Gabelle Tax Analysis: Court of Appeal invokes Ramsay Principle
An individual incurred a capital gains tax liability (“CGT”) in relation to a gain of £10 million. Days later, he entered into a tax scheme - marketed by PWC - to create an allowable capital loss. The Court of Appeal – in Schofield v Revenue  All ER (D) 126 (Jul) published on 11 July 2012 - held, following the so-called Ramsay principle, that there was no allowable loss.
The scheme involved the individual in buying two put options and two call options shortly before leaving the country and becoming non-resident for five years (and hence defeating the temporary non-residence anti-avoidance rules).
HMRC argued that following Ramsay, the statute should be purposively construed to take account of the transaction “as a whole” rather than as a series of separate steps. As such, no allowable loss was made.
The individual argued that the case of MacNiven v Westmoreland Developments Ltd narrows the application of the Ramsay principle:
“The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say "You had better ask a lawyer". For example, stamp duty is payable upon a "conveyance or transfer on sale": see Schedule 13, paragraph 1(1) to the Finance Act 1999. Although slightly expanded by a definition in paragraph 1(2), the statutory language defines the document subject to duty essentially by reference concepts such as "conveyance" and "sale". If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept. If the "disregarded" steps in Furniss v Dawson had involved the use of documents of a legal description which attracted stamp duty, duty would have been payable”.
Based on this analysis, the individual argued that there was no scope for a purposive ‘Ramsay’ interpretation of the relevant statute.
HMRC argued that:
"Where the taxpayer enters into a preconceived series of interdependent transactions deliberately contrived to be self-cancelling, that is to say, to return him substantially to the position he enjoyed at the outset, and incapable of having any appreciable effect on his financial position, no single transaction in the series can be isolated on its own as a disposal for the purposes of the statute."
The Court of Appeal agreed with HMRC. It was held that when applying the legislation to the transaction as a whole, the individual was not entitled to an allowable loss on his chargeable gain.
Why does this matter?
This decision extends the Ramsay principle. It was thought by some that Ramsay allowed the courts only to purposively construe legislation where there was some ambiguity and the legislation referred to commercial concepts. The Court of Appeal has held that this is not the case - the Ramsay principle can apply to even the most unambiguous legislation. The Court of Appeal did not comment on where the limits to a purposive construction lie. Without any limits, it seems that the courts have effectively enacted a ‘smell test’ through the back door. Likewise, there is nothing in the judgement to limit its application to ‘aggressive’ tax schemes so whether this principle will apply to less contentious tax planning remains to be seen.
It will be interesting to see how such a principle sits with the GAAR and it, of course, begs the question as to whether a GAAR is needed if the powers under Ramsay principle are as wide as the Court of Appeal suggests.