Schofield decision sinks PwC scheme
In its recent decision in Schofield v HMRC  EWCA Civ 927 the Court of Appeal quashed a tax avoidance strategy devised by PwC to help a client reduce the amount of tax due on a £10m capital gain.
The scheme involved creating an allowable capital loss for the taxpayer, Howard Schofield, by setting up a sequence of put and call options before he emigrated to become non-resident for five years.
With tax avoidance hitting the top of the news agenda, the decision has raised considerable interest because of the potential amounts HMRC could recoup from the wider application of the Ramsay principle.
HMRC won arguments in the first tier and upper tribunals that the decision made by Lord Wilberforce in Ramsay (WT) Ltd v Inland Revenue Commissioners  applied to Schofield’s arrangement. The Ramsay principle is that a tax loss created at one stage of an “indivisible process” that is later cancelled out does not constitute a loss for tax purposes: the transaction must be taken as a whole.
Endorsing the court’s decision, Lady Justice Hallett called the appeal “a thinly disguised attempt to undermine the Ramsay principle”. Once it was accepted that the principle remains valid and the facts established at the first tier tribunal were accepted, it was bound to fail.
PwC commented: “We aim to provide balanced, informed advice which takes into account not only current tax legislation but also current practice and case law. The case reported today relates to tax planning undertaken some years ago and planning of this nature would no longer be recommended to our clients.”
In her tax podcast this week (23 July edition), Anne Fairpo said the principle remains that capital gains tax applies to things, not arithmetic losses. “Broadly, any loopholes that exist in Ramsay are likely to be slammed shut,” she said.
A Gabelle tax analysis article this week expanded on how the Schofield decision extends the Ramsay principle.