Ramsay v IRC [1979] 1 W.L.R. 974; [1982] AC 300

• The taxpayer argued that at one stage in a series of transactions a step gave rise to an apparent gain and a later step gave rise to an apparent loss.

• The HL collapsed the scheme into a single step for tax purposes and applied the legislation to it as one potentially taxable disposition, giving rise to no gain or loss at all.

Lord Wilberforce

• The scheme consists of a number of steps to be carried out.

  • In each case two assets appear, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss, and which gain is intended not to be taxable.

  • These assets have a very short life. Having served their purpose they cancel each other out and disappear.

  • At the end of the series of operations, the taxpayer's financial position is precisely as it was at the beginning.

• There are other significant features which are normally found in schemes of this character.

  1. First, it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end.

     • This intention may be expressed either as a firm contractual obligation (it was so in Rawling) or as in Ramsay as an expectation without contractual force.

  2. Secondly, although sums of money, sometimes considerable, are supposed to be involved in individual transactions, the taxpayer does not have to put his hand in his pocket.

     • The money is provided by means of a loan from a finance house which is firmly secured by a charge on any asset the taxpayer may appear to have, and which is automatically repaid at the end of the operation.

     • In some cases one may doubt whether, in any real sense, any money existed at all.

  3. Finally, in each of the present cases it is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax.

• Additionally:

  • A subject is only to be taxed on clear words, not on ‘intendment’ or on the ‘equity’ of an Act. 

  • Any taxing Act of Parliament is to be construed in accordance with this principle. 

  • What are ‘clear words’ is to be ascertained on normal principles.

  • There may, indeed should, be considered, the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.

On the Westminster principle

• Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of IRC v Duke of Westminster.

• This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs.

• If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form.

• It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax.

• That does not introduce a new principle. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach would be a denial of the true judicial process. 

• Looking at a document in the context of related documents is not new or controversial.

Millet  

• The time had come for the HL to give clear guidance to the Commissioners and the courts below on the issues raised time and time again.

  • Reaching a conclusion which effectively denies all prospect of success in future to artificial schemes for the manufacture of tax deductions.

  • Such schemes are mere paper transactions and fiscal nullities.

  • The difficulty is to understand the reasoning in Ramsay.

• In emphasizing that each transaction must be construed and given effect in the context o the whole series, and not as if it stood alone, Lord Wilberforce was saying nothing new.

  • But he was now going further - he was accepting the Crown’s contention that the individual transactions should be ignored - the only legal consequences were those which flowed from the series of transactions, taken as an indivisible whole.

• Lord Wilberforce implicitly accepted this reasoning: upon a purposive construction of the taxing statutes they are not intended to grant allowances for losses incurred in the course of mere paper transactions.

  • No claims to a deduction from tax is to be entertained unless it is the consequence of a transaction capable of having some appreciable effect beyond the generation of the claim itself.

Wheatcroft

• It is fairly easy to make the case against tax avoidance.

• The trouble comes in suggesting any remedy which is not completely contrary to Adam Smith’s second canon of taxation: ‘the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be plain and clear to the contributory and to every other person.’

• Since Duke of Westminster it has been clear that a strict construction is applied both to the wording of the statute and to the form in which the taxpayer clothes his action.

  • In neither do considerations of ‘equity’ or ‘substance’ arise.

  • If the tax avoider is clever enough to get himself outside the wording of the Act then he escapes, and his motive, the legislature’s motive and the practical effects of the transaction are  irrelevant. 

  • Some citizens who might otherwise enter for this obstacles race are deterred by fear or uncertainty as to what the law is now, or what it will be or how it will be enforced against them. 

• The ideal is for the law to be stated clearly in a manner which does not permit avoidance or require inquiry as to ‘intention’ and over the greater part of the taxation field this can be done without great difficulty.

  • But in the borderline cases, where a transaction undertaken for genuine commercial reasons ought not to attract tax whilst the same transaction undertaken solely for reasons of tax avoidance should fail in its effect, the best way is to grasp the nettle firmly and say that ‘substance’ and ‘intention’ are to be the deciding factors.

Flesch

• Tax avoidance can take one of two forms.

  1. X whose primary concern is to achieve an objective and who selects from a number of alternative ways of achieving it the one which will attract the smallest fiscal penalty.

     • E.g. the man who decides to operate his business as a sole trader or in partnership rather than through the medium of a company, or a person who elects to marry at the end of March rather than the end of April for tax reasons.

  2. Y who enters into a transaction solely or primarily with a view to minimizing his tax burden.

     • E.g. a discretionary settlement in favour of his children in order to mitigate estate duty and surtax.

• One hears it suggested that this second form of avoidance is in some way more reprehensible than the first.

  • Mr X whose primary concern is the attainment of a specified commercial objective, would be foolish if he did not opt for the method of achieving this objective which resulted in the payment of the least tax.

  • No such defence is available to Y whose sole motive for entering into the transaction is to avoid tax.

• But the purported distinction on moral grounds between these two categories of tax avoidance is more apparent than real.

  • X and Y are both attempting to achieve a common objective- to retain and enjoy as much as they can of their capital and income and to preserve their estates for their families after their deaths.

  • They are therefore equally guilty or blameless, depending on one’s attitude to tax avoidance.

Procedural reform

• Traditional methods are still the best. Specific provisions should be enacted to counter specific avoidance devices, as and when this becomes neccessary. The suggested changes would be in the procedure whereby this legislation is enacted.

• Many of the problems in this area are attributable to the manner in which fiscal legislation is born. As long ago as 1955 the Royal Commission recommended that an expert body should be set up, containing parliamentary draftsmen, Revenue officials and lawyers and accountants specializing in tax work, with a view to examining anti-avoidance legislation.

• This recommendation should be implemented and such a body should also be invited to assist in the drafting of future fiscal measures. And proper notice should be given of proposed major tax changes. This would afford the various interested organizations an opportunity to discuss the proposals and enable them to make suggestions.

McFarlane and Simpson

• The courts have asserted their right, rather than any right of the parties, to identify the stages within a composite transaction which are relevant for the particular tax purposes - Lord Wilberforce in Ramsay.

• However, it would, of course, be unacceptable if taxpayers had no way of predicting in advance the stages which should properly be taken together for tax purposes: no one would argue that the fiscal regime should operate by ambush.  

• One might think, if it is legal analysis of factual events that counts for tax purposes, that contractually lined steps, or steps which must follow one another pursuant to some equitable obligation, might reasonably be regarded together, but the decision in Ramsay expressly went further than that.

• Rather than using the existence of a legal obligation as the relevant indicator, the House relied upon the factual interdependence of the separate stages in the scheme.

  • In each case the manufactured loss was dependent upon the corresponding gain: ‘the one could not occur without the other.’

  • The transactions were self-cancelling in this very precise sense, and their interdependence justified applying the legislation to the scheme as a whole.

• Applying the legislation in this way was not to trespass upon the factual substance of the matter; it merely recognised the parties’ own intentions with respect to what they were doing. 

RELATED CASES

• IRC v Duke of Westminster

• Barcays Mercantile Business Finance v Mawson

• MacNiven v Westmoreland Investments Ltd

• Furniss v Dawson

• IRC v Burmah Oil