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The taxpayer took part in an avoidance scheme involving gilt strip transactions. In essence, the participator claims loss relief on a sum equal to the amount of a gilt coupon payment on borrowed gilts.
In this instance, the taxpayer claimed that although the gilt coupon of £1.2 million was taxable interest income, the accrued income rules in TA 1988, s 710 to s 728 relieved him of the tax liability.
In addition, his payment of the manufactured interest payment to the custodian company gave rise to a loss of £1.2 million under the manufactured interest rules in Sch 23A which he could set against his other income.
HMRC’s first argument was that, viewed realistically, there was no genuine commercial possibility that the scheme would not run its course as intended by all parties.
Their alternative approach was that each step was precontracted so that the legal effect of each step and the application of the relevant legislation should be determined on that basis.
The tribunal examined the evidence in some detail. In respect of HMRC’s first argument, it concluded that the end result, taking each transaction separately and looking at the legislation in a purposive way, was that the taxpayer obtained relief under s 713 and s 714.
This resulted in none of the £1.2 million interest being taxable on him, but any Sch 23a relief was restricted to the amount, if any, of interest after the s 713 and s 714 relief.
With regard to HMRC’s second argument, the tribunal found that the scheme had no commercial purpose other than the obtaining of a financial benefit.
A standard set of documentation was used, and had been used by many other taxpayers. The outcome was inevitable, as was the intention of all parties involved.
The taxpayer’s appeal was dismissed.
