present case is very similar to the first stage in Floor v. Davis (the only material difference being that Greenjacket has more enduring functions than FMW had).The series of two transactions in the present case was planned as a single scheme, and I am clearly of opinion that it should be viewed as a whole. The relevant transaction, if I may borrow the expression used by Lord Wilberforce, consists of the two transactions or stages taken together. It was a disposal by the respondents of the shares in the operating company for cash to Wood Bastow.I would allow the appeal.

LORD SCARMAN

My Lords,I would allow the appeals for the reasons given by my noble and learned friend, Lord Brightman. I add a few observations only

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because I am aware, and the legal profession (and others) must understand, that the law in this area is in an early stage of development. Speeches in your Lordships' House and judgments in the appellate courts of the United Kingdom are concerned more to chart a way forward between principles accepted and not to be rejected than to attempt anything so ambitious as to determine finally the limit beyond which the safe channel of acceptable tax avoidance shelves into the dangerous shallows of unacceptable tax evasion.The law will develop from case to case. Lord Wilberforce in Ramsay's case referred to "the emerging principle" of the law. What has been established with certainty by the House in Ramsay's case is that the determination of what does, and what does not, constitute unacceptable tax evasion is a subject suited to development by judicial process. The best chart that we have for the way forward appears to me, with great respect to all engaged on the map-making process, to be the words of my noble and learned friend, Lord Diplock, in the Burmah case which my noble and learned friend, Lord Brightman, quotes in his speech. These words leave space in the law for the principle enunciated by Lord Tomlin in the Duke of Westminster's case that every man is entitled if he can to order his affairs so as to diminish the burden of tax. The limits within which this principle is to operate remain to be probed and determined judicially. Difficult though the task may be for judges, it is one which is beyond the power of the blunt instrument of legislation. Whatever a statute may provide, it has to be interpreted and applied by the courts: and ultimately it will prove to be in this area of judge-made law that our elusive journey's end will be found.

LORD ROSKILL

My Lords,I have had the opportunity of reading in draft the speeches delivered or to be delivered and in common with all your Lordships have reached the clear conclusion that these appeals by the Revenue must be allowed and that the reasoning in the courts below cannot be supported. I respectfully and entirely agree with the speeches of my noble and learned friends, Lord Fraser of Tullybelton and Lord Brightman. I only add to your Lordships' speeches out of respect for all the learned judges from whom the House is differing. Repeated perusal of their long and careful judgments has left me with the impression, which I am comforted to see is shared by my noble and learned friend, Lord Brightman, that they were seeking a route by which they might confine the decisions in Ramsay and Burmah to cases which were similar on their facts, that is to say where the transactions under attack were what have been described in argument as "self-cancelling". Those cases apart, what the learned judges all regarded as the principles long established by the Duke of Westminster's case might continue to reign supreme and unchallenged. They sought to find support for their conclusions in the majority judgments in the Court of Appeal in Floor v. Davis and were not prepared to

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accept that in Ramsay this House had, at least in principle if not explicitly, approved of the much discussed dissenting judgment of Eveleigh L.J. in the former case. As my noble and learned friends have pointed out, on any view the relevant statements in those majority judgments of Sir John Pennycuick and Buckley L.J. were obiter since this House subsequently decided in favour of the Revenue on another point and therefore had no cause to pronounce upon the rival merits of the views expressed upon what became known as "the "first issue".The error, if I may venture to use that word, into which the courts below have fallen is that they have looked back to 1936 and not forward from 1982. They do not appear to have appreciated the true significance of the passages in the speeches in Ramsay of my noble and learned friends, Lord Wilberforce at pages 325/6 and Lord Fraser of Tullybelton at page 337, and, even more important, of the warnings in Burmah given by my noble and learned friends, Lord Diplock and Lord Scarman in the passages to which Lord Brightman refers and which I will not repeat. It is perhaps worth recalling the warning given albeit in another context by Lord Atkin, who himself dissented in the Duke of Westminster's case, in United Australia Ltd, v. Barclays Bank Ltd. [1941] A.C. 1 at page 29, "when these ghosts of the past stand in the path of "justice clanking their mediaeval chains, the proper course for the "judge is to pass through them undeterred." 1936, a bare half century ago, cannot be described as part of the middle ages but the ghost of the Duke of Westminster and of his transaction, be it noted a single and not a composite transaction, with his gardener and with other members of his staff, has haunted the administration of this branch of the law for too long. I confess that I had hoped that that ghost might have found quietude with the decisions in Ramsay and in Burmah. Unhappily it has not. Perhaps the decision of this House in these appeals will now suffice as exorcism.I would only add, ignoring for the moment that the effect of the Duke of Westminster's case was subsequently nullified by statute, that I express no view whether were that case to arise for decision since 1982, the Duke or the Revenue would emerge as the ultimate victor.My Lords,learned counsel for the taxpayers ultimately found himself constrained to admit that the majority judgments in Floor v. Davis could not stand alongside the decisions in Ramsay and Burmah. I think he was entirely right to make this concession. But he sought to distinguish the present cases from Floor v. Davis on their facts contending that in these cases Green jacket's existence had enduring consequences whereas in Floor v. Davis Donmarco, the recipient of the ultimate proceeds of sale, did not. He also submitted that the dissenting judgment of Eveleigh L.J. was founded upon consideration of stage 2 of the transactions there in question and not only upon stage 1. My Lords, with respect, I regard both submissions as untenable. The learned Lord Justice was quite clearly treating the stage 1 transaction as involving a disposal to the ultimate purchaser which itself attracted capital gains tax. There is no relevant reference to stage 2 from beginning to end of his judgment. It was his view which found support in Ramsay and rejection of it at the present time would involve rehabilitation of the majority judgments in

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Floor v. Davis, which as already pointed out were not and indeed are not now capable of being supported.My Lords,I think Oliver L.J. was also influenced by fears of double taxation were the Revenue's submissions to be accepted. In my view the answer to the learned Lord Justice's fears is provided by my noble and learned friend, Lord Brightman, in his speech in accordance with the submissions of Mr. Millet Q.C. for the Revenue and I have nothing further to add on this part of the case.In conclusion, therefore, I am convinced that there was a disposal by the Dawsons to Wood Bastow in consideration of the payment to be made by Wood Bastow to Greenjacket at the behest of the Dawsons. This disposal is not exempt. Capital gains tax is payable. It is for these reasons as well as for those expressed by my noble and learned friends to whose speeches I have already referred I would allow these appeals. I would however make no order as to costs either in this House or in the courts below.

LORD BRIDGE OF HARWICH

My Lords,I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Brightman, and I agree with it.In one sense these appeals can be disposed of on a very short and simple ground. The facts of the present case are, for relevant purposes, indistinguishable from the facts of Floor v. Davis [1978] 1 Ch. 295 (CA), [1980] AC 695 (HL) limited to the transactions which in that case were referred to throughout as constituting stage 1. Floor v. Davis was in fact decided in favour of the Crown both in the Court of Appeal and the House of Lords on a ground wholly irrelevant to the present appeal arising from the transactions involved in stage 2, and the stage 1 point was never considered when the case came before this House. Hence the conflicting opinions expressed in the Court of Appeal as to the legal effect of the stage 1 transactions were entirely obiter. The judgment of Eveleigh L.J. relating to stage 1 contains no word of reference to stage 2 and the theory that he was influenced in his conclusion as to stage 1 by any of the factors arising at stage 2 is quite untenable. Eveleigh L.J. concluded that the transactions involved in stage 1, by themselves, effected a disposal by the taxpayers of their shares to the ultimate purchasers which attracted capital gains tax. That conclusion was unanimously approved, albeit again obiter, by your Lordships' House in W.T. Ramsay Ltd, v. I.R.C. [1982] AC 300 . It inevitably follows that, unless your Lordships are willing to reject that unanimous opinion of the House and reinstate the views on this point of the majority of the Court of Appeal in Floor v. Davis (Buckley L.J. and Sir John Pennycuick) whose reasoning counsel for the taxpayers in the instant case did not feel able to support, the appeal must succeed.

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But in another sense the present appeal marks a further important step, as a matter of decision rather than mere dictum, in the development of the courts' increasingly critical approach to the manipulation of financial transactions to the advantage of the taxpayer. Of course, the judiciary must never lose sight of the basic premise expressed in the celebrated dictum of Lord Tomlin in I.R.C. v. Duke of Westminster [1936] AC 1 , at p. 19, that:
"Every man is entitled if he can to order his affairs so that the "tax attaching under the appropriate Acts is less than it otherwise "would be."
Just a year earlier Judge Learned Hand, giving the judgment of the United States 2nd Circuit Court of Appeals in Helvering v. Gregory 69 Fed. Rep., 2nd Series, 809, had said the same thing in different words:
"Anyone may so arrange his affairs "that his taxes shall be as low as possible; he is not bound to "choose that pattern which will best pay the Treasury."
Yet, while starting from this common principle, the Federal Courts of the United States and the English courts have developed, quite independently of any statutory differences, very different techniques for the scrutiny of tax avoidance schemes to test their validity.The extent to which the speeches of the majority in the Westminster case still tend to dominate the thinking in this field of the English judiciary is well shown by the judgments in the courts below in the instant case. In particular, the Westminster case seems still to be accepted as establishing that the only ground on which it can be legitimate to draw a distinction between the substance and the form of transactions in considering their tax consequences is that the transactions are shams, in the sense that they are not what, on their face, they purport to be. The strong dislike expressed by the majority in the Westminster case for what Lord Tomlin described as "the doctrine that the "court may ignore the legal position and regard what is called 'the "'substance of the matter'" is not in the least surprising when one remembers that the only transaction in question was the Duke's covenant in favour of his gardener and the bona fides of that transaction was never for a moment impugned.When one moves, however, from a single transaction to a series of inter-dependent transactions designed to produce a given result, it is, in my opinion, perfectly legitimate to draw a distinction between the substance and the form of the composite transaction without in any way suggesting that any of the single transactions which make up the whole are other than genuine. This has been the approach of the United States Federal Courts enabling them to develop a doctrine whereby the tax consequences of the composite transaction are dependent on its substance not its form. I shall not attempt to review the American authorities, nor do I propose a wholesale importation of the American doctrine in all its ramifications into English law. But I do suggest that the distinction between form and substance is one which can usefully be drawn in determining the tax consequences of composite transactions and one which will help to free the courts from the shackles which have for so long been thought to be imposed upon them by the Westminster case.I shall attempt no exhaustive exposition of all the criteria by which, for the purpose I suggest, form and substance are to be distinguished. Once a basic doctrine of form and substance is

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accepted, the drawing of precise boundaries will need to be worked out on a case by case basis. But I venture to point out what a simple and readily applicable test a distinction between form and substance would have provided to arrive at the conclusions already reached in some of the cases of composite transactions decided by your Lordships' House. It would need no more than a cursory exposition of the avoidance schemes in Ramsay and Rawling to lead any intelligent layman to the conclusion that neither scheme was designed to achieve any substantial effect in the real world and that the elaborate steps designed to manufacture a tax deductible loss in each case were purely formal in character. If Special or General Commissioners had been directed to approach either case on the basis that the tax consequences of the interlocking, inter-dependent and predetermined transactions were to be judged by reference to the substance not the form of the composite transaction, I cannot think they would have had any difficulty in arriving at the right answer.The facts in C.I.R. v. Burmah Oil Co. Ltd. 54 TC 200 were more complicated but the effect of the decision of this House could fairly be summarised by saying that the scheme adopted by Burmah to convert a bad debt owing to it by a subsidiary company (a non-deductible loss) into a loss realised on the liquidation of that subsidiary which would be tax deductible was formal rather than substantial. In the words of Lord Fraser of Tullybelton:
"The question in this part of the appeal is whether the "present scheme, when completely carried out, did or did "not result in a loss such as the legislation is dealing with, "which I may call for short, a real loss. In my opinion it "did not."

Lord Diplock referred to:

"a pre-ordained series of transactions (whether or not they "include the achievement of a legitimate commercial end) "into which there are inserted steps that have no "commercial purpose apart from the avoidance of a liability "to tax which in the absence of those particular steps would "have been payable."
This seems to me to be language expressing with perfect precision the concept of steps which are formal rather than substantial.The distinction between form and substance in the instant case is still easier to draw. As my noble and learned friend, Lord Brightman, has pointed out, if there had been here at the outset a tripartite contract between the taxpayers, Greenjacket and Wood Bastow, the beneficial interest in the taxpayers' shares would have passed directly to Wood Bastow. The twin purpose of achieving the identical result by the elaborate and carefully timed scheme fully described in the speech of my noble and learned friend, Lord Brightman, was(i) to avoid a direct disposal of the shares to Wood Bastow and(ii) to ensure that for a scintilla temporis the beneficial interest in the shares was held by Greenjacket in order to found Green jacket's claim to have been in control of the operating companies for the purposes of paragraph 6(2) of Schedule 7 to the Finance Act 1965. Nothing could be clearer than that

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these two features of the pre-ordained scheme were purely formal and had no effect on the substance of the composite transaction.I would allow the appeals.

LORD BRIGHTMAN

My Lords,The transaction which we are called upon to consider is not a tax avoidance scheme, but a tax deferment scheme. The scheme has none of the extravagances of certain tax avoidance schemes which have recently engaged the attention of the courts, where the taxpayer who has been fortunate enough to realise a capital profit has gone out into the street and, with the aid of astute advisers, manufactured out of a string of artificial transactions a supposed loss in order to counteract the profit which he has already made. The scheme before your Lordships is a simple and honest scheme which merely seeks to defer payment of tax until the taxpayer has received into his hands the gain which he has made.There are three consolidated appeals. The taxpayers are Mr. George Dawson, who has died since the start of the proceedings and whose estate is represented by his widow; and his sons Mr. Douglas Dawson and Mr. Rexford Dawson.The facts are simple, and were admirably found by the Special Commissioners for the purpose of dealing with the only point which was then in issue. They are as follows:-1. Mr. George Dawson, together with his wife and two sons, held shares in two companies (the Operating Companies) which manufactured clothing. They held all the shares in one company and most of the shares in the other company. I propose to ignore this small outside shareholding. Mr. Wood was the Chairman and Managing Director of Wood Bastow Holdings Ltd (Wood Bastow). In September 1971 Mr. Dawson and Mr. Wood agreed in principle that Wood Bastow should buy the entire shareholding in the Operating Companies.Solicitors were instructed on each side. Further negotiations took place. In particular, the solicitors acting for Wood Bastow asked for the capital of the Operating Companies to be reorganised so as to include the issue of renounceable letters of allotment, in order to minimise the stamp duty payable by them on the purchase.Acting on advice, the Dawsons decided not to sell directly to Wood Bastow. They "arranged first to exchange their shares for "shares in an investment company to be incorporated in the Isle of "Man. Any sale to the ultimate purchaser would, it was "contemplated, be a sale by the Isle of Man company."4. On 15 November 1971 a meeting took place between the solicitors. At this meeting the solicitors for Wood Bastow first

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became aware of the proposal to introduce an Isle of Man company. They accepted the proposal, subject to certain amendments being made to the draft documents then in course of preparation. 2O December was fixed as the date for completion.5. On 16 December the following events occurred:-(a) A company called Greenjacket Investments Ltd. (Greenjacket) was incorporated in the Isle of Man by Manx solicitors acting upon the instructions of the Dawson solicitors. The subscribers to the memorandum of association were Mr. J. E. Crellin, a member of the Manx firm of solicitors, and Mr. Moroney, who was articled to them.(b) A meeting of the subscribers took place at which they and Mr. P. G. Crellin were nominated as the first directors.(c) A first meeting of the Board took place at which there were produced to the meeting (i) the agreement, which was then presumably in the form of an unexecuted engrossment or a draft, whereby Greenjacket would purchase the shares in the Operating Companies for the sum of £152,000 which was to be satisfied by the issue of shares in Greenjacket; I will call this "the First Sale Agreement"; and (ii) a draft agreement for Greenjacket to sell the shares in the Operating Companies to Wood Bastow for £152,000; I will call this "the Second Sale Agreement".(d) At the same Board meeting it was resolved (i) that the two Sale Agreements be proceeded with; (ii) that the First Sale Agreement be executed; it was ultimately dated 2O December and exchanged on that date; (iii) that the shares in the Operating Companies (with an immaterial exception)be taken in the name of Greenjacket; (iv) that Mr. Moroney be authorised to execute the Second Sale Agreement on behalf of Greenjacket; and (v) that in anticipation thereof the transfers of the shares in the Operating Companies to Wood Bastow (as they would exist after later reorganisation) be executed and held in escrow, which was then done.6. On 2O December a meeting for the completion of the sale to Wood Bastow took place as planned. It was held at the offices of Messrs. Browne, Jacobson and Roose, the Dawson solicitors. The following activities took place:-Meetings of the Boards of the Operating Companies and extraordinary general meetings of such companies were held at which resolutions were passed to reorganise the share capitals of the Operating Companies in the manner desired by Wood Bastow.Mr. Moroney, who attended completion, produced the First Sale Agreement and telephoned the Isle of Man in order to ascertain that the Board of Greenjacket were allotting the consideration shares in that company to the Dawsons.

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(c) The Boards of the Operating Companies approved transfers of the shares therein to Greenjacket. (d) The Second Sale Agreement was exchanged and the sale completed in consideration of the payment of the purchase money by Wood Bastow to Greenjacket. (e) The Boards of the Operating Companies approved the transfers of the shares therein to Wood Bastow.The Board meetings of the Operating Companies were interrupted on three occasions; first, to enable extraordinary general meetings to be held to reorganise the share capitals; secondly, to enable the First Sale Agreement to be exchanged between the Dawsons and Greenjacket; and thirdly, to enable the Second Sale Agreement to be exchanged. There are very full minutes of the Board meeting of one of the Operating Companies and similar minutes exist in the case of the other company. These show that the whole process was planned and executed with faultless precision. The meetings began at 12.45 p.m. on 20 December, at which time the shareholdings of the Operating Companies were still owned by the Dawsons unaffected by any contract for sale. They ended with the shareholdings in the ownership of Wood Bastow. The minutes do not disclose when the meeting ended, but perhaps it was all over in time for lunch.Section 19 of the Finance Act 1965 charges tax in respect of capital gains accruing to a person on the disposal of assets. There is no definition of disposal and it scarcely needs definition. Paragraph 6 of Schedule 7 provides certain exceptions in the case of company amalgamations. One exception applies to shares in a company transferred to another company which thereby acquires control, in exchange for shares in the transferee company. In such a case there is deemed to be no disposal of the former shareholding. The new shareholding and the old shareholding are to be treated as the same asset.In the instant case Mr. George Dawson and his sons were assessed to capital gains tax in respect of the year 1970/72 in the sums of £57,000, £28,000 and £28,000 The then argument on the part of the Revenue was that Greenjacket did not acquire control of the Operating Companies within the meaning of paragraph 6 of Schedule 7, because Greenjacket was a nominee or bare trustee for the Dawsons. If on the other hand, as the taxpayers contended, Greenjacket did acquire control of the Operating Companies, any charge to capital gains tax would, it was contended, be deferred until such time as the taxpayers disposed of their shareholdings in Greenjacket and thereby realised a chargeable gain. At this point the one and only question at issue was whether Greenjacket acquired control of the Operating Companies within the meaning of the Act. Indeed, that is in a sense the only question at issue now, but it falls to be answered in a very different legal context from that in which it originally fell to be considered.After a two-day hearing, including the oral evidence of four witnesses, the Special Commissioners held that Greenjacket had acquired control of the Operating Companies within the meaning of the Act. They therefore held that the First Sale Agreement was

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not a disposal by the Dawsons to Green jacket for the purposes of capital gains tax, and the assessments were discharged. The decision was given on 21 January 1976. The stated case was signed a year later, but for some reason it was over two years before it reached the High Court. During this long wait there occurred what has been described as "a significant change in the approach "adopted by this House" towards artificial tax saving schemes. The story of this change begins with the case of Floor v. Davis [1978] 1 Ch. 295, [1980] A.C. 695. In that case the taxpayer and others were shareholders in a company which I shall call I.D.M. They agreed in principle to sell their shares to another company which I shall call K.D.I. The vendors then decided to put into effect the following scheme. On 24 February 1974 they caused to be incorporated a company which I shall call F.N.W. On 27 February the vendors agreed to sell their I.D.M. shares to F.N.W. in consideration of an allotment of shares in F.N.W. On 28 February F.N.W. agreed to sell the I.D.M. shares to K.D.I, for a cash consideration. This can conveniently be called stage 1. On 5 April a special resolution was passed to wind up F.N.W. voluntarily. As a result of a complicated reorganisation of the capital of F.N.W. the liquidation of F.N.W. had the effect of passing most of its assets, which included the cash received from K.D.I., to Donmarco Ltd., a company registered in the Cayman Islands. This can conveniently be called stage 2. I will first summarise the decision in that case, before turning an more detail to the judgments. The Court of Appeal held(1) that the taxpayer could not be regarded as having disposed of his shareholding in I.D.M. to K.D.I., Eveleigh L.J. dissenting;(2) that F.N.W. acquired control of I.D.M., so that there was no disposal for capital gains tax purposes on the sale of the shares by the taxpayer to F.N.W.; but(3) that the taxpayer had exercised control over the shares in F.N.W. by reason whereof value had passed out of those shares into the shares in Donmarco, and in consequence the taxpayer was deemed by virtue of paragraph 15(2) of Schedule 7 to have .disposed of his shares in F.N.W. and was taxable accordingly; this paragraph taxes transactions which involve gratuitous transfers of value derived from assets and is not in point in the instant case.The leading judgment was delivered by Sir John Pennycuick . The first issue was whether the taxpayer made a disposal of his I.D.M. shares to K.D.I. Before answering this question he identified the critical transactions as the agreement of the 27 February 1969 to sell the I.D.M. shares to F.N.W. in consideration of the issue of F.N.W. shares, and the sale of the I.D.M. shares a day later by F.N.W. to K.D.I. It was, he said, impossible upon the plain effect of the two sale agreements to maintain that the taxpayer had sold his shares to anyone other than F.N.W., or that K.D.I, had purchased the shares from anyone other than F.N.W. Lord Justice Buckley similarly held that "the transactions which "together make up stage 1 of the series cannot for the present "purpose properly be regarded as a disposal by the taxpayer and "his sons-in-law of their shares in I.D.M. to K.D.I." It will be seen from the full report of the judgments that this conclusion was reached by both Lords Justices without any reference whatever to the existence of stage 2.In his dissenting judgment Lord Justice Eveleigh took the view that the I.D.M. shares were disposed of by the taxpayer to K.D.I. The ratio of his decision was as follows:-

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"It is dear that right from the beginning K.D.I, indicated "that it would purchase the shares. The only reason for "avoiding a direct sale to them was the prospect of capital "gains tax. In an attempt to avoid paying this, as is frankly "accepted, the initial tranfer to F.N.W. took place. There "was however no real possibility at any time that the "shares would not reach K.D.I. By virtue of their control of "F.N.W. the shareholders guaranteed from the moment they "parted with the legal ownership that the shares would "become the property of K.D.I. No one could prevent this "against their wishes. By virtue of the arrangement initially "made between them each was under an obligation to the "other to do nothing to stop the shares arriving in the hands "of K.D.I. They controlled the destiny of the shares from "beginning to end in pursuance of a continuing intention on "their part that the shares should be transferred to K.D.I."
In reaching this conclusion, it will be observed that he also did not refer to or place any reliance whatever upon the existence of stage 2.The taxpayer appealed to this House, and naturally opened the appeal by arguing the only point upon which he had failed in the Court of Appeal, namely, the applicability of paragraph 15 of Schedule 7. This House decided that point against him, which was sufficient to determine the appeal. Counsel for the Revenue was not therefore required to address this House on the issue whether there was a disposal by the taxpayer of the I.D.M. shares to K.D.I., and this House had no occasion to express a view.The decision of this House in Floor was followed two years later by the decision in W. T. Ramsay Ltd, v. I.R.C. [1982] A.C. 300. In that case a farming company had realised a chargeable gain of some £188,000 on the sale of farm land in Lincolnshire upon which capital gains tax was assessed. In order to mitigate, as it was hoped, the tax that would otherwise be payable, the taxpayer embarked upon a scheme which was designed to manufacture a paper loss of £173,647 by means of a series of loan and share transactions. Features of the scheme were as follows:-1. There was no commercial justification for the scheme. There was no prospect of a profit. In fact there was bound to be a small loss in the form of the fees and similar expenses which would be payable.2. No step in the scheme was a sham. Every step was genuinely carried through, and was exactly what it purported to be.3. There was no binding arrangement that each planned step would be followed by the next planned step, but it was reasonable to assume that all the steps would in practice be carried out.4. The scheme was designed to, and did, return the taxpayer to the position which he occupied before it began, except for the payment of the expenses of the scheme.

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5. The money needed for the various steps was lent by a finance house on terms which ensured that the loan came back to the finance house on completion; the taxpayer's personal outlay was confined to his expenses of the scheme.The leading speech was that of Lord Wilberforce. He reviewed recent cases, starting with Floor. His comment was as follows:-
"The key transaction in this scheme was a sale of shares "in a company called I.D.M. to one company (F.N.W.) and a "resale by that company to a further company (K.D.I.). The "majority of the Court of Appeal thought it right to look at "each of the sales separately and rejected an argument by "the Crown that they could be considered as an integrated "transaction. But Eveleigh L.J. upheld that argument. He "held that the fact that each sale was genuine did not "prevent him from regarding each as part of a whole, or "oblige him to consider each step in isolation. Nor was he "so prevented by I.R.C. The Duke of Westminster [1936] A.C. "1. Looking at the scheme as a whole, and finding that the "taxpayer and his sons-in-law had complete control of the "I.D.M. shares until they reached K.D.I., he was entitled to "find that there was a disposal to K.D.I. When the case "reached this House it was decided on a limited argument, "and the wider point was not considered. This same "approach has commended itself to Templeman L.J. and has "been expressed by him in impressive reasoning in the Court "of Appeal's judgment in Eilbeck v. Rawling. It will be "seen from what follows that these judgments, and their "emerging principle, commend themselves to me."
The fact that the court accepted that each step in a transaction was a genuine step producing its intended legal result, did not confine the court to considering each step in isolation for the purpose of assessing the fiscal results. "Viewed as a whole, a "composite transaction may produce an effect which brings it "within a fiscal provision." Lord Wilberforce added later, "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 courts to arrive at "a conclusion which corresponds with the parties' own intentions." Lord Fraser of Tullybelton delivered a concurring speech, in which he expressed his agreement with the dissenting opinion of Lord Justice Eveleigh in Floor and with the reasoning that led to it. Lord Russell of Killowen expressed his full agreement with the speeches of Lord Wilberforce and Lord Fraser of Tullybelton as did Lord Roskill and Lord Bridge of Harwich.Counsel for the respondents in this appeal laid emphasis on the fact, which is correct, that in Ramsay the transactions under attack were, as it was called, "self-cancelling", which were designed to return and did return the taxpayer to the starting position except for the payment of expenses. Both Lord Wilberforce and Lord Fraser of Tullybelton referred expressly to

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this characteristic. The transactions in the present appeal were not self-cancelling, because Greenjacket was brought into being for an indefinite period, and the consideration money paid by Wood Bastow, which was the foundation of the capital gain, would never reach the hands of the Dawsons, save by way of loan, unless and until Greenjacket was wound up or its capital was reduced.Following the decision of this House in Ramsay, the Revenue early in July 1981 gave notice to the respondents under R.S.C. Order 91 rule 4 that it would if necessary contend that the Dawsons had disposed of their shares in the Operating Companies to Wood Bastow and were liable to capital gains tax accordingly. The appeal came before Vinelott J. in mid-July and judgment was reserved. However, before judgment was delivered the case of I.R.C. v. Burmah Oil Co.Ltd. was argued and decided in this House. Vinelott J . therefore deferred giving judgment until the parties had had an opportunity to consider that case.Burmah involved another artificial tax avoidance scheme, the details of which are irrelevant for present purposes. The importance of the case lies in its reaffirmation of the Ramsay principle. I read this passage from the speech of Lord Diplock:-
"It would be disingenuous to suggest, and dangerous on "the part of those who advise on elaborate tax avoidance "schemes to assume, that Ramsay's case did not mark a "significant change in the approach adopted by this House in "its judicial role to a pre-ordained series of transactions "(whether or not they include the achievement of a "legitimate commercial end) into which there are inserted "steps that have no commercial purpose apart from the "avoidance of a liability to tax which in the absence of "those particular steps would have been payable. The "difference is in approach. It does not necessitate the "overruling of any earlier decisions of this House; but it "does involve recognising that Lord Tomlin's oft quoted "dictum in I.R.C. v. Duke of Westminster 'Every man is "'entitled if he can to order his affairs so that the tax "'attaching under the appropriate Acts is less than it "'otherwise would be', tells us little or nothing as to what "methods of ordering one's affairs will be recognised by the "courts as effective to lessen the tax that would attach to "them if business transactions were conducted in a "straightforward way."
The warning was repeated in the speech of Lord Scarman; "First, it is of the utmost importance that the business community "(and others, including their advisers) should appreciate, as my "noble and learned friend Lord Diplock has emphasised, that "Ramsay's case marks 'a significant change in the approach "'adopted by this House in its judicial role' towards tax avoidance "schemes. Secondly, it is now crucial when considering any such "scheme to take the analysis far enough to determine where the "profit, gain or loss is really to be found."That then was the state of judicial precedent when Vinelott J. came to give judgment in the instant case. He said that the question which he had to decide was how far the new approach justified or required the proposition for which the Crown

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contended, that is to say, the proposition set out in the Order 91 notice. The gist of his long and careful judgment is that the principle does not apply, and a transaction cannot be disregarded and treated as fiscally a nullity, if it has "enduring legal "consequences", a phrase which he repeated several times in his judgment. He identified "the enduring legal consequences" in the instant case as(i) the fact that Green jacket owned beneficially the proceeds of sale of the shares in the Operating Companies, which were brought into Greenjacket's accounts and upon the income of which Greenjacket was liable to tax, and(ii) the fact that Wood Bastow's rights under the Second Sale Agreement were rights against Greenjacket, whereas it would have had no such rights if the sale had been by the Dawsons to Wood Bastow. The effect of his judgment was to change Lord Diplock's formulation from "a "pre-ordained series of transactions . . . into which there are "inserted steps that have no commercial purpose apart from the "avoidance of a liability to tax" to "a pre-ordained series of "transactions . . . into which there are inserted steps that have "no enduring legal consequences." That would confine the Ramsay principle to so-called self-cancelling transactions.The learned judge's re-statement of Lord Diplock's formulation enabled him, as he thought, to escape from the difficulty imposed by this House's approval of the dissenting judgment in Floor. F.N.W. was placed in liquidation and its assets distributed; consequently its existence had no enduring effect on the rights and obligations of the parties after the completion of the scheme.On appeal the leading judgment was delivered by Lord Justice Oliver. He was, I think, greatly influenced by what he conceived to be oppressive double taxation which would follow if the Crown were right in its submission. His fears were in my view misconceived. If the Crown's case were correct, there would be a disposal by the Dawsons to Wood Bastow on which capital gains tax would be payable. There could be no additional capital gains tax on the steps by which that disposal was achieved, namely the sale first to Greenjacket and then by Greenjacket to Wood Bastow, because it is the Crown's case that the fiscal consequences of the introduction of Greenjacket are to be disregarded. The Revenue cannot, and does not claim to, have it both ways. There would of course be a charge to capital gains tax when the Dawsons realised their shares in Greenjacket, if a chargeable gain then arose. For that purpose the base cost of the Greenjacket shares allotted to the Dawsons would be the price which they paid for them, namely the value of the shares in the Operating Companies at the date of the transactions. That element of double taxation exists whenever a shareholder sells at a profit his shares in a company which has itself realised a capital asset at a profit. So I do not see any undesirable element of double taxation involved in the Revenue's submission.Lord Justice Oliver was satisfied that, applying the Ramsay principle, he was entitled to reject the Revenue's contention provided that the matter was not concluded by this House's approval of the judgment of Lord Justice Eveleigh in the Floor case. The question on the appeal, he said, was whether Vinelott J. was right to distinguish the Floor case. His conclusion was that

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the judgment of Lord Justice Eveleigh, and therefore this House's endorsement of it, could not properly be read divorced from the background that stage 1 was, and was all along intended to be, followed by stage 2, as a result of which the proceeds of sale became the absolute property of the taxpayers. (I observe in parenthesis that there seems to be no finding in the Floor case that the assets of F.N.W. on its liquidation became the absolute property of the taxpayers). The learned Lord Justice's approach to the judgment of Lord Justice Eveleigh and to this House's endorsement of it is in my opinion totally untenable. There is no indication whatever that Lord Justice Eveleigh paid the remotest attention to stage 2 at that stage of his judgment, or that the approval of this House proceeded upon the basis that the existence of stage 2 was significant or decisive.

Lord Justice Kerr adopted the reasoning and thus the errors of Lord Justice Oliver.

Lord Justice Slade accepted that there was no relevant distinction between the instant case and Floor, but nevertheless concluded that this House's approval of the dissent of Lord Justice Eveleigh was not intended to bind the court in future cases to the conclusion that, on facts such as were found in stage 1, there had been a disposal by the original vendor to the ultimate purchaser. The references to Floor, he said, were "clearly a convenient mode "of illustrating the broader approach to tax avoidance schemes "which [their Lordships] were concerned to establish." Having freed himself from the uncomfortable shackles of judicial precedent, he said that, on the facts, he could not see how there could have failed to be a disposal by the Dawsons to Greenjacket and by Greenjacket to Wood Bastow. He relied particularly on the undisputed fact that the First Sale Agreement passed the full legal and beneficial title to Greenjacket, and that the Second Sale Agreement passed the full legal and beneficial title to Wood Bastow.It is difficult to escape the impression that the High Court and the Court of Appeal were determined at all costs to confine the Ramsay principle to the sort of self-cancelling arrangement which existed in that case, and to resist what they conceived to be a deplorable inroad into the sacred principles of the Westminster case.My Lords,in my opinion the rationale of the new approach is this. In a pre-planned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between(i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and(ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are pre-ordained rather than pre-contracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that there was a tripartite contract between the Dawsons, Greenjacket and Wood

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Bastow under which the Dawsons contracted to transfer their shares in the Operating Companies to Green jacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the Operating Companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed, and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the pre- ordained series of steps are to be found in an informal arrangement instead of in a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the magic words "this is not a binding contract".The formulation by Lord Diplock in Burmah expresses the limitations of the Ramsay principle. 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 (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the Operating Companies by the Dawsons to Wood Bastow. 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 Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect. If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket.The formulation, therefore, involves two findings of fact, first whether there was a pre-ordained series of transactions, i.e. a single composite transaction. Secondly, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. Those are facts to be found by the Commissioners. They may be primary facts or, more probably, inferences to be drawn from the primary facts. If they are inferences, they are nevertheless facts to be found by the Commissioners. Such inferences of fact cannot be disturbed by the court save on Edwards v. Bairstow principles.In Marriott v. Oxford and District Co-operative Society Ltd. (No. 2) [1970] 1 Q.B. 186, Lord Denning M.R., at page 192, said:
"... the primary facts were not in dispute. The only "question was what was the proper inference from them. "That is a question of law with which this court can and "should interfere."

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Similar observations occur in other reported cases. I agree with the proposition only if it means that an appellate court, whose jurisdiction is limited to questions of law, can and should interfere with an inference of fact drawn by the fact-finding tribunal which cannot be justified by the primary facts. I do not agree with it if it is intended to mean that, if the primary facts justify alternative inferences of fact, an appellate court can substitute its own preferred inference for the inference drawn by the fact-finding tribunal. I think this is clear from the tenor of the speeches in this House in Edwards v. Bairstow. The point does not seem to have been the subject matter of explicit pronouncement in any of the reported cases, at least your Lordships have been referred to none, and both propositions have from time to time emerged in judgments as a matter of assumption rather than decision. But for my part I have no doubt that the correct approach in this type of case, where inferences have to be drawn, is for the Commissioners to determine (infer) from their findings of primary fact, the further fact whether there was a single composite transaction in the sense in which I have used that expression, and whether that transaction contains steps which were inserted without any commercial or business purpose apart from a tax advantage; and for the appellate court to interfere with that inference of fact only in a case where it is insupportable on the basis of the primary facts so found. Accordingly I respectfully disagree with the learned judge in the instant case where he expressed the opposite view at page 2S7 b.The result of correctly applying the Ramsay principle to the facts of this case is that there was a disposal by the Dawsons in favour of Wood Bastow in consideration of a sum of money paid with the concurrence of the Dawsons to Greenjacket. Capital gains tax is payable accordingly. I would therefore allow the appeals. I agree that there should be no order for costs in your Lordships' House or in the courts below.

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Cited in 2 later judgments