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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Flanagan & Ors v Revenue & Customs [2014] UKFTT 175 (TC) (10 February 2014) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03314.html Cite as: 82 TC 392, [2014] SFTD 881, [2014] UKFTT 175 (TC), [2014] STI 1772 |
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[2014] UKFTT 175 (TC)
TC03314
Appeal numbers: TC/2012/00573, TC/2012/00980 & TC/2012/01070
INCOME TAX — loss relief — admitted avoidance scheme — whether trade existed — no — if existed, when begun — whether manufactured payment representative of overseas dividend — no — whether payment an incidental cost of obtaining finance — no — scheme unsuccessful — whether if scheme succeeded it would fail on Ramsay principles — yes — appeals dismissed
TRIBUNAL: JUDGE COLIN BISHOPP
Sitting in public in London on 11, 12, 13, 14, 19 and 20 March 2013
Mr David Ewart QC and Ms Zizhen Yang, counsel, instructed by NT Advisors Limited, for the appellants
Ms Aparna Nathan, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
The three appellants all used a marketed tax avoidance scheme, known as “Working Wheels”, promoted by NT Advisors Limited. The avoidance scheme was disclosed to HMRC’s Anti-Avoidance Group, under the Disclosure of Tax Avoidance Schemes (“DOTAS”) legislation in Part 7 of the Finance Act 2004, on 19 March 2007.
HMRC acknowledged the disclosure on 30 April 2007 and allocated a tax avoidance scheme disclosure reference number to the scheme.
The first appellant, Eoghan Flanagan
, submitted his
self-assessment tax return for the year ended 5 April 2007 on 15 January 2008. In
that return, Mr
Flanagan
declared the following:
(1) that he had used the scheme, quoting the DOTAS number and giving additional information about it in the “white space”;
(2) that during the year he had engaged in self-employment as a used car trader; and
(3) that his turnover from the trade in used cars was nil, the cost of sales was £100, and he had incurred other finance costs and charges of £184 and £5,000,000 respectively, resulting in a total loss of £5,000,284.
The second appellant, Christopher Moyles, declared in his self-assessment tax return for the year ended 5 April 2008:
(1) that he had used the scheme, quoting the DOTAS number and giving additional information about it in the “white space”;
(2) that during the year he had engaged in self-employment as a used car trader; and
(3) that his turnover from the trade in used cars was £3,731, that he had paid an interest charge of £63, the cost of goods sold was £3,827 and he had incurred other finance charges of £1,000,000, resulting in total loss of £1,000,159.
The third appellant, Allan Stennett, declared in his self-assessment tax return for the year ended 5 April 2008:
(1) that he had used the scheme, quoting the DOTAS number and giving additional information about it in the “white space”;
(2) that during the year he had engaged in self-employment as a used car trader; and
(3) his turnover from the trade in used cars was £9,513, that he had paid bank interest of £141, total expenses of £9,564 and other finance charges of £14,500,000, resulting in total loss of £14,500,192.
4. In summary, the appellants’ position in respect of the first issue is based on the straightforward proposition that, as a matter of fact, they were buying and selling, and therefore trading in, used cars. The respondents’ position is that there was no such trade in the relevant year, or any year; alternatively that if there was such a trade in any appellant’s case it did not commence until a later year. As to the second, the appellants say that the expense was incurred, by the payment of a manufactured overseas dividend to the provider of a loan facility, as a necessary pre-condition for drawing down an advance under that facility, and that the amount advanced was used in the trade. HMRC’s response is that the argument is flawed; the payment was not representative of the overseas dividend and consequently the provisions on which the appellants rely (to which I shall come later) are not engaged. In short, they say that the scheme does not work. As a further alternative, HMRC contend that the scheme was an abuse in the sense developed in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (“Ramsay”).
6.
The appellants were represented by Mr David Ewart QC, leading Ms Zizhen
Yang, and the respondents by Ms Aparna Nathan. I heard the oral evidence (in
this order, though I shall describe their evidence in a more convenient
sequence) of Mr Stennett; Mr Flanagan
; Mr Derek Smith, a chartered accountant
and chartered tax adviser who acted for Mr Moyles; Mrs Penelope Warneken, an
employee of Masters Nominees Limited (“MNL”), which performed various
administrative functions described below; Mr Matthew Jenner, one of the
directors of NT Advisors Limited (“NTA”) and a promoter and user of the scheme;
Mr Simon Barre, formerly a director of a car dealership, Langrop Anstey Limited,
who undertook the buying and selling of some of the cars; Mr Richard Styrin, a
director of Styrin Motors Limited, who performed the same function as Mr Barre;
Mr Anthony Mehigan, also a director of NTA and a user of the scheme; Mr Simon
Ballands, a chartered accountant based in Jersey who provided trustee services;
and Mr Stuart Gower, an employee of SG Hambros Bank (Channel Islands) Limited (“SGH”),
registered in Jersey, which provided finance for the scheme. All of them had
made one or more witness statements. Mr Moyles too had made a brief witness
statement, which I have read, but he did not give oral evidence. I was provided
in addition with the statement of Dr Colin Masters, a solicitor and director of
MNL, who also did not give oral evidence, and a considerable volume of
documentation.
7.
Although the parties differ on the consequences of the arrangements into
which each of the appellants entered, they do not disagree on the structure of
the scheme. I adopt Mr Flanagan
’s implementation of it for illustration;
details of the differences, which are of no significance for the outcome of the
appeals, between his implementation and that of the other appellants follow.
8.
The events relevant for present purposes began on 12 March 2007, when Mr
Mehigan sent to Mr Flanagan
an email, attached to which were several documents which
he was required to sign and return. These were:
(a) A
letter of engagement with NTA and TSB Holdings Ltd (“TSB”) headed “Income Tax
Planning”. TSB, a company registered in the British Virgin Islands (“BVI”) though
Singapore-based is or was apparently independent of NTA and it seems it was
this company, with Mr Jenner and Mr Mehigan, which had devised the scheme. Among
other things, the letter set out the fees payable by Mr Flanagan
to NTA for the
implementation of the scheme, which comprised two elements, a non-contingent
fee and a contingent fee. The non-contingent fee, payable immediately, was 5% (though
certain other costs of no present importance could be deducted from it) of the “Sheltered
Amount”, which was equivalent to a “Loan Finance Fee” of, in Mr
Flanagan
’s case,
£5 million. The contingent fee was fixed at 2% of the sheltered amount and was
payable, in effect, when HMRC had allowed the relief Mr
Flanagan
was seeking or
their challenge to the claim had failed. In other words, NTA received 5% in any
event, and an additional 2% if the scheme worked. Mr Mehigan asked Mr
Flanagan
to transfer the non-contingent fee—5% of £5 million, or £250,000—to NTA’s
account.
(b) A letter appointing NT Advisors (Ancillary) Limited (“NTAA”) to act as his agent with authority to enter into an agreement for a trade loan and to deal on his behalf with the money borrowed.
(c) A
Trade Loan Application Letter, addressed to Courland Holdings Limited (“Courland”), also a BVI company, by which Mr Flanagan
applied for a term loan facility for a
maximum of £5 million “to assist with any payment I am required to make to
Philario Enterprises Limited” (“Philario”). Philario was a wholly-owned
subsidiary of Courland and was also registered in the BVI.
(d) A Repayment Loan Application Letter, addressed to SGH, applying for a term loan facility for a maximum sum of £5 million “to assist with the repayment of any loan I may (or may have) obtained from Courland Holdings Limited”.
(e) A “Power
of Attorney – Bare Trustee”, by which Mr Flanagan
appointed Mr Jenner and Mr
Mehigan to act as his attorneys in respect of a bare trust, defined as “any
trust whatsoever of which I am (or it is proposed that I will become) a
beneficiary entitled to at least 95% of that trust’s trust assets”; the Bare
Trustee was the trustee from time to time of that trust. The power of attorney
expressly instructed the attorneys that “any monies due to me from such Bare
Trustee to be used wholly or in part to repay any liabilities of mine with SG
Hambros Bank (Channel Islands) Limited or other lenders.”
(f) A
letter to NTA, confirming that the monies to be paid by Mr Flanagan
into the
NTA “Holding Account” were to be disbursed by NTA, on his behalf and without
further reference to or authority from him, in the making of various identified
payments, including loan arrangement fees payable to Courland or SGH, interest
on the loans, the repayment of part of the loans outstanding at any time, NTA’s
and TSB’s fees, and various miscellaneous items of no present importance.
(g) A “Power
of Attorney — Joint Arrangement”, also appointing Mr Jenner and Mr Mehigan as Mr
Flanagan
’s attorneys, in this case authorised to sign any document “in relation
to the Joint Arrangement Agreement to be entered into during March 2007 between
myself, Working Wheels Admin Limited and Working Wheels BTC Limited”. I come to
that agreement at para 18 below. Working Wheels Admin Limited (“WW Admin”) and
Working Wheels BTC Limited (“WW BTC”) are or were special-purpose companies
which performed various functions in the scheme arrangements.
(h) A
further letter to NTA, confirming Mr Flanagan
’s willingness “to borrow funds to
be employed (via the contribution of cars) in a joint arrangement with Working
Wheels Admin Limited (amongst others)”.
(i) A “Power
of Attorney – Main” which appointed Mr Jenner, Mr Mehigan and NTA, jointly and
severally, as his attorneys with authority to execute documents relating to, in
particular, Mr Flanagan
’s loan facility agreement with Philario.
9.
On 14 March 2007 Mr Jenner, as Mr Flanagan
’s attorney, engaged MNL as
his bare trustee in respect of his loans from SGH or any other lender. Two days
later, Mr
Flanagan
transferred £225,000 to NTA’s Holding Account. I assume that
the amount paid was less than the amount requested because of the permissible
deductions to which I have referred. SGH then made a loan facility offer to
Greenleaf Finance Limited (“Greenleaf”), for an aggregate principal amount not
exceeding £790,000. Greenleaf was, I was told, wholly owned by the Sovereign
Charitable Trust, a Jersey-based charitable trust. The purpose of the facility
was to enable Greenleaf to acquire £790,000 Redeemable 2007 Loan Notes (“the
2007 Notes”), issued by Vanderveer Investing Limited (“Vanderveer”), also a BVI-registered
company. Vanderveer was also owned by a Jersey-based charitable trust. Any
advance under the loan facility was to be made only to a specified SGH account
of Vanderveer.
10.
On the same day SGH offered a loan facility
to Courland, for an aggregate principal amount not exceeding £40,155,000. The
purpose of the facility was, the offer stated, to enable Courland itself to
make a loan to NTAA, as agent for and on behalf of each of a number of persons.
They were, in summary, persons identified to SGH and listed in a schedule to
the offer who, on or about the same day, each entered into a joint arrangement
agreement with WW Admin. Mr Flanagan
was one of the persons listed in the
schedule. The underlying purpose, as the facility made clear, was that the person
concerned would use the money advanced to him “in the payment of a manufactured
overseas payment to Philario”. Mr
Flanagan
incurred the obligation to make such
a payment in accordance with a loan agreement to which I shall come very
shortly. The money could be used only for that purpose, and had to be paid into
an identified SGH account of Philario.
11.
The boards of Courland, Philario, Vanderveer and Greenleaf immediately
passed resolutions the effect of which was to approve the execution of various
documents by which the loan arrangements were implemented. Those documents,
with only two of which I need to deal in any detail, were then executed and the
funds became available. Of the two documents I need to describe the first was a
certificate issued by Vanderveer showing that Greenleaf was the registered
holder of £7,500 of the 2007 Notes. In later documents they were referred to as
“the Debt Securities”, a term I shall adopt. The second document was an
instrument by which Greenleaf lent the Debt Securities to Mr Flanagan
, to which
I shall return at para 22 below.
12.
Also on 16 March, Mr Flanagan
and Philario entered into a loan agreement which incorporated a deed of charge over securities. By
this agreement, Philario offered to Mr
Flanagan
a loan facility of the greater
of either £3,000 or the aggregate of the face value of the Debt Securities and
the value (as determined by Philario) of any securities other than the Debt
Securities which Philario agreed to accept from Mr
Flanagan
as additional
security, subject to a maximum amount of £5 million. The loan was to be
interest-bearing. The advance would not become available until the Debt
Securities had been transferred, cum div, to Philario, Philario had
received a certificate confirming that the loan was to be used in Mr
Flanagan
’s
trade pursuant to the joint arrangement agreement with WW Admin, and the payment
(the manufactured overseas payment to which the facility referred) due from Mr
Flanagan
had been received by Philario. The advance had to be paid into Mr
Flanagan
’s sub-account in a specified SGH account of WW BTC, to be held by WW BTC
as Mr
Flanagan
’s trustee.
“2.3 Manufactured Overseas Dividend
(a) If an Interest Amount is paid during the Deferred Transfer Period, the Trader shall pay to the Lender an amount representative of that Interest Amount.
(b) In order to discharge its obligation under clause 2.3(a) above, The Trader shall pay to the Lender on the Security Transfer Date an amount calculated as the product (that is, the multiplication) of:
(1) the Interest Amount
and
(2) 81,111.11
such resultant amount being the ‘Manufactured Overseas Dividend’, being a payment for the account of the Lender absolutely (both legally and beneficially) free from any encumbrance or any security rights of the Trader.”
14.
“Interest Amount” had a somewhat convoluted definition, but in essence it
meant Mr Flanagan
’s share of the amount of interest paid or payable by
Vanderveer to Greenleaf on the 2007 Notes. The “Deferred Transfer Period” was
the period between the date of the loan agreement (16 March) and the transfer
of the Debt Securities to Philario (19 March). The interest was also paid on 19
March. Whether it was, as a matter of fact, paid before the transfer of the
Debt Securities to Philario is unclear since, although the copy documents
produced to me are dated, they are not timed. However, as the clause
contemplates payment of the interest before transfer of the securities (and the
efficacy of the scheme depends on it) I shall assume in the absence of evidence
to the contrary that payment preceded transfer.
15.
The interest paid on the entire £790,000 of the 2007 Notes was £6,493.
Mr Flanagan
’s share of that interest, that is the amount attributable to the
Debt Securities to be allotted to him, with a face value of £7,500, was £61.64.
Clause 2.3, however, obliged him to pay to Philario that sum multiplied by
81,111.11, or almost exactly £5 million. For reasons which neither Mr Jenner
nor Mr Mehigan was able to explain, the arithmetical relation between the face
value of the Debt Securities allotted to each participant and the amount of the
loss he or she wished to generate differed, as did the multiplier. However, in
every case the multiplier, which was invariably a very large number, was so
determined that the product of the user’s share of the interest and the
multiplier was always equivalent to the desired loss.
16.
In accordance with the arrangements described at para 10 above, Courland then offered a loan facility to NTAA, as agent for
each of the relevant participants in the scheme. As will be apparent, several
participants (“Traders” in this context), including Mr Flanagan
, entered into
the scheme at the same time. The facility offered was for an amount of up to
£40,155,000—that is, the same amount in respect of which Courland had secured the
facility with SGH. The offer stipulated that the loan proceeds were to be used
by each of the Traders only in order to pay the manufactured overseas dividend due
from him to Philario. There were provisions for repayment to which I return at
para 27 below.
18.
WW Admin, WW BTC and Mr Flanagan
then entered into the joint arrangement
agreement to which I have already referred. It provided that Mr
Flanagan
and WW Admin were to enter into a joint venture to trade in used cars:
WW Admin was to contribute administrative services and Mr
Flanagan
was to
contribute the stock of used cars, or the benefit of
certain options to purchase used cars, for which purpose WW BTC was to act as
his bare trustee. He was in addition to issue various instructions about the
buying and selling of cars when necessary. WW Admin’s obligations were to
employ sales managers to undertake the trade in used cars, to secure licences
to use parking and office premises, and to purchase a motor trader’s combined
insurance policy from an insurer. Further agreements with Mr Barre and his
company, Langrop (Anstey) Limited (“Langrop”) secured Mr Barre’s services as
sales manager at an annual salary of £30,000 and a licence to occupy Langrop’s
forecourt (in common with Langrop) for a monthly fee of £100. WW Admin obtained
a suitable insurance policy from Allianz Cornhill for a premium of £5,548.23. It
is agreed that all those sums have been paid. As I understand the matter, the
cost has been borne by NTA.
19.
WW BTC, as Mr Flanagan
’s bare trustee, entered into an option agreement
with Langrop pursuant to which, in return for consideration of £100, Langrop
granted to WW BTC two options, each to buy a used car with a maximum cost of
£8,000. A further condition of the option agreement was that, within 5 days of
its date (also 16 March), WW BTC was to pay to WW Admin the sum of at least
£7,500, to be held by WW Admin as a deposit in
respect of WW BTC’s obligations under the option agreement. The appellants’
case is that as WW BTC was a bare trustee, the obligations were in reality and
substance Mr
Flanagan
’s.
20.
On 19 March 2007 MNL declared a bare trust (“the EF Bare Trust”) the
assets of which were to be held as to 99% for Mr Flanagan
. The sum of £100 was paid
in—it was not clear to me by whom—as the initial trust fund.
21.
On the same day, Vanderveer offered a loan facility to Philario for an
amount not exceeding £85,000. The stated purpose of the loan was to enable
Philario to make the advances requested by Traders, including Mr Flanagan
,
pursuant to the loan agreement between Philario and each Trader. The £85,000
could be paid only to a specified Philario account with SGH. Mr
Flanagan
’s
share of that sum was £7,500.
22.
Greenleaf and Mr Flanagan
entered into an agreement setting out the
terms and conditions on which the Debt Securities would be lent
by Greenleaf to Mr
Flanagan
: Mr
Flanagan
was to pay a cash collateral of
£7,500, and the redelivery date of equivalent securities was to be 14 May 2007.
Mr
Flanagan
paid the collateral of £7,500, and Greenleaf thereupon executed an
instrument transferring all its rights, title and interest in the Debt
Securities to Mr
Flanagan
. Vanderveer issued a certificate identifying Mr
Flanagan
as the registered holder of the Debt Securities. Mr
Flanagan
immediately
transferred the Debt Securities to Philario, and Vanderveer issued a further certificate
identifying Philario as the registered holder.
23.
Courland then issued a drawdown notice to SGH, requesting payment of the
entirety of the advance of £40,155,000 for which the loan facility offered on
16 March provided. Courland paid the requisite arrangement fee of £184,300. NTAA,
as agent for the Traders including Mr Flanagan
, issued a drawdown notice to
Courland requesting advances in accordance with their respective loan
agreements (in the form described at para 12 above). An advance of £5 million
was requested in respect of Mr
Flanagan
. NTAA paid Courland an arrangement fee
of £200,775.
24.
Courland then credited Philario’s bank account with £40,155,000. That
credit represented the combined effect of SGH’s loan to Courland of £40,155,000,
Courland’s loan of the same amount to NTAA as agent for the Traders, and the
aggregate of the manufactured payments due from the Traders to Philario in
accordance with their respective loan agreements. The aggregate payment
included the £5 million which Mr Flanagan
was required to pay.
26.
On the following day, 20 March, Philario issued a drawdown notice to Vanderveer
pursuant to the loan facility granted on the preceding day, for the whole
amount of £85,000, and paid the prescribed arrangement fee of £2,494.
Vanderveer instructed SGH to transfer the £85,000 from its account to Philario’s
account, and that was duly done. At the same time, Mr Flanagan
issued a
drawdown notice to Philario in respect of the loan of £7,500 agreed on 16 March
(again, the agreement described at para 12). The drawdown notice stipulated
that the loan proceeds were to be used wholly and exclusively by Mr
Flanagan
in
his trade. Philario instructed SGH to transfer £7,500 from its account to WW
BTC’s account, in order that WW BTC could hold the money on trust for Mr
Flanagan
, as the agreement provided. That transfer, too, was duly made. The
money was used by Mr
Flanagan
to pay the £7,500 deposit required by the option
agreement (see para 19 above) to WW Admin.
27.
Then, in accordance with the terms of the loan facility agreement by
which Courland had offered a total of £40,155,000 to NTAA as agent for the
Traders (see para 16 above), and in consideration of a payment of £100 from the
EF Bare Trust, Courland assigned to MNL (as trustee of
the EF Bare Trust) all of Courland’s rights in the loan of £5,000,000 to Mr
Flanagan
. Courland gave notice of that assignment to Mr
Flanagan
.
28.
Immediately thereafter SGH offered a loan facility offer to NTAA (again as
agent for each of the Traders, including Mr Flanagan
) for a maximum amount of
£40,155,000 in aggregate, of which £5 million related to Mr
Flanagan
. The stated
purpose of the loan was to enable the Traders to repay the loans they had
obtained from Courland. NTAA, as Mr
Flanagan
’s agent, instructed SGH to advance
£5 million to MNL, as trustee of the EF Bare Trust, in order that Mr
Flanagan
could repay the loan from Courland which had just been assigned to MNL. NTAA
paid an arrangement fee of £217,250 to SGH. The £5 million was duly
transferred. NTA then instructed SGH to debit £50,000 from an NTA holding
account, designated for Mr
Flanagan
, as part repayment of the £5 million loan which
had been drawn down earlier in the day. Mr Mehigan, as Mr
Flanagan
’s attorney, instructed
MNL to use the £5 million repayment of the Courland loan to repay the balance
of the £5 million loan from SGH, and to transfer the remaining £50,000
(representing 1% of the sum assigned to MNL) to “Beneficiary B” of the EF Bare
Trust.
29.
MNL issued appropriate instructions to SGH: £4,950,000 was duly withdrawn
from MNL’s EF Bare Trust sub-account to repay the balance of the SGH loan, and
£50,000 was withdrawn from the same account and paid to Beneficiary B. In Mr
Flanagan
’s case Beneficiary B was “S G Hambros Trust Company (Channel Islands)
Limited as trustee of the John A Mehigan 2006-01 Life Interest Trust”.
30.
On 26 March Mr Masters and Mrs Warneken, on behalf of MNL, which in turn
was acting as trustee of the EF Bare Trust, duly performed the Prayer Condition
as the consideration for the assignment from Courland of its rights in respect
of the £5 million loan to Mr Flanagan
.
31.
On 4 April 2007, Langrop, WW BTC and Mr Mehigan entered into a Master
Agreement providing for Langrop to sell and WW BTC to buy (on behalf of Mr
Mehigan) certain used cars. Although he was described in it as the “principal”,
in fact Mr Mehigan entered into the Master Agreement as agent for a number of
participants in the Working Wheels scheme, including Mr Flanagan
.
32.
There were no further relevant events until 14 May 2007, when Philario’s
board of directors agreed, after receiving a guarantee from NTA, that its loan
of £7,500 to Mr Flanagan
could remain outstanding notwithstanding the discharge
of the security for the loan (that is, the Debt Securities). Philario transferred
all its rights in the Debt Securities to Mr
Flanagan
, and Vanderveer issued a
certificate identifying Mr
Flanagan
as their registered holder. Mr
Flanagan
immediately
transferred all his rights in the Debt Securities to Greenleaf, and Vanderveer
issued another certificate, identifying Greenleaf as the registered holder.
33.
Greenleaf borrowed £790,000 from NTA in order to fund the repayment of their
collateral to the Traders; Mr Flanagan
’s collateral (equalling the deposit payable
pursuant to the option agreement with Langrop—see para 19 above) was £7,500. The
collateral repayments were duly made, by crediting NTA’s Holding Account.
35.
The flows of money and securities are very well illustrated by a chart provided
by counsel, a copy of which is annexed to this decision. I repeat the note of
caution that it is not entirely clear in what order the events occurred.
However, what the chart clearly shows is that, in Mr Flanagan
’s case, there were
in fact two distinct flows, one of the £7,500 (part of the aggregate of
£790,000) initially lent by SGH to Greenleaf which found its way via Vanderveer
and Philario to Mr
Flanagan
and was used by him in his trade (or, if HMRC are
right, purported trade) in cars; and the other, in two “loops”, of the £5
million (part of the aggregate of £40,155,000): in the first from SGH via
Courland to Mr
Flanagan
, before passing from Mr
Flanagan
via Philario and
Courland and back to SGH; and in the second from SGH to Mr
Flanagan
and, via
his bare trust, back to SGH. The link between the two flows lies in steps 7 and
10, as they are identified in the chart: the payment of interest by Vanderveer
to Greenleaf at step 7 was the trigger for the payment of the manufactured
overseas dividend and the irregular payment at step 10.
36.
In his return for the 2006-07 tax year Mr Flanagan
stated that on 16
March 2007 he began to trade in buying and selling used cars, that the cost of
sales, in the purchase of cars for resale, amounted to £100, but that his
turnover in the year was nil as no cars had been sold. He had incurred, he
said, interest of £184 and other finance charges of £5 million. He claimed a
loss of the aggregate of those sums, £5,000,284, in the year from his trade.
His total income from other sources, principally an investment management
business in which he was a partner, was disclosed as £5,902,112. He claimed
relief for the loss in the car trade against that income.
37.
In his return for the following year, 2007-08, Mr Flanagan
stated that
his turnover in used cars was £15,000, with costs of sales amounting to
£14,900. His gross profit from the trading activity was therefore £100. The
pattern was similar in the following years: in 2008-09 turnover in sales of
used cars amounted to £7,245, with costs of sales amounting to £7,187, leaving
a gross profit of £58; and in 2009-10 turnover was £13,822, cost of sales £13,756
and gross profit £66. In all those years he also disclosed substantial income
from other activities.
38.
In June 2007 Mr Stennett entered into a similar arrangement. The dealer
which provided forecourt facilities was Styrin Motors Ltd, and it was Mr Styrin
who was appointed as sales manager. The role of NTAA was taken by Masters Tax
LLP, and Mrs Warneken and Ms Jinnie Strydom replaced Mr Mehigan and Mr Jenner
as Mr Stennett’s attorneys. Greenleaf and Vanderveer took the same parts, but Courland’s position was taken instead by Pennistone Limited, a BVI company which I was told
was owned by a charitable trust, and Pennistone’s wholly-owned subsidiary,
Tiziana Assets Limited, also a BVI company, replaced Philario. There were some
minor differences in the documentation and amounts (in Mr Stennett’s case the
advance was £14.5 million and the deposit £10,000) but the essential nature of
the scheme was the same. Mr Moyles entered into another iteration of the scheme
in November and December 2007. There were some further changes of participants
but, again, the arrangement was essentially identical. The advance in Mr Moyles’
case was £1 million and the deposit £5,000. In their tax returns Mr Stennett
and Mr Moyles made statements similar to those made by Mr Flanagan
, although of
course the figures and other details differed. Copies of the helpful charts
prepared by counsel showing the flows in their cases are also annexed to this
decision.
43.
Mr Flanagan
, too, was open about his motives—he had, he said, looked
around for a tax avoidance scheme in conjunction with his financial advisers,
and had rejected several schemes because he did not feel comfortable with them.
He chose this scheme because of the favourable opinion of leading counsel, and
because he too received reassurances from his advisers about the extent of his
exposure to risk, which he recognised to be very limited. He had what he
described as a layman’s understanding of the scheme, as he had seen a slideshow
presentation of it, but like Mr Stennett he took no interest and played no part
in the trading activities, and was indifferent about whether or not they were
profitable; the £7,500 he had injected was money he was quite willing to lose
as it was a small sum in comparison with the potential tax saving, and he knew
he would not have to inject more. He agreed that the size of the loan he took
was dictated solely by the scale of the tax deduction he wished to achieve, and
had no commercial rationale. He accepted too that he could easily have paid the
£7,500 used as a deposit without any borrowing.
49. Mr Mehigan, like Mr Jenner, was candid about the true purpose of the scheme, and open about its mechanics. In his witness statements (he made one in each appeal, in very similar terms) he said this:
“The plan relied on combining 2 rules in the tax code in a novel way. Under the detailed rules on stock lending in Schedule 23A ICTA where a taxpayer paid an amount as a ‘manufactured dividend’ that was much larger than the actual dividend it represented, an anti-avoidance rule in paragraph 7 thereof mandated that it was not to be a manufactured dividend (which might be tax deductible) and instead was to be treated as a fee. The rule confirmed that the amount was a fee for ‘all purposes of the Tax Acts …’.
So long as the client taxpayer who paid the fee was trading we could then come within section 58 ITTOIA and the fee would be tax deductible. It was crucial also that section 58 replaced the usual tax deductibility test (being ‘wholly and exclusively for the purposes of the trade’) with a much wider test which was easier to satisfy (being ‘wholly and exclusively for the purpose of obtaining finance’). Therefore the size of the fee did not have to be commensurate with the scale of the trading activities, so the fee could be very large.”
50.
Mr Mehigan acknowledged that the borrowed money—in Mr Flanagan
’s case
the £5 million—went round in a circle, and that Courland, Philario, Greenleaf
and Vanderveer (and their equivalents in other cases) were special purpose
vehicles brought into existence for no reason other than to participate in the
scheme arrangements.
54.
Mr Barre explained that on 16 March 2007 he had entered into a large
number of option agreements by which more than 100 individuals, all
participants in the scheme (among them Mr Flanagan
), were granted an option to
buy two cars. In fact, as Mr Mehigan had said, none of the options was ever
exercised. Instead, the cars, typically but not invariably of low value, were
sold by Mr Barre to WW BTC at cost price, and then sold, on behalf of WW BTC,
to a customer. Only Mr Barre undertook the sales and purchases—he did not
involve his company’s staff—and no part of his company’s premises was set aside
for WW BTC business (nor, of course, for the business of any individual
participant).
61.
The essence of the appellants’ case is that in the relevant years of
assessment, 2006-07 for Mr Flanagan
and 2007-08 for Mr Moyles and Mr Stennett:
(a) each of them had commenced and carried on a trade in used cars, before paying the irregular payment;
(b)
that they each made that payment to the lender—Philario in Mr Flanagan
’s
implementation—pursuant to the terms of the loan agreement between the lender
and the appellant;
(c) that the excess of the irregular payment over the interest whose payment triggered it is to be treated, in accordance with para 7(1) of Sch 23A to the Income and Corporation Taxes Act 1988 (“ICTA”) (for the tax year 2006-07) or s 583 of ITA 2007 (for the tax year 2007-08), as a separate fee for entering into the loan with the lender; and
(d) by application of s 58 of ITTOIA, the fee is an incidental cost of obtaining finance and, therefore, deductible for that year of assessment in computing the profits of the trade carried on by each appellant.
“(1) In calculating the profits of a trade, a deduction is allowed for incidental costs of obtaining finance by means of–
(a) a loan, or
(b) the issue of loan stock,
if the interest on the loan or stock is deductible in calculating the profits of the trade.
(2) ‘Incidental costs of obtaining finance’ means expenses–
(a) which are incurred on fees, commissions, advertising, printing and other incidental matters, and
(b) which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.
(3) Expenses incurred wholly and exclusively for the purpose of–
(a) obtaining finance, or
(b) providing security for it,
are incidental costs of obtaining the finance even if it is not in fact obtained.
(4) But the following are not incidental costs of obtaining finance–
(a) sums paid because of losses resulting from movements in the rate of exchange between different currencies,
(b) sums paid for the purpose of protecting against such losses,
(c) the cost of repaying a loan or loan stock so far as attributable to its being repayable at a premium or having been obtained or issued at a discount, and
(d) stamp duty.
(5) This section needs to be read with section 59 (which provides for restrictions in relation to convertible loans and loan stock etc.).”
63. It is common ground that s 59 is of no relevance in these cases.
“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.”
“1—
(1) In this Schedule—
‘manufactured dividend’… and ‘manufactured overseas dividend’ shall be construed respectively in accordance with paragraphs 2 … 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; ...
...
‘securities’ includes any loan stock or similar security;
‘transfer’ includes any sale or other disposal ….
4—
(1) 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 to 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.
7—
(1) in any case where (apart from this paragraph)—
(a) an amount paid by way of manufactured dividend would exceed the amount of the dividend of which it is representative, or
(b) the aggregation of—
(i) an amount paid by way of manufactured interest or manufactured overseas dividend, and
(ii) the tax required to be accounted for in connection with the making of that payment,
would exceed the gross amount (as determined in accordance with paragraph 3 or 4 above) of the interest or overseas dividend of which it is representative, as the case may be,
the payment shall, to the extent of an amount equal to the excess, not be regarded for the purposes of this Schedule as made in discharge of the requirement referred to in paragraph 2(1), 3(1) or 4(1) above, as the case may be, but shall instead to that extent be taken for all purposes of the Tax Acts to constitute a separate fee for entering into the contract or other arrangements under which it was made, notwithstanding anything in paragraphs 2 or 3 above or anything in paragraph 4 other than in sub-paragraph (1A).”
66.
Mr Flanagan
’s case is that para 7(1) is engaged and that £5 million,
being the amount of the excess of the irregular payment over the Interest
Amount, is “a separate fee for entering into the contract or other arrangements
under which it was made” falling within s 58(2) and available to him to set off
against his other income for the year by way of sideways relief.
“567 Meaning of ‘overseas securities’ and ‘overseas dividend’
(1) This section applies for the purposes of this Part.
(2) ‘Overseas securities’ means shares, stock or other securities issued by–
(a) a government, local authority or other public authority of a territory outside the United Kingdom, or
(b) another non-UK resident body of persons.
(3) ‘Overseas dividend’ means any interest, dividend or other annual payment payable in respect of overseas securities.
(4) In this section ‘securities’ includes loan stock or any similar security.”
“572 Overview of Chapter
This Chapter is about the situation where a person–
(a) pays another person an amount which is representative of–
(i) dividends on UK shares,
(ii) periodical payments of interest on UK securities, or
(iii) overseas dividends on overseas securities, and
(b) does so under a requirement of an arrangement between them for the transfer of the UK shares, UK securities or overseas securities concerned.”
“581 Manufactured overseas dividends
(1) This section applies if–
(a) a person (‘the payer’) pays another person an amount (‘manufactured overseas dividend’) which is representative of an overseas dividend on overseas securities,
(b) the payer does so under a requirement of an arrangement between them for the transfer of the securities, and
the condition in subsection (2) is met.
(2) The condition is that–
(a) in a case within section 922(1) (manufactured overseas dividends: payments by UK residents etc), the amount required to be deducted as a result of that section has been deducted, or
(b) in a case within section 923(1) (foreign payers of manufactured overseas dividends: the reverse charge), the amount of income tax required to be accounted for and paid as a result of that section has been accounted for and paid.
(3) Subsections (4) and (5) apply in relation to the recipient, and all persons claiming title through or under the recipient, for all relevant income tax purposes.
(4) The manufactured overseas dividend is treated as if it were–
(a) an overseas dividend of an amount equal to the gross amount of the manufactured overseas dividend, but
(b) paid after the withholding from it, on account of overseas tax, of the amount deducted as a result of section 922 or (as the case may be) accounted for and paid as a result of section 923.
(5) The amount deducted or accounted for and paid is accordingly to be treated as an amount withheld on account of overseas tax instead of as an amount on account of income tax.
(6) In this section ‘relevant income tax purposes’ means the purposes of the Income Tax Acts as they apply in relation to—
(a) UK residents, and
(b) persons carrying on business through a branch or agency in the United Kingdom.”
“583 Manufactured payments exceeding underlying payments
(1) This section applies if—
(a) an amount paid by way of manufactured dividend would otherwise exceed the amount of the dividend of which it is representative, or
(b) the sum of—
(i) an amount paid by way of manufactured interest or manufactured overseas dividend, and
(ii) the income tax required to be accounted for and paid in connection with the making of the payment,
would otherwise exceed the gross amount of the interest or overseas dividend of which it is representative.
(2) The payment, to the extent of an amount equal to the excess, is treated for the purposes of this Chapter and Chapter 9 of Part 15 as not made under the requirement mentioned in section 573(1)(b), 578(1)(b) or 581(1)(b) (criteria for application of provisions about manufactured payments).
(3) Instead it is treated, to that extent, for income tax purposes as a separate fee for entering into the arrangement under which it was made.
(4) Subsection (3) applies despite anything in—
(a) sections 572 to 582 (main rules about manufactured payments), or
(b) Chapter 9 of Part 15 (deduction of income tax at source: manufactured payments).”
“589 Meaning of ‘gross amount’: interest and manufactured overseas dividends
(1) This section applies for the purposes of this Chapter.
(2) …
(3) The gross amount of a manufactured overseas dividend is an amount equal to the gross amount of the overseas dividend of which the manufactured overseas dividend is representative.
(4) The gross amount of an overseas dividend is the sum of—
(a) so much of the overseas dividend as remains after the deduction of any overseas tax chargeable on it,
(b) the amount of any overseas tax so deducted, and
(c) the amount of any overseas tax credit in respect of the overseas dividend.”
“591 Interpretation of other terms used in Chapter
(1) In this Chapter—
…
‘transfer’ includes a sale or other disposal.…”
68. Although the earlier and later provisions are differently worded, it is undisputed that for present purposes they are to the same effect.
70. The appellants’ starting point was the analysis of a Special Commissioner, Mr (now Judge) Hellier, in Mansell v Revenue and Customs Commissioners [2006] STC (SCD) 605 at [95]-[96], an analysis approved by Henderson J in Tower MCashback LLP 1 and another v Revenue and Customs Commissioners [2008] STC 3366 at [95]. It is, Judge Hellier said, necessary to distinguish between the setting up of a trade and the commencement of a trade. It is not always necessary that a sale is made before a trade can be said to have begun, but there must be both a reasonably firm concept of the type of profit-making activities to be carried on, and steps must have been taken with a view to converting the concept to reality. In the ordinary case trade can be said to start when the trader undertakes some operational activities, most commonly by dealing with third parties (for example by negotiations to enter into contracts intended to culminate in obligations or assets, and which give rise to a real possibility of loss or gain), in a manner which is immediately and directly related to the supplies to be made, which it is hoped will give rise to profits, and which require the trader to put money at risk. The acquisition of goods to sell or to turn into items to be sold is another example of operational activity, and the kind of activity which contributes to the potential profit of the enterprise.
“Whether a given transaction or series of transactions is in the nature of trade is a question of fact … If the transaction is of a commercial nature and has a genuine commercial purpose, the presence of a collateral or ulterior purpose to obtain a tax advantage does not ‘denature’ what is essentially a commercial transaction. If, however, the sole purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose … Where commercial and fiscal purposes are both present, questions of fact and degree may arise, and these are for the commissioners. Nevertheless, the question is not which purpose was predominant, but whether the transaction can fairly be described as being in the nature of trade … The purpose or object of the transaction must not be confused with the motive of the taxpayer in entering into it. The question is not why he was trading, but whether he was trading. … The test is an objective one.”
74. That case proceeded to the House of Lords ([1992] 1 AC 655). At p 677 Lord Templeman said:
“The principles of Ramsay and subsequent cases do not compel or authorise the court to disregard all the fiscal consequences of a single composite transaction read as a whole on the grounds that it appears that the transaction is a tax avoidance scheme …
… in the view of Sir Nicolas Browne-Wilkinson V-C, the taxpayer is deprived of all the beneficial effects of the scheme if the scheme was entered into ‘essentially for the purpose of obtaining a fiscal advantage under the guise of a commercial transaction’: …
‘if the commissioners find as a fact that the sole object of the transaction was fiscal advantage, that finding can in law only lead to one conclusion, viz that it was not a trading transaction. … if the commissioners find as a fact only that the paramount intention was fiscal advantage … the commissioners have to weigh the paramount fiscal intention against the non-fiscal elements and decide as a question of fact whether in essence the transaction constitutes trading for commercial purposes.’
My Lords, I do not consider that the commissioners or the courts are competent or obliged to decide whether there was a sole object or paramount intention nor to weigh fiscal intentions against non-fiscal elements. The task of the commissioners is to find the facts and to apply the law, subject to correction by the courts if they misapply the law. The facts are undisputed and the law is clear. Victory Partnership expended capital of $3¼ m. for the purpose of producing and exploiting a commercial film. The production and exploitation of a film is a trading activity. The expenditure of capital for the purpose of producing and exploiting a commercial film is a trading purpose. By section 41 of the [Finance] Act of 1971 capital expenditure for a trading purpose generates a first year allowance. The section is not concerned with the purpose of the transaction but with the purpose of the expenditure.”
75. There is a misconception, Mr Ewart added, in HMRC’s argument, based on the decision of this tribunal in Eclipse Film Partners No 35 LLP v Revenue and Customs Commissioners [2012] UKFTT 270 (TC), that there was no “real” trade carried on by any of the appellants. In that case the tribunal held that a purposive construction of the concept of “trade”, as the word is used in the Corporation Tax Acts, must take account of the definition in ICTA s 832(1), namely “every trade, manufacture, adventure or concern in the nature of a trade”. The tribunal concluded, at [398], that “an element of speculation is a characteristic of the concept of trade—if a taxpayer is trading, what he does must, normally at any rate, be speculative in the sense that he takes a risk that the transaction(s) may not be as profitable as expected (or may indeed give rise to a loss).”
79. In Ransom v Higgs [1974] STC 539 at 545 Lord Reid said that the word “trade” is commonly used to denote “operations of a commercial character by which the trader provides to customers for reward some kind of goods or services”. It is trite law, Ms Nathan said, that whether a trade exists is a mixed question of fact and law and that, as Millet J said in Ensign Tankers v Stokes, it is necessary when determining whether a trade exists, that the “part of the transaction which is alleged to constitute trading must not be viewed in isolation, but in the context of all the surrounding circumstances”. The respondents accept that the activity of buying and selling second hand cars is capable of constituting a trade, but say that in this case it was the dealers—Langrop and Styrin—which carried on such trade as there was and, taking a realistic view of the evidence, that none of the appellants carried on a trade. None of them was aware, either personally or through their bare trustee, until after they were informed by the dealer of important facts such as the type of car which was being acquired as stock, at what price it was being acquired, when it was to be acquired, when, to whom and at what price it was to be sold, and the level of profit on each car. Complete ignorance of that kind is, Ms Nathan said, inconsistent with the proposition that the appellants were each carrying on a trade in second hand cars.
81. In addition, it is not sufficient to point, as the appellants do, to the agreements with the dealerships to demonstrate that there was a trade. The clear purpose of those documents was merely to create the illusion of a trade; the reality is rather different. The mere presence of the characteristics commonly found in a trade does not of itself show that there is a trade—there must be some real trading purpose to the activity. The appellants have accepted that the scheme was entered into for tax avoidance purposes; the evidence shows that the purported trade was, as Lord Morris of Borth-y-Gest put it in Lupton (Inspector of Taxes) v FA & AB Ltd [1972] AC 634 at 647, “so inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction”. The supposed car dealing was nothing more than the “hook” the appellants needed in order to bring themselves within s 58.
83. In my judgment Ms Nathan is right in respect of the first of the two questions I have identified, and broadly for the reasons she gave. The joint venture agreement provided that each appellant should “contribute the stock of used cars, or the benefit of certain options to purchase used cars”, and give various instructions: see para 18 above. In reality, none of the appellants performed any of those obligations. They did not exercise the options at all, and they can be left to one side. Nor did they ever supply any cars. Had a particular car been allocated to an identified or identifiable participant before the dealer—Mr Barre or Mr Styrin—acquired it, or even as he was acquiring it, it might be said that the participant so identified was trading in that car through the agency of the dealer. But that is not what happened. Not only did the participant not know any detail of the car at the time of the purchase and sale, as Ms Nathan said, he could not know contemporaneously, even if he had enquired, whether on any particular day he had bought or sold a car, and if so what was the car and what were the purchase and selling prices. Those details were available to him only long after the event, when WW BTC allocated the transactions to the participants, and did so moreover in a manner which had no purpose, as is perfectly clear, other than to ensure that each participant could claim to have bought and sold enough cars in a tax year to be able to argue that he was trading. A participant could not, therefore, possibly have given any instructions in relation to any such purchase or sale. Equally, he did not give consideration, whether directly or through an agent, for the car as it was bought, nor receive the proceeds as it was sold. I should add for completeness that I do not accept Mr Ewart’s argument that there is any analogy between this case and Scott & Horton v Godfrey [1901] 2 KB 726. There is a fundamental difference between dealing in choses in action, as in that case, and dealing in goods, as here.
85.
Their evidence showed, as I have said, that none of the appellants took
any interest whatever in the details of the purchases and sales, that they were
indifferent to whether a profit or loss was made, and that they obtained the
bare minimum of information solely in order that that information could be
entered on their tax returns. Even had the cars been allocated in advance to
named participants, it is impossible to reach the conclusion that, “in the
context of all the surrounding circumstances”, to borrow Millet J’s phrase,
this was a trade seriously pursued with a view to profit when the supposed
traders care nothing about the profit and, moreover, have not in reality put
any money at risk. The payment of £100 for the options was not, in my view,
money at risk, since it could never be recovered, but an expense; and, since
the options were never exercised there appears to be no risk to the deposit of
£7500, which could be returned at any moment. The joint venture agreement was,
as both Mr Flanagan
and Mr Stennett accepted, something they entered into
because the scheme required it, and which they would not have contemplated for
any other reason. From their perspective, this was not a trade but a means of
securing tax relief.
88.
Mr Flanagan
, however, is in the position that he had entered into all
the necessary agreements, but as I understand the matter had not made a
purchase or sale: the cost of sales disclosed in his tax return represented the
price paid for the options. He entered into the joint venture agreement on 16
March 2007, but I agree with Ms Nathan that such an agreement is consistent
with an intention to enter into business, but is not an indication that trade
has begun. It is true that on the same day WW Admin obtained forecourt
facilities and an insurance policy, although it did so in order to discharge its
obligations to all of the relevant participants and not Mr
Flanagan
alone. Mr
Flanagan
paid his option fee of £100 on 18 March, and his deposit of £7,500 was
paid on 20 March. But it does not seem to me that these steps were enough to
enable Mr
Flanagan
to start trading (again, assuming there was a trade at all)
in the chosen manner since it was not until 4 April that the Master Agreement
with Langrop was made, and it was only at this point that Mr
Flanagan
had put
himself in a position to trade. There was, however, no evidence of any further
activity on that or the following day (which was of course the last day of the
tax year). In my judgment Mr
Flanagan
had put himself in a position to trade
but has not demonstrated that he had begun trading, and this issue, if it
arose, should be decided against him.
89.
My conclusion on the first issue is, of course, fatal to the appellants’
case, but I deal with the second issue in case I should be found elsewhere to
have erred. This issue too requires to be divided into several questions: did
each of the appellants pay a manufactured overseas dividend within the meaning
of the applicable legislation?; if so, is it to be treated as a separate fee
for the lending facility (the borrowing of £7,500 from Philario in Mr Flanagan
’s
case)?; and, if so, was the fee an incidental cost of obtaining finance?
91.
The character of each appellant’s payment to the lender was a “manufactured
overseas dividend” which satisfied the definition set out in para 4 of Sch 23A
to ICTA (for the first appellant) and s 581(1) of ITA (for the second and third
appellants), because, as is common ground, the Debt Securities were “overseas
securities” in respect of which an “overseas dividend”—described in the
documents as the Interest Amount—was paid by Vanderveer to Greenleaf, the facility
offered by Philario (as before I use Mr Flanagan
’s iteration for illustration) was
“a contract or other arrangement for the transfer of overseas securities”, and
the facility required the appellant to pay to Philario, as he did, an amount
(that is, the manufactured overseas dividend) which was representative of the
overseas dividend. That, said Mr Ewart, was all that was required.
“… one can, indeed one should, take into account the fact that one is construing a deeming provision. This is not to say that normal principles of construction somehow cease to apply when one is concerned with interpreting a deeming provision; there is no basis in principle or authority for such a proposition. It is more that, by its very nature, a deeming provision involves artificial assumptions. It will frequently be difficult or unrealistic to expect the legislature to be able satisfactorily to [prescribe] the precise limit to the circumstances in which, or the extent to which, the artificial assumptions are to be made.”
“A adj. 1. Serving to represent, figure, portray or symbolise…
2. Standing for, or in place of, another or others especially in a permanent or comprehensive manner;…
4. Taking the place of, replacing, other forms or species.”
“Where Income is paid in relation to any Loaned Securities … on or by reference to an Income Payment Date Borrower, in the case of Loaned Securities … shall, on the date of the payment of such Income … pay and deliver a sum or money or property equivalent to the type and amount of such Income that, in the case of Loaned Securities, Lender would have been entitled to receive had such Securities not been loaned to Borrower and had been retained by Lender on the Income Payment Date.…”
100. In this case,
the agreement provided that the Debt Securities were to be transferred to
Philario cum div but the arrangements were so constructed that a
dividend would always in fact be paid, and moreover to Greenleaf rather than Mr
Flanagan
or Philario, in the brief interval between the agreement to transfer
and the transfer itself. It was that payment which triggered what should have
been no more than a compensatory payment to Philario, to make up for the
dividend of £61.64 it had not received, and now would not receive. Instead it
received £5 million. That differential demonstrated the error in the appellants’
interpretation of the statutory provisions: they were treating “representative”
as if it meant no more than “connected to” or “triggered by”.
109. I would therefore determine this issue, were it to arise, in HMRC’s favour.
111. Ms Nathan’s starting point was the proposition that the principles established in Ramsay are principles by which statutory provisions are to be construed in accordance with their purpose rather than by over-literal attention to the words used. The principles have been developed and refined in many cases, of which the most notable are MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311, [2001] STC 237, Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 (“BMBF”), in which Lord Nicholls provided an extensive analysis of the line of authority, and the more recent analysis of Lewison J, as he was, in Berry v Revenue and Customs Commissioners [2011] STC 1057. A straightforward statement adopted with approval in many of the cases is that of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, (2004) 6 ITLR 454 at [35]:
“[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.”
“The relevant transaction here is plainly the scheme as a whole: namely a series of interdependent and linked transactions, with a guaranteed outcome. Under the scheme as a whole, the options were created merely to be destroyed. They were self cancelling. Thus, for capital gains purposes, there was no asset and no disposal. There was no real loss and certainly no loss to which the Taxation of Chargeable Gains Act 1992 (‘TCGA’) applies. There is in truth no significant difference between this scheme and the scheme in Ramsay, other than the nature of the ‘asset’. A consideration of the scheme ‘asset by asset’ (or step by step) as urged on us by Mr Schofield ignores the reality of the scheme, the findings of the First-tier Tribunal and the Ramsay principle.”
113. What s 58 is
aimed at can be derived from its opening words: “In calculating the profits of
a trade, a deduction is allowed for incidental costs of obtaining finance…”. The
meaning and purpose of the section are plain: a deduction is allowed for the
incidental costs of obtaining finance, not for a grossly inflated payment
which, viewed realistically, had nothing to do with raising finance. The
appellants had conceded that the arrangements had no commercial purpose, but
were designed only in order to gain a tax advantage. In fact, as the evidence
showed, they amounted to a pre-planned series of transactions which took place
over the space of a few days and which required little more than signing pieces
of paper and making entries in accounts. The loan stock and the obligation to
pay the manufactured payment were created solely for the purposes of the scheme,
and had no other reason to exist. The maximum that could ever be lent for use
in the putative trade was an amount equal to the collateral, invariably a small
amount (in Mr Flanagan’s case £7,500). There was no commercial rationale for
the very large figure by which the Interest Amount had to be multiplied; it was
determined by, and only by, the desired size of the tax deduction.
115. Mr Ewart pointed out that the deeming by para 7 of Sch 23A and by s 583 of the excess of a manufactured payment over the overseas dividend of which it was representative as a fee was the manifest purpose of those provisions. They were, in fact, anti-avoidance provisions designed to restrict the deductibility of the excess as an expense. It could not be offensive in the Ramsay sense to interpret them in accordance with that purpose. They were plainly intended to create a statutory fiction in circumstances where the taxpayer was doing something artificial, such as paying a manufactured overseas dividend payment which exceeds the value of the overseas dividend of which it is representative (something for which the provisions expressly provide), and that fiction is to apply for all income tax purposes. A purposive construction of the provisions could lead only to the conclusion that the excess must be treated for the purposes of s 58(2)(a) as a fee for the borrowing from Philario. A similar conclusion was reached by this tribunal in Land Securities plc v Revenue and Customs Commissioners [2012] SFTD 215, especially at [63] to [66]. I interpose that I agree with Ms Nathan that there is no true analogy between that case and this, and I derive nothing of assistance from it.
“Cases such as these gave rise to the view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far.” [original emphasis]
117. Similarly, in Mayes v Revenue and Customs Commissioners [2011] STC 1269, Mummery LJ said, at [68],
“Instinct informed by experience plays a role in decision-making, but does not relieve the court of the duty to reach a decision that is based on a proper understanding of the meaning of the legislation and of the facts that make up the transaction.”
“One of the lessons of the [BMBF] case is that it is not enough for the revenue, in attacking a scheme of this sort, to point to the money going round in a circle. Closer analysis is required.”
“…the ordinary trader in stocks and shares normally makes his purchases on the attractions of the investments as a merchantable commodity: eg the soundness of the underlying assets, the potentiality for growth, the quality of the relevant management, the interim yield, and so on. The purchase of the Oakroyd shares was not decided upon by the present appellants as the result of any such commercial appraisement. They were bought pursuant to a plan having as its objects (a) to provide the Gill family with the equivalent in capital of certain undistributed profits which if taken by way of dividend would attract surtax: and (b) to provide the appellants with an opportunity to compel the revenue to pay to them a large sum of money which they, the appellants, had never themselves disbursed in tax, and which on recovery they would share with the vendors of the shares.
I say that this is not trading in stocks and shares. If I am asked what it is, I would reply that it is the planning and execution of a raid on the Treasury using the technicalities of revenue law and company law as the necessary weapons.”
121. In similar vein, Lord Goff of Chieveley said this, in Ensign Tankers v Stokes at p 684:
“In short, this is indeed a case in which, as though by magic, the appearance is given that the taxpayer has incurred capital expenditure, but the truth is otherwise. The structure created to achieve the conjuring trick is, as usual in such cases, both complex and artificial. Here the trick consists of, first, the pre-arranged self-cancelling transactions under which LPI purported to advance money to VP, and VP immediately repaid identical sums, on the same day; and second, the characterisation of part of LPI’s share of the net profits from the film as repayment of the so-called loans by LPI to VP. The self-cancelling payments by LPI to VP and repayments by VP to LPI are typical examples of artificial transactions, the sole purpose of which is the avoidance of tax. They can, in my opinion, be properly disregarded for the purposes of tax.”
124. The appeals are dismissed.
TRIBUNAL JUDGE
RELEASE DATE: 20 February 2014