Chappell v Revenue & Customs

LORD JUSTICE KITCHIN: This is an application for permission to appeal against the decision of the Upper Tribunal and its consequential order dismissing the applicant's appeal against the decision of the First-tier Tribunal dismissing the applicant's appeal against an amendment made by the respondent, HMRC, to the applicant's self assessment return for the year 2005/2006 so as to disallow a deduction from his total income of just over £300,000 and bringing that sum into the charge to tax. This sum comprised two payments in respect of certain loan notes which the applicant maintained were "manufactured overseas dividends" within the meaning of schedule 23A to ICTA 1988, were paid in circumstances prescribed by the relevant regulations made under ICTA and were therefore to be treated as annual payments within section 349 of that Act. Permission to appeal was refused on the papers by order of Lewison LJ dated 15 December 2014. The applicant requested that this decision be reconsidered at an oral hearing which has come on before me today. The applicant has been represented at this hearing by Mr David Ewart QC and Mr Edward Waldegrave, as he was before the Upper Tribunal.

In dismissing the appeal, the Upper Tribunal accepted each of the following three arguments advanced on behalf of HMRC. First, that applying the Ramsay principle, the loan notes in issue were not securities for the purpose of the legislation, the applicant did not make” payments” within the meaning of the relevant provisions, and there was no relevant “transfer”. Second, and on the assumption that the relevant payments did constitute manufactured overseas dividends and were to be treated as annual payments, the applicant was nevertheless not entitled to deduct the payments from his total income because there was no obligation or option on his part to deduct tax from the payments; and third, even if the applicant was entitled to deduct the payments, then by operation of section 3 of ICTA he remained liable to income tax at the basic rate on those amounts.

The applicant seeks to contend before this court that in making each of these findings the Upper Tribunal has fallen into error. He recognises that in order to obtain the result that he seeks he must succeed on each of these issues. In dealing with the application on the papers, Lewison LJ observed that, on the facts found by the First-tier Tribunal and the Upper Tribunal, the scheme in this case fell within the ambit of the Ramsay principle, and that since the ambit of that principle was and is well known, the appeal raised no important point of principle or practice. He went on to observe that the arguments on the remaining issues were more cogent but that unless the appeal succeeded on the Ramsay point they were of academic interest only. In the light of these reasons, Mr Ewart has focussed his attention today on this application upon the Ramsay issue.

Mr Ewart does not shrink from the findings of the First-tier Tribunal that the arrangements in issue formed part of a scheme which had no commercial purpose and that the objective of the participants in the scheme was to obtain a tax advantage. However, he continues, the scheme cannot be condemned on this basis and that it is wrong to apply an artificiality test in the abstract. Instead, as explained by the House of Lords in Barclays Mercantile Business Finance Limited v Mawson [2004] UKHL 51, it is necessary to give the relevant statutory provisions a purposive interpretation in order to determine the nature of the transactions to which they were intended to apply and then to consider whether the transaction in issue answers that description.

As for the particular elements of the transaction in issue here, Mr Ewart submits that there clearly was a “payment”, a “transfer” and a “security” in the ordinary sense of those words. Taking first the term "payments", the applicant seeks to contend that the Upper Tribunal failed properly to follow the decision of the House of Lords in MacNiven v Westmoreland Investments Limited [2001] UKHL 6 and that it ought to have found that the word "payment" simply means "satisfaction of an obligation to pay". Further, he continues, it can make no difference as a matter of principle whether the relevant liability is generated internally, and that in this regard the Upper Tribunal failed properly to have regard to the decision of Nourse J, as he was, in Cairns v MacDiarmid (1982) 56 TC 556. As for the meaning of the term "securities", the applicant seeks to contend that the loan notes carried very substantial rights to interest and consequently could not properly be ignored. It is, therefore, a very different case to that of Arrowtown. Finally, the applicant seeks to contend that the Upper Tribunal misunderstood the term "transfer" and wrongly took into account that the loan notes served no independent or commercial purpose. There being no sham in this case, the Upper Tribunal ought to have found that the circumstances of this transaction, which would ordinarily be regarded as a transfer, should have been so treated for the purposes of the legislation. I am persuaded by Mr Ewart that these submissions do raise points of sufficient general interest to merit consideration by this court and that they do have a real prospect of success. They do, as it seems to me, involve points of principle.

I can deal with the second and third issues very shortly. The applicant contends that the decision of the Upper Tribunal on the second issue, referred to as the "technical annual payment” issue, leads to the conclusion that the relevant regulation 2B(3) is effectively pointless. This is, it seems to me, arguable, as is the applicant's further submission that the evident purpose of the regulation, in treating a relevant payment as an annual payment, must have been to make it deductible. As for the third and final issue, the applicant seeks to contend that section 3 of ICTA applies to annual payments within section 348 but not to those within section 349. Here, the payments in issue were, on the applicant's case, deemed by the relevant regulation to be within section 349 and accordingly section 3 should not apply in respect of them. This submission was accepted by the First-tier Tribunal but its finding was reversed by the Upper Tribunal. It seems to me that it is at least arguable that it fell into error in so doing.

For all of these reasons I have come to the conclusion that this appeal does raise points which are of some importance, which are properly arguable and which, as I say, merit consideration by this court. Accordingly, I grant permission to appeal.