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10. Tax Avoidance The Ramsay Principle And The Uk Gaar Notes

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law


1. The Traditional Approach to Interpreting Taxing Statutes A. Clear Words Needed to Impose Tax B. Ambiguity must Favour the Taxpayer C. Ascertaining the Intention of Parliament D. A Summary of the Traditional Approach

2. The Classical View and the New Approach A. Respect for Legal Facts Created by Parties - The Classical View B. Shams and Labels C. The New Approach in Ramsay and Beyond - Court Looks at End Results D. Language: Tax "Avoidance" and Tax "Mitigation" E. Limiting the Ramsay Principle F. Reasserting the Doctrine

3. The "Westmoreland Detour"

4. Ramsay Killed Off?

5. The Law After BMBF and Scottish Provident

6. Academic Theories on Tax Avoidance A. Judicially-Developed Principles

7. The New UK General Anti-Abuse Rule (GAAR) A. Scope of the GAAR: "Arrangements" B. Scope of the GAAR: "Abusive" C. Remedies under the GAAR D. The GAAR Advisory Panel and Proceedings before the Courts or Tribunals E. The GAAR and Double Tax Agreements

8. BCL Past Exam Questions & Essay Plans - Ramsay and the UK GAAR (Personal Tax BCL Course)

9. BCL Past Exam Questions & Essay Plans - The GAAR and Corporate &
Business Tax Avoidance __________________________________________________________________________________

The questions facing the courts in tax avoidance cases arise because the taxpayers have arranged their affairs so as to come within the words of the statute, at least in their view Revenue authorities argue that the facts do not come within the words of the statute, whether because of a different view of the law or a different view of the facts The current view on statutory construction is that the statute must be interpreted in their context and with an eye to the purpose of the provision 1

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

This is of course no different from any other branch of statute-based law; although the case law relating to the tax statutes has been more turbulent than this statement suggests.

Two major cases in the 21st century have established the basis for the new approach, although the first caused chaos of its own and had to be corrected in the second.

The first is MacNiven v Westmoreland and the second Barclays Mercantile v Mawson.

1. The Traditional Approach to Interpreting Tax Statutes A. Clear Words Needed to Impose Tax Partington v Attorney-General Lord Cairns

As I understand the principle of all fiscal legislation, it is this: If the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any dispute what is called equitable construction, certainly such a construction is not admissible in a taxing statute, where you simply adhere to the words of it…

Cape Brandy Syndicate v IRC Rowlatt J

In a taxing Act, clear words are necessary in order to tax a subject... There is no room for any intendment There is no equity about a tax There is no presumption as to a tax; nothing is to be read in and nothing to be implied One can only look fairly at the language used

B. Ambiguity must Favour the Taxpayer Wilcox v Smith

The testator, by his last will, disposed of his estate to his children (A) remainder for life to B The Inland Revenue Commissioners argued that succession duty was payable where "any person has become beneficially entitled to any 2

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

property, or income thereof, upon the death of the person after the commencement of the Act…" under the relevant taxing statute Kindersley VC

It is unquestionably a principle established in reference to taxing statutes that they must be construed strictly, and that, if the Act is ambiguous, the subject is entitled to the benefit of the doubt; if, after careful examination, a judicial mind shall entertain reasonable doubt as to what the Legislature intended, then the subject shall have the benefit of the doubt

We come to the words "on the death of any person dying after the time"…
Suppose a devise to A for life, remainder to B; on the death of the testator, B certainly becomes entitled to the estate expectant on the death of a person (A), an event which has not yet happened That is one sense in which the words may be used; but they mean becoming entitled in possession by reason of a death which has actually happened (the testator's): so there is certainly ambiguity as to which of the modes "becoming entitled" is intended.

[Even though the taxpayers' contention might lead to absurd results] still, if this question before me rested entirely on… the effect of the words "become entitled", I should be of the opinion that there is considerable doubt whether this comes within it But it is unnecessary to decide it on this point, for the section is a string of alternatives viz. of phrases and words connected by the word "or"…
"…or the income thereof" the Crown is entitled to read as "by reason whereof any person shall become entitled to the income thereof", and in this way, the case is within the section It comes then to this - Do I now entertain any reasonable judicial doubt as to the intention of the Legislature on this question? I am bound to say that I do not.

C. Ascertaining the Intention of Parliament Leedale v Lewis Lord Wilberforce

I would only refer to one other argument, that based on the alleged "hardship" of accepting the Crown's contentions: but I do not think that this is a relevant consideration at all If there were two equally possible constructions of this subsection, it might be correct to choose that which is the more favourable to the taxpayer, on the basis that subjects can only be taxed by clear words…
But this principle does not apply where there are decisive legal reasons for preferring one construction over another 3

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

Once this step has been taken then considerations of "hardship" do not enter discussion The "hardship" (if any) consists in imposing a tax on discretionary beneficiaries at a time when they may have received no benefit from the trust out of which the tax is paid But if that is the effect of the section, it represents Parliamentary intention and we cannot characterise at as "hardship" Settlors, after 1965, make their settlements with the knowledge of the legislation and its consequences, and they can avoid the use of discretionary trusts - of if they use them - make provision to meet the hard cases

Pepper (Inspector of Taxes) v Hart

Under a concessionary fees' scheme operated by a school for members of staff (the taxpayers), the taxpayers' son were educated at the school for one-fifth of the normal school fees; but during the relevant years the school had sufficient surplus places to accept the taxpayers' sons without refusing other boys The taxpayers did not dispute that they had received a benefit the cash equivalent of which was chargeable to income tax under Section 61 Finance Act 1976, but contended that the cost of the benefit was the marginal cost to the employer of providing the benefit, not a proportion of the average cost of normally providing the students with food and housing: on this basis, the reduced fee covered the cost such that there was no net taxable benefit The House of Lords held that since some statutory provisions would inevitably be found to be ambiguous, where the very question was considered by Parliament in passing the Act, the courts should not blind themselves by adhering strictly to a rule excluding reference to parliamentary material as a guide to the construction of the statute On this basis, the parliamentary history showed that the effect of Section 61 was to assess the in-house benefits by reference to the marginal cost to the employer and not the average cost, and so the words of Section 61 should be construed accordingly

Lord Browne-Wilkinson

As a matter of law, there are sound reasons for making a limited modification to the existing rule: reference to parliamentary material should be permitted as an aid to the construction of legislation which is ambiguous or obscure or where the literal meaning leads to absurdity And even so, references in court to parliamentary material should only be permitted where such material clearly discloses the mischief aimed at or the legislative intention lying behind the ambiguous words

1 - Reasons for abandoning the Exclusionary Rule 4

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

1. It is the court's duty to construe statutory words and in doing so give effect to the intention of Parliament. But it is inescapable that some statutory provisions, when applied, will be ambiguous. Why? Members of the legislature, when enacting, will have been told what result the words are meant to achieve. Within a given set of words, words are accepted as conveying that meaning. Parliament never intends ambiguity. Contrast that with the courts who are ignorant of the underlying parliamentary purpose; the given set of words may be capable of bearing two meanings [instead of the one so obvious to the draftsmen].

2. The courts can already look at white papers and official reports for the purpose of finding the "mischief" sought to be corrected by an Act. A ministerial statement made in Parliament is equally authoritative: why should the courts be cut off from this source of information? Clear and unambiguous statements made by ministers in Parliament are as much the background to legislation as white papers and parliamentary reports.

3. A number of distinguished judges have already admitted to looking at Hansard, in breach of the exclusionary rule, in order to ascertain the intention of Parliament. When this happens, the parties have no opportunity to contest the judge on the matter. In Hadmore, Lord Denning in the Court of Appeal relied on his own researches into Hansard: in the House of Lords, counsel protested that had he known of Lord Denning's acts, he would have prepared his submissions differently. It cannot be right for such information to be available, as a sidewind, for the court, but not for the parties. 2 - Refuting Reasons against abandoning the Exclusionary Rule

1. It is said that parliamentary materials are not readily available or understandable by citizens and their lawyers, who should be entitled to rely on the words of Parliament alone to discover his position: o

But it is possible to obtain parliamentary materials and it is possible to trace the history; the problem is one of expense and effort in doing so and not in the availability of the material. While it is a fallacy to start from the position that all legislation is available in readily understandable form, the practitioner manages to deal with the problem (albeit at considerable expense)

2. It is said that lawyers and judges are not familiar with parliamentary procedures and will therefore have difficulty in giving proper weight to the parliamentary materials: o

But if, as I think, significance should only be attached to the clear statements made by a minister or promote of the Bill, the difficulty of knowing what weight to attach to such statements is not overwhelming. What is persuasive in this case is the 5

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

consistent series of answers given by the minister, which all point the same way

3. It is said that if the rule is relaxed, legal advisers faced with an ambiguous statutory provision may feel that they have to research the materials to see whether they yield the crock of gold, i.e. a clear indication of Parliament's intentions; in many cases this crock will not be discovered and many resources will be wasted: o

But again it is easy to overstate the cost of such research: if a reading of Hansard shows that here is nothing of significance said by the minister in relation to the clause in question, further research will become pointless

4. The constitutional objection is that, in an infringement of Article 9 Bill of Rights 1688, the use of such material would be a "questioning" in any court (or any place outside of Parliament) the "freedom of speech and debates in Parliament"; the process would involve an investigation of what the minister meant: o

But even given a generous approach to this construction, it is impossible to attach the breadth of the meaning of the word "question"… if the contention is correct then any comment in the media or elsewhere on what is said in Parliament would count as a "questioning"… Relaxation to the rule will not involve criticising, in the courts, what is said in Parliament, and would not involve an infringement of Article 9 Bill of Rights 1688.

3 - Resolving the Ambiguity in the Present Case

The taxpayers contended that Section 63(1) defines the cash equivalent of the benefit as being an amount equal to the cost of the benefit; it is said, one is looking for the actual cost of providing that benefit for the employee. Since the basic expense of providing and running the school would have been incurred in any event, the expenditure is not caused by the provision of the benefit - thus what one is looking for is the additional or marginal expense

The Revenue contended that Section 63(2) defines the cost of the benefit as being the expense incurred in its provision; the benefit in this case consists of the enjoyment of the facilities of the school. The cost of providing these facilities, it is said, must be the total cost of providing the school, such that the cost of the benefit is a proportion of the total cost. These arguments are nicely balanced: the statutory words can bear either meaning


Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

[But looking at Hansard] the Financial Secretary gave two answers: (1) that in all cases the benefit would be taxed on the same basis as the existing law (the existing practice of the Revenue under the pre-1976 law was not to tax benefits on the average cost basis); (2) that in all cases the amount of the cost of the schoolteachers would be "very small indeed"…
Thus the parliamentary history shows that Parliament passed the legislation on the basis that the effect of the 1976 Act was to assess inhouse benefits on the marginal cost to the employer and not on the average cost: since Section 63 can be given that meaning, it must bear that meaning.

D. A Summary of the Traditional Approach Mangin v Inland Revenue Commissioners Lord Donovan p.746 B-F

1. First, the words are to be given their ordinary meaning - they are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices. Moral precepts are not applicable to the interpretation of Revenue statutes.

2. Second, as Rowlatt J said in Cape Brandy Syndicate, one has to look merely at what is clearly said. There is no room for intendment. There is no equity abut a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied.

3. Third, the object of the statutory construction being to ascertain the will of Parliament, it may be presumed that neither justice nor absurdity was intended. If literal interp. would produce such a result, and the language admits of an interpretation that would avoid it, then such an interpretation may be adopted.

4. Fourth, the history of the enactment and the reasons which led to its being passed may be used as an aid to construction (Pepper v Hart)

2. The Classical View and the New Approach A. Respect for Legal Facts Created by Parties (Westminster) - The Classical View

That the courts must respect the legal facts created by the parties was laid down by Lord Tomlin in Inland Revenue Commissioners v Duke of Westminster

Inland Revenue Commissioners v Duke of Westminster


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