|[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]|
England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Chappell v HM Revenue and Customs  EWCA Civ 809 (04 August 2016)
Cite as:  WLR 2701,  1 All ER 550,  EWCA Civ 809,  STI 2293,  BTC 36,  1 WLR 2701,  STC 1980
[New search] [Context] [View without highlighting] [Printable RTF version] [Buy ICLR report:  1 WLR 2701] [Help]
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Simon and Judge Greg Sinfield
 UKUT 344 (TCC)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PATTEN
LORD JUSTICE SALES
| ANDREW CHAPPELL
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
David Goy QC and Aparna Nathan (instructed by The General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date : 12 July 2016
Crown Copyright ©
Lord Justice Patten :
The statutory provisions
"736A. Manufactured dividends and interest.
Schedule 23A to this Act shall have effect in relation to certain cases where under a contract or other arrangements for the transfer of shares or other securities a person is required to pay to the other party an amount representative of a dividend or payment of interest on the securities".
"This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the "overseas dividend manufacturer") is required to pay the other ("the recipient") an amount representative of an overseas dividend on the overseas securities; and in this Schedule the "manufactured overseas dividend" means any payment which the overseas dividend manufacturer makes in discharge of that requirement."
""dividend manufacturer" has the meaning given by paragraph 2(1) below;
"dividend manufacturing regulations" means regulations made by the Treasury under this Schedule;
"interest manufacturer" has the meaning given by paragraph 3(1) below;
"manufactured dividend", "manufactured interest" and "manufactured overseas dividend" shall be construed respectively in accordance with paragraphs 2, 3 and 4 below, as shall references to the gross amount thereof;
"overseas dividend" means any interest, dividend or other annual payment payable in respect of any overseas securities;
"overseas dividend manufacturer" has the meaning given by paragraph 4(1) below;
"overseas securities" means--
(a) shares, stock or other securities issued by a government or public or local authority of a territory outside the United Kingdom or by any other body of persons not resident in the United Kingdom; and
"overseas tax" means tax under the law of a territory outside the United Kingdom;
"overseas tax credit" means any such credit under the law of a territory outside the United Kingdom in respect of overseas tax as corresponds to a tax credit;
"prescribed" means prescribed in dividend manufacturing regulations;
"securities" includes any loan stock or similar security;
"transfer" includes any sale or other disposal;
"United Kingdom equities" means shares of any company resident in the United Kingdom;
"United Kingdom securities" means securities of the government of the United Kingdom, of any public or local authority in the United Kingdom or of any company or other body resident in the United Kingdom or of any company or other body resident in the United Kingdom, but does not include … United Kingdom equities."
"may make provision for –
(a) such … manufactured overseas dividends as may be prescribed,
(aa) such persons who receive, or become entitled to receive, … manufactured overseas dividends as may be prescribed, or
(b) such … overseas dividend manufacturers as may be prescribed,
to be treated in prescribed circumstances otherwise than as mentioned in paragraph … 4 above for the purposes of such provisions of the Tax Acts as may be prescribed.
"(1) For the purposes of the provisions of the Tax Acts relating to the charge to tax under Schedule D, paragraph 4(2) and (3) of Schedule 23A shall not apply to a manufactured overseas dividend paid in the circumstances prescribed in paragraph (2).
(2) The circumstances prescribed are where the manufactured overseas dividend is representative of an overseas dividend on an overseas security that represents a loan relationship.
(3) Where the payer of a manufactured overseas dividend to which paragraph (2) applies is neither a company nor carrying on a trade in circumstances where the manufactured overseas dividend is taken into account in computing the profits of that trade, the manufactured overseas dividend shall be treated, for the purposes of the provisions of the Tax Acts relating to the charge to tax under schedule D and so far as the payer is concerned, as if the amount paid was an annual payment, within section 349(1) of the Taxes Act , but so that no amount is required to be deducted on account of income tax from the amount of the payment, or accounted for under section 350 of that Act.
(4) Where the recipient of a manufactured overseas dividend to which paragraph (2) applies is neither a company nor carrying on a trade in circumstances where the manufactured overseas dividend is taken into account in computing the profits of that trade, the manufactured overseas dividend shall be treated, for the purposes of the provisions of the Tax Acts relating to the charge to tax under schedule D and so far as the recipient is concerned, as an overseas dividend of an amount equal to the amount of the manufactured overseas dividend received by him, but not so as to entitle the recipient to claim relief under Part XVIII of the Taxes Act in respect of any tax attributable to the manufactured overseas dividend received.
(5) For the purposes of paragraph (2), an overseas security shall be taken to represent a loan relationship if a company holding that security would have a loan relationship within the meaning of section 81 of the Finance Act 1996.
"8. On 29 July 2005, Mr Chappell entered into a ' Global Master Securities Lending Agreement ' (the 'GMSLA') with a company called Barsbury Limited ('Barsbury'). Under the terms of the GMSLA , securities could be lent by Barsbury to Mr Chappell, secured against 'collateral'. The terms of each loan of securities were to be agreed before the loan was made. The GMSLA provided that, where interest or dividends were paid in respect of securities which had been loaned to him, Mr Chappell was required to pay a corresponding amount to Barsbury.
9. On 29 July 2005, Mr Chappell and Barsbury both signed a letter (the 'Stock Loan Letter') from Mr Chappell to Barsbury setting out the terms of a loan of securities under the GMSLA . Under the terms of the Stock Loan Letter, Mr Chappell borrowed from Barsbury loan notes (the "Loan Notes") issued by a company called Santi Crescent Limited ('SCL'). The nominal value of the borrowed Loan Notes was £6,377,280. The Loan Notes were to be transferred to Mr Chappell on 29 July 2005 and were to be returned to Barsbury on 9 August 2005 (or earlier if Mr Chappell so chose).
10. The Loan Notes were governed by a 'Loan Note Instrument' issued by SCL on 29 July 2005 (the 'Loan Note Instrument'). The Loan Note Instrument provided that SCL would pay interest in respect of the Loan Notes at a rate of about 4.8% per annum. Interest was to be calculated on a daily basis, and was to be paid by SCL as follows:
(1) on 2 August 2005, interest was payable in arrears in respect of the period from 29 July 2005 to 2 August 2005;
(2) on 4 August 2005, interest was payable in arrears and in advance in respect of the period from 3 August 2005 to 27 July 2006;
(3) on 28 July 2006, interest was due in respect of that day only; and
(4) on 27 July 2007 (which was the day before the Loan Notes' 'Final Redemption Date'), interest was payable in arrears in respect of the period from 29 July 2006 to 27 July 2007.
11. On 1 August 2005, Mr Chappell sold the Loan Notes to a company called Berry Lane Limited ('BLL'), by a 'Loan Note Sale Agreement' signed on that day. BLL paid Mr Chappell £6,373,804 for the Loan Notes.
12. On 2 August 2005, interest was due from SCL in respect of the Loan Notes, for the period from 29 July 2005 to 2 August 2005. This amounted to £4,164 (rounded to the nearest £1). As required by the GMSLA , Mr Chappell made an equivalent payment (i.e. of £4,164) to Barsbury. This is one of the two payments in respect of which Mr Chappell seeks a deduction from his income.
13. On 4 August 2005, interest was due from SCL in respect of the Loan Notes, for the period from 3 August 2005 to 27 July 2006. This amounted to £298,959 (rounded to the nearest £1). As required by the GMSLA , Mr Chappell made an equivalent payment (i.e. of £298,959) to Barsbury. This is the second payment in respect of which Mr Chappell seeks a deduction from his income.
14. On 5 August 2005, Mr Chappell purchased SCL Loan Notes with a nominal value of £6,377,280 from a company called Qintar Limited ('QL'), by a 'Loan Note Sale Agreement' signed on that day. Mr Chappell paid QL £6,073,588 for these Loan Notes.
15. On 5 August 2005, Mr Chappell transferred the Loan Notes which he had acquired from QL to Barsbury, in repayment of the loan made under the Stock Loan Letter.
The construction of paragraph 4(1)/regulation 2B
"First, it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end; they are not intended to be arrested halfway (cf Chinn v Collins (Inspector of Taxes)  1 All ER 189, p 1, ante). 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.
Second, 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 (cf Inland Revenue Comrs v Plummer  3 All ER 775,  AC 896,  STC 793, and Chinn v Collins (Inspector of Taxes)). 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. It seems very doubtful whether any real money was involved in Rawling: but facts as to this matter are for the commissioners to find. I will assume that in some sense money did pass as expressed in respect of each transaction in each of the instant cases. 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."
"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 Inland Revenue Comrs v Duke of Westminster  AC 1, 19 Tax Cas 490. This is a cardinal principle but it must not be overstated or over-extended. 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: see Chinn v Collins (Inspector of Taxes) and Inland Revenue Comrs v Plummer.
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 Duke of 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. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd v Nicol (Inspector of Taxes)  STC 372, 50 Tax Cas 229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction or a number of independent transactions."
"The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs  1 All ER 962,  AC 885,  STC 127, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, is not such a loss (or gain) as the legislation is dealing with, is in my opinion well, and indeed essentially, within the judicial function."
"… there must be a pre-ordained series of transactions; or if one likes one single composite transaction… 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 essence of the new approach was to give a statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straightjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found."
"[T]he driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
"64. This approach has proved to be particularly important in relation to tax avoidance schemes as a result of two factors identified in Barclays Mercantile at para 34. First, "tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said, 'in the real world'". Secondly, tax avoidance schemes commonly include "elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge". In other words, as Carnwath LJ said in the Court of Appeal in Barclays Mercantile,  EWCA Civ 1853;  STC 66, para 66, taxing statutes generally "draw their life-blood from real world transactions with real world economic effects". Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that "to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic". Accordingly, as Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd  HKCFA 46; (2003) 6 ITLR 454, para 35, where schemes involve intermediate transactions inserted for the sole purpose of tax avoidance, it is quite likely that a purposive interpretation will result in such steps being disregarded for fiscal purposes. But not always.
65. As was noted in Barclays Mercantile at para 35, there have been a number of cases since Ramsay in which it was decided that elements inserted into a transaction without any business or commercial purpose did not prevent the composite transaction from falling within a charge to tax, or bring it within an exemption from tax, as the case might be. Examples include Inland Revenue Comrs v Burmah Oil Co Ltd 1982 SC (HL) 114, Furniss v Dawson  AC 474, Carreras Group Ltd v Stamp Comr  UKPC 16;  STC 1377, Inland Revenue Comrs v Scottish Provident Institution and Tower M Cashback LLP 1 v Revenue and Customs Comrs  UKSC 19;  2 AC 457. In each case the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in MacNiven v Westmoreland Investments Ltd  UKHL 6;  1 AC 311 and Barclays Mercantile itself.
66. The position was summarised by Ribeiro PJ in Arrowtown Assets, para 35, in a passage cited in Barclays Mercantile:
"The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
67. References to "reality" should not, however, be misunderstood. In the first place, the approach described in Barclays Mercantile and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian at p 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements.
68. Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application."
"13. My Lords, I confess that during the course of this appeal I have followed the same road to Damascus as Peter Gibson LJ. Like him, my initial view, which remained unchanged for some time, was that a payment comprising a circular flow of cash between borrower and lender, made for no commercial purpose other than gaining a tax advantage, would not constitute payment within the meaning of section 338. Eventually, I have found myself compelled to reach the contrary conclusion. My reasons are as follows.
15. I must elaborate a little. In the ordinary case the source from which a debtor obtains the money he uses in paying his debt is immaterial for the purpose of section 338. It matters not whether the debtor used cash in hand, sold assets to raise the money, or borrowed money for the purpose. Does it make a difference when the payment is made with money borrowed for the purpose from the very person to whom the arrears of interest are owed? In principle, I think not. Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor. Once that is accepted, as I think it must be, I do not see it can matter that there was no business purpose other than gaining a tax advantage. A genuine discharge of a genuine debt cannot cease to qualify as a payment for the purpose of section 338 by reason only that it was made solely to secure a tax advantage. There is nothing in the language or context of section 338 to suggest that the purpose for which a payment of interest is made is material.
16. This is not surprising. Payments of interest, other than interest on a bank loan, have the advantageous tax consequence of constituting charges on income. But, hand in hand with this, they have the consequence that tax must be deducted from the payment and paid to the Inland Revenue. In the ordinary course, therefore, an exchange of cheques between creditor and debtor does not give rise to a tax advantage. The tax benefit of being able to treat the payment as a charge on income is offset by the obligation to account to the Inland Revenue for tax on the payment. This being so, there is no basis on which Parliament can be taken to have intended that payment in section 338 should bear some special meaning which would exclude the case where the interest debt is satisfied with money borrowed for the purpose from the creditor."
Lord Hoffmann said:
"67. My Lords, payment of a debt such as interest ordinarily means an act, such as the transfer of money, which discharges the debt. It is accepted that in this case the interest debt was indeed discharged. So why did this not count as payment for the purposes of the Act? One of the difficulties which I have with the argument for the Crown is that I find the alternative concept of payment for which it contends completely elusive. It is easy to understand a commercial sense of a loss which treats as irrelevant the fact that one part of a composite transaction produced a loss which was never intended to be more than momentary and theoretical. But what is the commercial concept of payment of a debt which treats as irrelevant the fact that the debt has been discharged? Mr McCall does not contend that payment must involve a negative cash flow which is not compensated by a cash flow in the opposite direction. He accepts, for example, that many commercial refinancing operations discharge old debts and create new ones without any cash flow either way. Nor is there any apparent policy to be found in section 338 which would require a negative cash flow. Otherwise, why should bank interest be deductible without any payment at all? As I have already said, the only apparent reason for the insistence on payment of yearly interest is that payment gives rise to an obligation to deduct tax. In the present case, WIL complied with that obligation. The Crown's real complaint is that the scheme, as an exempt fund, was able to reclaim the tax. But this cannot be remedied by giving the word "paid" a different meaning in the case of a payment to an exempt lender. The word must mean the same, whatever the status of the lender."
"Approaching the matter initially at a general level, the fact that Chapter 2 was introduced partly for the purpose of forestalling tax avoidance schemes self-evidently makes it difficult to attribute to Parliament an intention that it should apply to schemes which were carefully crafted to fall within its scope, purely for the purpose of tax avoidance. Furthermore, it is difficult to accept that Parliament can have intended to encourage by exemption from taxation the award of shares to employees, where the award of the shares has no purpose whatsoever other than the obtaining of the exemption itself: a matter which is reflected in the fact that the shares are in a company which was brought into existence merely for the purposes of the tax avoidance scheme, undertakes no activity beyond its participation in the scheme, and is liquidated upon the termination of the scheme. The encouragement of such schemes, unlike the encouragement of employee share ownership generally, or share incentive schemes in particular, would have no rational purpose, and would indeed be positively contrary to rationality, bearing in mind the general aims of income tax statutes."
"16. This is not surprising. Payments of interest, other than interest on a bank loan, have the advantageous tax consequence of constituting charges on income. But, hand in hand with this, they have the consequence that tax must be deducted from the payment and paid to the Inland Revenue. In the ordinary course, therefore, an exchange of cheques between creditor and debtor does not give rise to a tax advantage. The tax benefit of being able to treat the payment as a charge on income is offset by the obligation to account to the Inland Revenue for tax on the payment. This being so, there is no basis on which Parliament can be taken to have intended that payment in section 338 should bear some special meaning which would exclude the case where the interest debt is satisfied with money borrowed for the purpose from the creditor."
"The Special Commissioners found as a fact that the loans which were made by the Scheme to WIL were real loans. It is clear that, but for the loans, WIL could not have afforded to pay the interest which it owed to the Scheme. Nevertheless the fact is that the loans were made and the interest was paid. WIL's claim is therefore based upon transactions which have been found by the Special Commissioners to be genuine. There was no step that falls to be ignored because it was artificial. It cannot be said that there was no business or commercial reason for the interest to be paid. The payment reduced the amount of WIL's accrued liability to pay interest. It was received as interest in the hands of the payee. WIL's obligation to pay interest to that extent was discharged. Nothing was inserted into the transaction to make it appear to be different from what it was. It was a payment of yearly interest which was paid out of the company's profits for the relevant accounting period."
"95. The Special Commissioners found  STC 1103, 1116G that:
"all the loans made to the taxpayer company from 1980 onwards were real loans and the taxpayer company used them for real purposes, viz the discharge of real earlier outstanding loans and the payment of real accrued interest…. "
Therefore by undertaking to pay the interest Westmoreland had incurred the economic burden which Parliament intended should give rise to the allowances given by section 338, and I consider that Westmoreland was entitled to take steps to obtain the advantage which Parliament gave to it in respect of that burden. As Lord Templeman said in Ensign Tankers (Leasing) Ltd v Stokes at page 676D: "the taxpayer is entitled to any reduction in tax which Parliament has attached to each transaction."
This was not a case, as in Inland Revenue Commissioners v McGuckian, where a tax payer was on the point of incurring a tax liability and took an artificial step to avoid the liability: rather this was a case where Westmoreland had incurred a genuine loss for tax purposes and then took a step to enable it to claim the tax allowance for that loss. Accordingly I am in respectful agreement with Peter Gibson LJ ( STC 1131, 1143B) that:
"In the present case the accrued interest liability was real and always possessed the potentiality of being converted into a charge on income by payment. What occurred was the crystallisation of the tax loss through payment of the accrued interest.""
"Where a person is required to be assessed and charged with income tax in respect of any property, profits or gains out of which he makes any payment in respect of –
(a) any annuity or other annual payment (not being interest); or
(b) any royalty or other sum in respect of the user of a patent;
he shall, in respect of so much of the property, profits or gains as is equal to the payment and may be deducted in computing his total income, be charged at the basic rate."
"73. The effect of those provisions is that, to the extent that annual payments are made out of profits or gains chargeable to income tax, the payer is entitled to deduct tax from a payment and retain the tax deducted. We consider that the fact that similar consequences follow under section 349 and section 350 in relation to payments made out of profits or gains chargeable to tax as follow when section 348 applies, indicates that section 3 should also apply to annual payments within section 349 made out of profits or gains chargeable to income tax. Although the FTT may be correct in stating, at , that the usual sort of payment within section 349 is one made other than out of profits or gains chargeable to income tax, that does not mean that, where a payment within section 349 is made out of such profits or gains, section 3 should not apply.
74. In our view, the fact that regulation 2B(3) removes the requirement to deduct and account for tax under sections 349 and 350 does not lead to the conclusion that section 3 does not apply to payments that fall within section 349 by virtue of regulation 2B of the Regulations. We consider that the words of section 3 are clear. On its terms, section 3 applies where a person makes an annual payment out of any property, profits or gains in respect of which he is required to be assessed and charged with income tax. We cannot discern any purpose in section 3 which would lead us to interpret it so as to limit its operation to annual payments subject to deduction of tax at source. Nor can we find such a purpose in sections 348, 349 and 350."
Lord Justice Sales :
The Chancellor of the High Court :