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Tax cases

01 December 2004
Issue: 3986 / Categories:

Tax avoidance

The House of Lords has given judgments in two tax avoidance cases where the Inland Revenue was appealing against decisions for the taxpayer in the Court of Appeal — Barclays Mercantile and Scottish Provident. In the first they dismissed the appeal; in the second they allowed it.

Tax avoidance

The House of Lords has given judgments in two tax avoidance cases where the Inland Revenue was appealing against decisions for the taxpayer in the Court of Appeal — Barclays Mercantile and Scottish Provident. In the first they dismissed the appeal; in the second they allowed it.

Barclays Mercantile concerned a sale and leaseback arrangement whereby Barclays Mercantile Business Finance (BMBF) bought a pipeline running between Scotland and Ireland from the Irish national gas supplier, BGE, who then leased it back again. The price was £91 million. The purchase price was ultimately put on deposit back with Barclays Bank which then provided security for the rental payments; it was only as each rental payment was made that BGE could recover some of their share of the money. The reason that a profit was generated for BGE and BMBF was that BMBF claimed capital allowances on the expenditure

The Inland Revenue succeeded before the Special Commissioners in arguing that the entire transaction was pre-ordained, and that the circularity of it meant that BMBF did not 'incur expenditure' on the purchase of the pipeline, and therefore could not claim capital allowances. Finance leasing generally provided up-front finance to the lessee, but BGE received no up-front finance.

The Court of Appeal upheld the taxpayers' appeal, and the House of Lords has confirmed that decision in a single judgment issued as the opinion of the whole appellate committee that heard the case.

The judgment says that the Ramsay principle should not be seen as a special tax principle; it is simply a version of the general principle of purposive statutory construction. It is therefore incorrect to say that in all cases steps inserted for no commercial purpose should be disregarded. It is necessary first to decide what transactions the statute is intended to cover and then to see whether the transaction undertaken by the taxpayer falls into that description.

In the present case, the statutory requirements related to the provision of a tax allowance that substituted for the disallowed depreciation on fixed assets. The right to the allowance related solely to the actions of the lessor, and what the lessee subsequently did with the purchase price did not affect that. The fact that BMBF raised its finance to purchase the pipeline from Barclays Bank, who also provided the security because of the cash deposit, was not a necessary element of the scheme; it was simply a 'happenstance'.

Scottish Provident involved a pair of matching options between Citibank and Scottish Provident designed to take advantage of the change in 1995 from not taxing companies on the profits made selling options on gilts, to treating profits as taxable income and losses as relievable.

For £100 million of a five year gilt valued at 100, SPI bought a call option from Citibank with a strike price of 90 and sold it one with a strike price of 70. The difference in the premiums for the two options was £20 million payable by Citibank to SPI, but not taxable under the old rules in SPIs hands. Provided the value of the gilts did not fall below 90, when the options were exercised after the change in the law, there would be a corresponding payment due from SPI to Citibank arising from the difference in the strike prices. This would be allowable as a loss under the new rules.

The Inland Revenue challenged the tax loss, saying that it arose from a pre-ordained scheme involving circular payments. This was accepted by the Special Commissioners and upheld by the Inner House of the Court of Session.

The House of Lords again applied a purposive construction which allowed a composite transaction to be viewed as one single transaction provided that it was intended to have a commercial unity. The taxpayers were arguing that there was a small, but not insignificant, likelihood that both options would not be exercised together, which was the likelihood that the price of the gilt would fall below 90. However, the House of Lords considered that this had been deliberately introduced by the companies to create an artificial possibility that the options would not be exercised together, with the strike price of 90 being deliberately chosen to achieve this. Since the contingency itself had no commercial justification, and was part of the scheme, the scheme should still be viewed as one composite transaction, and no real loss ever therefore arose.

(Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, CIR v Scottish Provident [2004] UKHL 52, House of Lords, 25 November 2004.)

Unclaimed money

For over 100 years, in New Zealand, holders of unclaimed monies were required to pay it to the Commissioner of Inland Revenue in certain circumstances. The taxpayer company in the course of its business issued to customers foreign currency drafts against payment of New Zealand dollar equivalent with commission. Some of those drafts were never presented for payment. The New Zealand Revenue claimed that the unpaid monies should be paid to it. The company appealed, and the judge found in its favour. The Court of Appeal of New Zealand allowed the Revenue's appeal, so the company appealed to the Privy Council.

The central issue was whether a cause of action had to have arisen in respect of money before it could be regarded as 'payable' within the meaning of Unclaimed Money Act (NZ) 1971, s 4(1).

The Privy Council said that 'payable' meant no more than legally due if demanded, and that the making of such a demand was not legally necessary. The monies unclaimed under the drafts were owing and payable from their date of issue.

The company's appeal was dismissed.

(Thomas Cook (New Zealand) Ltd v Commissioner of Inland Revenue, Privy Council, 11 November 2004.)

Parking feud

Customs refused a claim under VAT Act 1994, s 80 by the Isle of Wight council to repay overpaid VAT in respect of off-street parking facilities. The council appealed to the VAT tribunal which allowed the appeal. It agreed that the off-street parking facilities were excluded from VAT by the operation of Article 4.5 of the Sixth Directive, and that the article had been properly implemented into UK law.

Customs appealed.

In the High Court, Mr Justice Pumfrey said that, while the issues decided by the tribunal did point to allowing the authority's claim, the tribunal should also have considered whether in so doing, it would give rise to a serious distortion of competition. Thus the case was remitted to the tribunal.

Customs' appeal was allowed.

(CCE v Isle of Wight Council, Chancery Division, 12 November 2004.)

Advantage taxpayer

The taxpayer, an international tennis player, was ordinarily resident and domiciled outside the UK. He set up a company, AE Ltd, through which he entered into endorsement contracts with two manufacturers of sports clothing and equipment, neither of which was resident in the UK. The taxpayer played in a number of tournaments in the UK each year, and his company received payments, deriving at least in part from his playing in those tournaments, from the sponsors.

The Special Commissioners decided that the taxpayer could be assessed to tax under TA 1988, s 556 in respect of those payments, and this decision was upheld in the High Court. The judge said that the presumption that a tax statute did not have extra-territorial effect did not apply to s 555(2), so that it applied to the activities of the sponsoring companies, even though they had no UK presence. Thus it followed that s 556(2) applied to the payments made to the taxpayer's company.

The Court of Appeal disagreed with the High Court, saying that s 555(2) should not be given extra-territorial effect. The territoriality principle was one of some strength and was inherent in any Act of Parliament. Those who wished to disapply it had to show good reason for saying so. Furthermore, it took account of the potential difficulties in collecting tax from individuals who may only have a fleeting presence in the UK.

The taxpayer's appeal was allowed.

(Agassi v Robinson, Court of Appeal, 19 November 2004.)


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