Timothy Watts v The Commissioners for HMRC

Prior to 2003, Mr Watts’ previous experience with government gilts was limited to purchasing for his parents and a small self-administered pension fund. He was aware that income from a gilt was taxable, but that the gain arising on disposal was not.

Mr Green provided advice to Pertemps and its employees as a qualified independent financial adviser (‘IFA’), and introduced Eric Williams, the regional senior partner of Grant Thornton to Mr Watts. According to Mr Watts, Mr Green had ‘specifically’ been asked ‘to identify people of significant wealth in the Midlands so that [Eric Williams] might be introduced to them’.

In October 2003, Mr Williams, accompanied by Mr Green, visited Mr Watts with Mr Hamilton in attendance. During the hour-long meeting, Mr Williams explained to Mr Watts that the government had difficulty selling sufficient gilts to cover the difference between public spending and revenues.

Mr Watts said that he did not have sufficient liquid cash at the time, and Mr Williams explained that under the gilt strip scheme, Mr Watts would be lent cash to purchase gilt strips.

Mr Watts said that he had previously been approached by Ernest & Young with similar arrangements but did not enter into them as he ‘did not feel comfortable with those arrangements’. He was ‘comfortable entering into the arrangements marketed by Grant Thornton as they had been advised by the same counsel’ who, as understood by Mr Watts, had also advised the government ‘to devise arrangements that would be more attractive to wealthy persons who wished to purchase gilts’; and that the government had brought in legislation to allow the interest element on gilts to be split into different strips.

Mr Watts said that he was ‘sold these arrangements as a way of helping the government by purchasing gilts’; and that to his mind, was a ‘win-win scheme’.

Grant Thornton LLP as the scheme promoter (‘Grant Thornton’);

SG Hambros and Trust (Jersey) Limited as the loan provider and adviser in respect of government securities (‘Hambros’ or the ‘Bank’);

Cobbetts LLP based in Manchester as the provider of the legal services in relation to the execution of the instruments to implement the Scheme (‘Cobbetts’);

Timothy Watts IIP Settlement 2003 created with the appellant as the settlor and life tenant (the ‘Trust’);

Cobbetts as the trustee company by the name ‘Timothy Watts IIP Settlement 2003 Limited’ (the ‘Trustee’);

Investec Bank as the ‘third-party purchaser’ of the Gilt Strips (‘Investec’).

‘The Government (by parliamentary announcement on 27 March 2003 and in the 2003 Finance Act) stopped RDS [Realised losses on Discounted Securities] schemes.

However, the new rules specifically exempt “Gilt Strips” from the changes designed to stop the RDS planning…’ (emphasis original)

‘FA 1996, s202 and FA1996 Sch 40 make various provisions to enable the creation of the facility operated by the Bank of England, for gilt-edged securities to be stripped into their 2 components, i.e. income payments and redemption proceeds.

A person who holds a gilt that is designated as “strippable” will then be able to surrender it to the Bank of England and in its place receive a number of gilt strips. Each strip will be a fully fledged gilt-edged stock in its own right.’

No borrowing: (i) acquisition of gilt strips 0.25% commission payable; (ii) stamp duty 0.5%; (iii) Gilt strip sale costs 0.6%; (iv) Grant Thornton 6%.

With borrowing: (i) costs as above 7.35%; (ii) arrangement fee 0.5% (minimum £2,500); (iii) interest costs 5% for the period outstanding (estimated 14 days = £1,918 on £1m).

Grant Thornton’s fee is stated to include: (i) all trustees costs (excepting trust return filing of £400); (ii) all planning time; (iii) all legal costs; (iv) all relevant documentation.

‘Q: Mr Watts, as Grant Thornton put it in their own literature, there was “Nil economic loss” here, was there not?

A: I wouldn’t call a hundred thousand pounds nil economic loss. I wouldn’t call interest on the money nil economic loss. I wouldn’t call putting my family silver and my house at risk nil economic loss …

Q: There was simply a mechanism (the “Meccano” as you put it) designed to spit out the win that you referred to, supposedly giving the very significant tax saving which Grant Thornton referred to in relation to what they called their “Tax avoidance planning idea” [§§ 24 and 27 below] – that is correct, is it not?

A: To the best of my knowledge, in UK law, tax avoidance is a perfectly legal and moral thing to do. Tax evasion is not.

Q: Mr Watts, you said that you wished to help the government, does it, to avoid half a million pounds of tax?

A: … the government managed to sell one and a half trillion … of government interests, most of which were gilts. I would say it fantastically helped the Exchequer and the government … ’ (Day 3, p80, L12-25; and p81, L1-20]

‘[Cobbetts] will also provide the trustees of the settlement (via a corporate trustees company wholly owned by the partners of Cobbetts) and in that capacity will administer the trust. In their capacity as trustees, Cobbetts will be acting independently under the Trustee Acts and not under our instructions.’

‘In summary, the proposed structure is implemented as follows:

(i)You will purchase gilt strips in the market to the value of, say, £1,500,000.

You settle a sum on a settlement of, say, £150,000.

You grant an option to the trustees to acquire the strips at a strike price of, say, £150,000. The premium for which will be its then market value and this will be paid to you.

The trustees may then look to sell the, as yet, unexercised option to a third party, e.g. a bank.

The bank exercise the option requiring you to transfer the strips to it for consideration of £150,000.

The strip will mature and the bank will receive the £1,500,000.

The difference in value between the amount paid by you for the strip (e.g. £1,500,000) and the consideration received from the bank (e.g. £150,000) will be an income tax loss and will be available to shelter other income arising in the same tax year.’

‘The monies in the trust are held on your behalf by the trustees and all income arising thereon is yours as of right. The trustees have the power to lend money to you or even appoint capital out to you as a beneficiary.’

‘As with any tax planning arrangements there are risks that the arrangements will not achieve the desired outcome. The risks outlined below are not intended to be an exhaustive list. …Whilst we and Tax Counsel are confident that this is a legitimate tax avoidance planning idea we cannot guarantee that the Inland Revenue will not seek to attack it. … The Finance Act 2003 changed the law with the aim of preventing similar arrangements. As this planning idea is based on broadly similar principles to those arrangements, the Inland Revenue are likely to take exception to the planning … (italics added, see §14)

One avenue of attack … would be to argue that the premium received for the grant of the option should be included in the calculation of the income loss which would negate the benefit of the planning idea. …

A further possibility is that the … Revenue may seek to argue that the position should be analysed on a commercial basis rather than a strictly technical (or juristic basis). … that as a commercial matter no loss arose after all …’

‘The purchase of the gilt strip for these purposes is not intended to be for investment gain and you will not get back the amount originally invested.

Grant Thornton cannot guarantee the efficacy of these arrangement, which would be a matter for the court to decide in the event of an Inland Revenue challenge. … For the avoidance of doubt, the fees for the implementation of this scheme do not include fees in relation to an Inland Revenue challenge.’

‘You will appreciate that the proposed acquisition of gilt strips up to a value of £1.5m could generate an income tax saving of up to £540,000.’

‘[Grant Thornton] and Tax Counsel are confident that this is a legitimate tax avoidance planning idea we cannot guarantee that the Inland Revenue will not seek to attach it. This would mean that you will not obtain tax relief for the relevant loss and you would lose money.’ (emphasis added)

‘Grant Thornton cannot guarantee that a purchaser will buy the option. We have approached a number of institutions who have indicated in principle that they would be interested in buying such options but they are not required to do so. The price at which you can sell the option determines the actual economic loss and is not guaranteed. Any potential purchasers would look at each option in isolation and decide whether or not they are prepared to purchase that option and at what price. You could, therefore, get back less than anticipated at the outset or the option may not be sold at all.’ (emphasis added)

‘… you stated that you will receive significant income, (at least £1,500,000) in the current tax year and you would like to enter into some form of planning to shelter this income from income tax liability. … In the financial questionnaire, you have described your attitude to risk as “adventurous”, … This attitude to risk has been taken into account in formulating the recommendations made to you.’

‘In view of your objective and attitude to risk, … we have recommended that you purchase Gilt Strips with a view to the possibility of those strips subsequently being sold in circumstances that might give rise to an allowable loss for income tax purposes. …’

‘In order to use gilt strips for the purpose of mitigating income tax it is necessary to establish an interest in possession (IIP) and Cobbetts solicitors will deal with the trust deeds in this respect. An initial amount of £10 is all that is required to establish the trust. However, an additional contribution of £150,000 will need to be made …’

Granted option to trust for say 1,350,000

Strike price of option say 150,000

‘Individual purchases gilt strips (1,500,000)

Result of option lapsing is that individual hold

gilt strips to maturity with a value of 1,500,000

Individual has also received the option proceeds of 1,350,000

Trust has paid for an option and has no asset and therefore has lost (1,350,000)

Tax consequences none as the grant of the option is not a chargeable event

No income tax consequence

Unless the trust has been funded with full value it will be insolvent’

‘Individual purchases gilt strips (1,500,000)

Individual receives option proceeds 1,350,000

Individual receives strike price from trust 150,000

Trust could now hold to maturity and receive full value or sell at market value depending on market value between date of exercise and redemption

Technically the loss still arises but this is very aggressive and open to serious challenge under the Ramsey case.

GT [i.e. Grant Thornton] will not claim a loss in these circumstances.’

‘Individual purchases gilt strips (1,500,000)

Individual receives option proceeds 1,350,000

Individual receives strike price 150,000

Any third party purchaser is almost certain to exercise the option and therefore assumed to do so.

If not then the example is as number 1 but the trust does not become insolvent, the individual is better off by the option proceeds paid by the third party.

Tax consequences the option proceeds are ignored for the purposes of income tax if the option is exercised by a third party purchaser. As such the individual suffers a loss for tax of 1,350,000

This is available for offset against income of the year.

Trustees may make a profit or loss on sale depending on market value of option at date of sale.’

‘In the period before the option is exercised, should the FTSE 100 index rise above 5,500 for a continuous period of 10 days then the option would unravel and the proceeds would be repayable back to the trustees as if the option has not been granted.’

The appellant entered into a loan facility with Hambros for the sum of £1.5 million to ‘assist with the purchase of gilt strips’ (the ‘Loan Agreement’).

By a Deed of Charge, the appellant covenanted that he would charge the gilt strips to be acquired in favour of Hambros, such charge being in respect of the appellant’s obligations and liabilities under the Loan Agreement (the ‘Gilt StripsCharge’), including the right to take possession of the gilt strips; to sell, exchange or convert into money or otherwise dispose of the gilt strips. The appellant was obliged to take all action necessary to enable the Bank to exercise these rights.

The appellant executed a further power of attorney in favour of Hambros, whereby the Bank was appointed as the appellant’s attorney with power to exercise the Bank’s rights in respect of the property (i.e. the Gilt Strips) to like effect of the Charge.

The Timothy Watts IIP Settlement 2003 was created by deed (the ‘Trust Deed’) between the appellant as settlor and Timothy Watts IIP Settlement 2003 Ltd as Trustee. The Trust Deed stated the initial fund was £10 (documentation absent).

The appellant was appointed as ‘Life Tenant’ under the Trust (clause 1.4); was a beneficiary under the Trust; the other beneficiaries were members of the appellant’s family (clause 1.5); the appellant was entitled to income of the Trust (clause 3.1). The appellant reserved to himself the power to appoint new trustees (clause 10.1), and to remove any trustee (clause 10.3).

The Trustee had wide powers of appointment, (clause 4.1), such as the power to advance the trust property for the benefit of any beneficiary (including the appellant), and to borrow on the security of the trust fund, and with all the powers of an absolute beneficial owner in relation to the management and administration of the trust fund.

By letter dated 29 October 2003, Mr Hartland (Tax Manager) of Grant Thornton wrote to the appellant to ‘enclose copies of the documentation signed in the meeting [of 15 October 2003]’ and confirmed that Hambros would be ‘looking to draw down the loan and acquire the necessary gilt strips later this week’ and would telephone Mr Watts ‘to fulfil their compliance requirements’ prior to the purchase.

As part of the compliance requirements, Mr Watts sent Hambros (Grant Thornton copied in) a facsimile with the subject heading of ‘Purchase of Gilt Strips’, which stated:

On or before 7 November 2003, pursuant to the Loan Agreement with Hambros, the Gilt Strips were acquired on behalf of the appellant using funds provided by Hambros. After the acquisition, Hambros held the Gilt Strips as nominee.

On 7 November 2003, the appellant wrote to Hambros to advise of his intention to grant an option over the Gilt Strips to the Trustee, and to request written consent thereto from Hambros as nominee holder of the strips, and over which it had a charge.

By undated deed (the ‘Consent Deed’), Hambros consented to: (i) the appellant granting the Trustee the Option; (ii) the appellant granting the Trustee a charge over the Gilt Strips as security for the obligations of the appellant under the Option (the ‘Option Charge’); (iii) the release of the Charge; (iv) the appellant agreed to grant Hambros a charge over his interest under the Option Contract (the ‘Option Contract Charge’).

On 7 November 2003, the appellant wrote to the Trustee to grant an option to purchase the gilt strips, stating:

On 13 November 2003, Hambros issued a notice of assignment (the ‘Notice of Assignment’) providing that the Trustee had assigned the rights in respect of the Option Contract and the Option Charge to Hambros under the Option Contract Charge (the ‘Assignment’).

The appellant acknowledged the Notice of Assignment by way of written notice (the ‘Acknowledgement of Notice of Assignment’), which was witnessed but undated, whereby he agreed that: ‘upon payment of the relevant exercise price by the Secured Party when the option conferred by the Option Contract is capable of exercise perform the Option Contract in favour of Secured Party and effect any required transfer of the Gilt Strips or any other property to the Secured Party’.

The Trustee would enter into the Option Contract with the appellant;

Hambros having been requested to, had agreed to provide a loan facility of £1,350,000 for the purpose of funding the consideration due under the Option Contract (the ‘Trustee Loan Agreement’).

The Option Contract was entered into by way of deed (the ‘OptionContractDeed’). The terms of the Option Contract included that the consideration payable for the grant of the Option was £1,338,749 and the consideration payable on exercise of the Option was £150,400.

The terms of the Option Contract included a condition for the Option to be exercisable until 28 November 2003 if the following condition was not met:

The appellant and the Trustee entered into a deed of charge dated 19 November 2003, whereby the appellant granted the Trustee a first fixed charge over the gilt strips to secure the appellant’s obligations under the Option (the ‘Option Charge’) whose terms were substantially similar to the Gilt Strips Charge.

Hambros entered into a deed which consented to: (i) the granting of the Option, (ii) the granting by the appellant to the Trustee of the Option Charge, (iii) the releasing of the Gilt Strips Charge in exchange for the granting by the appellant to the Bank of a charge over the Option (the ‘Consent’).

Hambros and the Trustee entered into a loan facility dated 19 November 2003 in the sum of £1,350,000 with the purpose being to assist with the purchase of the Option from the appellant.

Hambros and the Trustee entered into a deed of charge, also dated 19 November 2003, by which the Trustee assigned to the Bank all its rights in the Option and the Option Charge in exchange for the Trustee Loan Facility.

On or around 21 November 2003:

On or around 25 November 2003:

On or around 26 November 2003:

Hambros’ statement dated 28 November 2003 of the appellant’s Call Deposit Account recorded the following transactions in a 5-day period in November, followed by deposit from the Trustee to fund interest payments in December 2003:

The appellant’s Call Loan Account with Hambros (annual statement dated 27 August 2004) recorded the following transactions in an 18-day period in November 2003, when the brought forward balance stood at nil:

The Trust’s Call Deposit account statement with Hambros dated 28 November 2003 recorded transactions in a 7-day period, when the opening balance was nil.

‘Q: Each of the three accounts (Footnote: ³) were opened specifically for the purposes of the scheme, were they not?

A: I would imagine so. It is part of the Meccano sets, that we are looking for a plural noun, yes.

Q: Once the Meccano sets had been built, the activity stopped, did it not?

A: I would ask you to refer – I am not going to avoid your question, sir, but construction of this, I left with Mr Hamilton. …’ (Day 2, p161, L15-25)

‘… did I go to a firm of lawyers? I probably, certainly, maybe, did not. I would in my, and I use the word “layman” in inverted commas, I am not an ignoramus, but within my knowledge of what was being spoken of, put before me, I would have considered it more of a professional tax matter than a general purpose lawyer. If I’m wrong, so be it.’ (Day 3, p10, L14-25, p11, L1-2)

‘I certainly challenged them on it and they did give me a breakdown. £20,000 went to the chambers that gave the advice of what they describe as the leading expert in the United Kingdom on this particular subject. And they went on to say that not only was he the leading expert, he was the very person that the government relied upon to draft the phrase which has become common as gilt strip that originated all of this.’ (Day 3, p11, L3-17)

‘There must be a purpose to your question, but if you can ask another ten of a similar ilk and the answer will always be no. … they are my signatures and would have been put in front of me at the appropriate time by the appropriate people, after we have received the appropriate advice, and with all things considered, … I was putting the family silver on the line again, and such instances do, maybe it is the synapses of the brain, create a memory. But does that memory extend to the room and the persons in it? With all honesty … I have agreed that the documents were signed by me. …’ (Day 3, p14, L1-25)

‘I’ve mentioned the family silver. I have mentioned £100,000 being the first step on this journey. There was considerable risk involved in this particular piece of Meccano, … Was I advised? Yes. Did I take multiple advice? Yes. Did I sign at the appropriate time? I would believe so, sir.’ (Day3,p15, L7-19)

On 1 December 2003, Grant Thornton sent the appellant a fee note in the sum of £88,125 (being £75,000 plus VAT) for the services provided in respect of the Scheme.

On or around 19 December 2003, Grant Thornton’s fee note was paid by way of a cheque from a company bank account of the Pertemps Group.

On 6 January 2004, Grant Thornton wrote to the appellant stating that:

‘The [Trustee] have considered Mr Watt’s request for a loan of £130,000. They have decided that it would be in the trustees’ interests to retain approximately 10% of the original trust fund. The trustees are therefore prepared to make a loan of £128,000. This is good evidence, of course, of the independence of the trustees, which in turn helps to demonstrate the robustness of the planning.’

‘I promise to pay to Timothy Watts IIP Settlement 2003 Limited of [address] on demand the sum of One hundred and twenty-eight thousand pounds (£128,000) for value received.’

‘To the best of my knowledge today, it probably hasn’t been repaid then, no. I have no evidence to the contrary as I sit here.’ (Day 2, p169, L8-14)

‘On 4 November 2003 I purchased UK Treasury Principal Gilt Strip 7 December 2003, nominal amount £1,504,212 (SEDOL 0219055), for £1,500,000. On 19 November 2003 I granted an option to the Timothy Watts IIP Settlement 2003 Limited in their capacity as trustees of the Timothy Watts IIP Settlement 2003 of which I am settlor and life tenant. I understand that the trustees sold this option to Investec Bank (UK) Ltd who subsequently exercised the option by paying £150,400 to me. As a result of this exercise of the option I have suffered an income tax loss of £1,349,600. It is considered this loss is allowable under para 14A Schedule 13 to the Finance Act 1996 and is reflected at Box 15.8 in the attached tax return.’

On 12 July 2004 HMRC advised EY that an enquiry into the loss claim in relation to the Gilt Strip transaction was likely, and the repayment claim could not be processed,

The appellant’s 2004 Return also claimed film partnership loss and EIS deferment, which HMRC confirmed in writing to EY on 27 August 2004 that the repayment claims in relation thereto as having been processed.

On 27 September 2004, HMRC gave notice of intention to enquire into the 2004 Return under s 9A of the Taxes Management Act 1970 (‘TMA’) and that pursuant to ss 59B(4A) of TMA, no repayment would be made.

‘HMRC has clearly indicated in its Litigation and Settlement Strategy paper that it is willing to pursue litigation in all enquiry cases where it is advised by Tax Counsel that there is a more than a 50% chance of success. …’

‘Counsel advised that while he originally held the view that Gilt Strip planning should achieve its intended outcome, he would now not expect to win if he were to take a case forward….’

‘… we understand there may be Tax Counsel who are more optimistic of the chances of success for Gilt Strip planning. This was mainly because in the recent case of Commissioners for HMRC v David Mayes [2011] EWCA Civ 407, the Court of Appeal decided in the taxpayer’s favour on a highly artificial piece of tax planning based on the “corresponding deficiency level” legislation. HMRC were refused a further hearing of the appeal by the Supreme Court so the decision is final….

We believe that the chance of successfully litigating Gilt Strip planning remains law but cannot be totally ruled out. …’

The Respondents have accepted that the Arrangements entered into by the appellant were not a sham. Accordingly, the individual deeds, agreements, notices etc effected the matters stated therein.

The correct approach to the interpretation of para 14A is as stated in UBS, which requires the Tribunal to start with the statutory language to determine to which facts that statute should be applied.

The language of para 14A(3)(b) is clearly and tightly drawn: it prescribes an ‘A-B’ calculation of a taxpayer’s loss, with no room for wider enquiry into commercial loss.

The effectiveness of the Arrangements followed from the definition of ‘loss from a discount on a strip’ contained in para 14A, namely ‘the amount paid by him for the strip exceeds the amount payable on the transfer or redemption’ (appellant’s emphasis).

It is asserted that the premium paid for the grant of the Option was not a sum ‘payable on the transfer’ of the gilt strips, and is therefore excluded from the ‘A-B’ calculation of the appellant’s loss.

Nothing in the background and context to the enactment of Sch 13, or its subsequent amendment, suggests that it had the statutory purpose of permitting relief only in respect of ‘commercial’ losses.

The Upper Tribunal in Berry failed to apply the UBS approach and Berry therefore cannot be applied to the facts of the present case, which are in any event different to those in Berry.

‘(a) the Arrangements which the appellant entered into were not a sham; and

the Arrangements resulted in a loss from the discount on a strip as defined in paragraph 14A, Schedule 13, Finance Act 1996.’ (emphasis original)

‘HMRC’s understanding of the relevant factual context, based on the available material and prior to seeing the Appellant’s skeleton argument, is as follows. See also HMRC’s Amended Statement of Case (“HMRC’s Amended SoC”) at paragraphs 74 to 98A [64-70]. For the avoidance of doubt, the burden of proof is on the Appellant to establish the facts and that the tax treatment claimed by him is correct. Nothing in the paragraphs below or in HMRC’s Amended SoC should be taken as an admission as to the facts or the consequences alleged by the Appellant, as to which the Appellant is put to proof.’ (underlining as in the appellant’s supplemental skeleton)

The Amended SoC pleads a positive case on the facts, which is not conditional on proof by the appellant. The appellant can and will rely on those pleaded facts which are not in dispute.

HMRC cannot transform their pleaded case on the facts from a positive one to a conditional one by means of a skeleton argument. Thus far, HMRC have not claimed, either during the enquiry or the present appeal, that the appellant has failed to prove that he implemented the arrangements.

‘[7] Ramsay did not introduce a new legal principle. … The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application.’

‘[29] The Ramsay case … liberated the construction of revenue statutes from being both literal and blinkered … [quoting from Ramsay at 179]

“What are ‘clear words’ is to be ascertained upon normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: ..”

[30] Secondly ([Ramsay at 180]) on the application of a statutory provision so construed to a composite transaction:

“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.”’

‘[31] The application of these two principles led to the conclusion, as a matter of construction, that the statutory provision with which the court was concerned, namely that imposing capital gains tax on chargeable gains less allowable losses was referring to gains and losses having a commercial reality (“The capital gains tax was created to operate in the real world, not that of make-belief”) and [Ramsay at 182]:

“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.”’

‘In saying that the transactions in Ramsay were not sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence. They are intended to do what they purported to do. They had a legal reality. But in saying that they did not constitute a “real” disposal giving rise to a “real” loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of ‘disposal’ and ‘loss’ as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income tax legislation was intended to operate ‘in the real world’, one is gain referring to the commercial context which should influence the construction of the concepts by Parliament.’

‘[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 … 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.’ (emphasis by the appellant)

‘[36] … Cases such as these gave rise to a 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. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so…’ (italics original)

‘[40] These statutory requirements … are in the case of a finance lease concerned entirely with the acts and purposes of the lessor.’

‘[41]… None of these transactions, whether circular or not, were necessary elements in creating the entitlement to the capital allowances.’

‘[38] In a speech of Lord Hoffmann in MacNiven it was said that if a statute laid down requirements by reference to some commercial concept such as gain or loss, it would usually follow that elements inserted into a composite transaction without any commercial purpose could be disregarded, whereas if the requirements of the statute were purely by reference to its legal nature (in MacNiven, the discharge of a debt) then an act having that legal effect would suffice, whatever its commercial purpose may have been.

This is not an unreasonable generalisation, indeed perhaps something of a truism, but we do not think that it was intended to provide a substitute for a close analysis of what the statute means. It certainly does not justify the assumption that an answer can be obtained by classifying all concepts a priori as either “commercial” or “legal”. That would be the very negation of purposive construction …’ (sub-paragraphing added)

‘[79] The Special Commissioners … found as a fact that the loans which were made by the pension 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 pension 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 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….’

‘[32] … The contrast being made throughout Lord Wilberforce’s speech is between juristic or arithmetical realities on the one hand and commercial realities on the other. He is construing the words “disposal” and “loss” to refer to commercial concepts which are not necessarily confined by the categories of juristic analysis. … The innovation in Ramsay was to give the statutory concept of “disposal” and “loss” a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, … the court was required to take a view of the facts which transcend the juristic individuality of the various parts of a preplanned series of transactions.’

‘It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the test of ordinary business.’

‘[39] … If “the legal position” is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business “substance” of the matter is not to ignore the legal position but to give effect to it.’

‘[23] … [The legislation] shows a lack of interest in (a) attributing gains to the person who made them, (b) not attributing gains to a person who did not make them and (c) timing the taxation of the gain fairly. Instead it operates mechanically according to a series of statutory formulae.’

‘[44] … This is legislation that does not seek to tax real or commercial gains. This it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance.’

‘[47] In summary it seems to me that [the relevant legislation] adopts a formulaic and prescriptive approach. No overriding principle can be extracted from the legislation, or from the authorities, that some types of transaction should be ignored in the application of the Chapter. To say that there is no premium and no partial surrender, that those steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self-cancelling nature of the transaction was no different and no more extreme than that in MacNiven.’

‘The question of law is whether, in a case in which [the options] were in fact exercised so as to cancel each other out, the existence of this contingency prevented the commissioners from applying the statute to the scheme as it was intended to operate and as it actually did operate. The commissioners thought that it obliged them to treat the options as separate transactions.’

‘[22] … Here, the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the SPI option at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. Form the point of view of money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.

[23] … The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.

[24] It follows that in our opinion the special commissioners erred in law in concluding that their finding that there was a realistic possibility of the options not being exercised simultaneously meant, without more, that the scheme could not be regarded as a single composite transaction. We think that it was and that, so viewed, it created no entitlement to gilts and that there was therefore no qualifying contract.’

‘That depends upon what the statute means by “entitlement”. If one confines one’s attention to the Citibank option, it certainly gave Citibank an entitlement, by exercise of the option to the delivery of the gilts. On the other hand, if the option formed part of a larger scheme by which Citibank’s right to the gilts was bound to be cancelled by SPI’s right to the same gilts, then it could be said that in a practical sense Citibank had no entitlement to gilts. … the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the court to have regard to the whole of a series of transactions which were intended to have a commercial unity. … If the scheme amounted in practice to a single transaction, the court should look at the scheme as a whole. …’ (italics added)

‘The 85% chance of the market change condition being satisfied was favourable enough to make it a risk which the appellants were willing to accept in the interests of the scheme’; and the market change provision is fully within the principle in SPI: Astall SpC at [16] and [17]; and

That ‘it was a practical certainty that at the time of issue of the securities KPMG would succeed in finding purchasers willing and able to purchase the securities within the time scale at a discount of not more than about 10%’: Astall SpC at [18].

‘[34] Both Mawson and SPI emphasise the need to interpret the statute in question purposively, unless it is clear that that is not intended by Parliament. The court has to apply that interpretation to the actual transaction in issue, evaluated as a commercial unity, and not be distracted by any peripheral steps inserted by the actors that are in fact irrelevant to the way the scheme was intended to operate. SPI also illustrates another important point, namely that the fact that a real commercial possibility has been injected into a transaction does not mean that it can never be ignored. It can be disregarded if the parties have proceeded on the basis that it should be disregarded.’

[42] … This principle [in Mawson] is not expressed to be limited to a composite transaction. It can thus apply to a single multi-faceted transaction which on its face operates in a particular way but which when examined against the facts of the case does not operate as a transaction to which the statute was intended to apply.’

On 14 December 1999, C formed a company; he was the sole shareholder and director.

On 23 December 1999, C borrowed £3.9m from NatWest; security was given by a charge over the share portfolios of Mr Campbell and his wife, a second mortgage over their matrimonial home, a charge over a life policy, and a lien over certain loan notes to be issued by the company.

On 24 December 1999, C subscribed £3.75m loan notes in the company, and the company received the £3.75m borrowed from NatWest.

On 14 March 2000, the GM Group Ltd was acquired by another media group; C’s taxable income from his share options was £3.35m.

On 15 March 2000, C gifted the loan notes to his wife by a deed of gift.

As at 31 March 2001, the company had made a number of investments in both listed and unlisted securities.

C claimed a loss of £2,483,100 on the transfer of the loan notes to his wife in his tax return for 1999-2000; the loss was calculated based on the aggregate market value of the loan notes on the date of the transfer being £1,266,900.

A market value of £1.5m for the loan notes at 15 March 2000 was agreed, which made the ‘loss’ figure (if allowed) £2.25m, being the difference of £3.75m and £1.5m.

That the main purpose of C in establishing the Company and subscribing for the Loan Notes was to obtain tax relief under Sch 13 FA 1996; C also had the commercial, non-tax purpose of making investments through the Company; [66].

The Loan Notes were issued after taking tax advice, in particular as regards the redemption price and the redemption date, which were critical terms to their status as relevant discounted securities, since the definition of RDS depends on the rate of return by reference to the redemption date and redemption amount: Sch 13, para 3(3); at [66].

The gift of the Loan Notes to C’s wife was wholly tax motivated so as to generate the loss under Sch 13, para 2(1), and the transfer to a connected person was purely to generate the loss for which C seeks relief and for no other reason; at [67].

That the Revenue had accepted two important facts, namely (i) that the entire subscription monies of £3.75m were paid for the Loan Notes and were in no part a gift to the Company, and (ii) that the gift to C’s wife was a ‘transfer’; at [68].

On the facts as conceded by the Revenue, ‘the only issue’ for the Special Commissioners to decide is then stated in terms as follows at [68]:

‘[86] In this case, we are concerned with the terms of Sch 13, para 2 in circumstances in which the Inland Revenue accepts that the subscription price was entirely paid in respect of the acquisition of the Loan Notes and that there was a transfer by the Appellant to a connected person. Paragraph 2(3) is an entirely mechanistic provision which calculates the “loss” by deducting the subscription price “paid in respect of [the] acquisition of [the Loan Notes]”, within para 2(2)(b), from the market value deed by para 8 to be obtained on the “transfer”, within para 2(2)(a), and deducting any relevant costs.

[87] Once an amount paid in respect of a relevant discounted security is ascertained and the amount received (or deemed to be received) on transfer or redemption is determined, there is a “loss” where the former exceeds the latter. There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term “loss”.

In other words, once the terms “amount paid … in respect of [an] acquisition of [of the relevant discounted security]’ have been construed in the context of para 2(2), the “loss” is also automatically ascertained. This is confirmed by the terms of para 2(3) which provides that ‘For the purposes of [Sch 13] the loss shall be taken … to be equal to the amount of the excess increased by the amount of any relevant costs …’.

Paragraph 2(3) confirms the term “loss” is, to use the terminology of The Lord President (Lord Cullen of Whitekirk) (at para 43) in Scottish Provident a ‘construct which has a specific statutory meaning’, so that, like s 155 of the Finance Act 1994, in Scottish Provident, para 2(2), of Sch 13 is “an artificial framework … [which] does not indicate that a commercial meaning falls to be given to “loss”’. (italics original, sub-paragraphing added)

‘[88] The artificial (legal) meaning of the term “loss” in Sch 13, para 2(1), (2) is further reinforced by the statutory mechanism which quantifies a “loss” for these purposes. Firstly, the “loss” is increased by the “relevant costs” incurred by a taxpayer (being the costs incurred “in connection with the acquisition of the [relevant discounted security]’ and costs incurred ‘in connection with [any] transfer or redemption of the [relevant discount security]’: see Sch 13, para 1(4) and para 2(3)(a). Secondly, … the transferor of a relevant discounted security is deemed to receive an amount equal to its market value, when the transfer is to a connected person, even though he may receive no such sum. These factors, while not at all conclusive in themselves, confirm that the term “loss”, in the context of para 2(1) and (2), is far removed from any “commercial” sense of the term.’

‘[43] The ground of the decision [in Campbell], as I read it, is that: “There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term “loss”.’ In other words Mr Campbell’s motivation did not automatically deny him his tax relief. They were not saying that the fact-fining tribunal should ignore the reality of the transactions that in fact took place. Moreover, as they went on to point out, the Commissioners’ finding of fact that Mr Campbell had a commercial purpose in subscribing for the loan notes meant that HMRC’s argument failed on the facts (para 92). At the start Mr Campbell was the holder to the loan notes, for which he had paid in real money borrowed from the bank. At the end, Mr Campbell no longer owned the loan notes; but he still owed the money to the bank. His economic position had changed for the worse. In ordinary terms, he had suffered a loss. The loan notes had not disappeared. They still existed, but they were owned by his wife. They were, therefore, two real events separated by several months which existed in the real world. In his submissions Mr Gammie submitted:

“Thus, once the Commissioners had decided (or the Revenue had conceded) that no part of the £3.75m was in reality a gift to the company, there was only one possible answer to the statutory question posed by paragraph 2(2)(b) of Schedule 13 – what amount did Mr Campbell pay to subscribe the securities? Similarly, once it had been determined (or conceded) that the reality of the arrangement was that Mr Campbell subscribed the securities and then, as a separate matter, gave them to his wife, paragraph 8 of Schedule 13 supplied the answer to the question – what amount did Mr Campbell receive on transferring the securities? Paragraph 8 directed that this was the market value.

The relevant point about Campbell is that the provisions of Schedule 13 were too closely articulate in relation to the reality of the taxpayer’s transaction in that case. It is not that the provisions of Schedule 13 are too closely articulated to exclude the application of the Ramsay principle and to prevent one deciding in any other case what is the tax reality of the taxpayer’s transactions.’ (italics original)

‘[51] As I have said, the FTT held that the purpose of para 14A was the general proposition sated in sub-para(1) viz:

“A person who sustains a loss in the year of assessment from the discount on the strip shall be entitled to relief from income tax on the amount of his income for that year according to the amount of the loss.”

[52] In my judgment the FTT were right to identify the purpose of the paragraph in that way. This is not a case in which Parliament has used algebra (amount A and B) to create a notional profit or loss. It has used words which have a recognised commercial meaning; and it is to be expected that Parliament intended to tax (or relieve) real commercial outcomes. The FTT were right not to adopt a slavishly literal “tick-box” interpretation of the legislation. This is precisely how the Ramsey principle is meant to operate. I thus conclude that the FTT made no error of law in identifying the purpose of the legislation.’

Pitt did not consider the legislative history of Sch 13 FA 1996 in relation to the removal of para 2, Sch 13 and the introduction at the same time of para 14A Sch 13, on which the appellant has made detailed submissions.

The decision in Pitt followed the Upper Tribunal in Berry, and the appellant contends that Berry erred in its understanding and application of Ramsay to the interpretation of para 14A Sch 13 FA 1996.

First: from 27 July 1999, introduction of a targeted anti-avoidance provision into the definition of ‘relevant discounted securities’ which was not applicable to gilt strips.

Second: from 10 July 2003, the general scheme for ‘relevant discounted securities’ other than strips was repealed. The provisions of para 2(2), formerly used to calculate losses for relevant discounted securities, were replicated in the newly introduced para 14A in materially identical terms, without the targeted anti-avoidance provision being introduced into para 14A.

Third: from 22 July 2004, Sch 13 was significantly amended to introduce general anti-avoidance provisions that denied loss relief in the case of certain schemes or arrangements with an unallowable purpose.

that the amendments to Sch 13 did not make any changes of substance to the tax treatment of gilt strips, especially in relation to the ‘A-B’ calculation for losses from a discount on gilt strips, even after para 2 (as concerns Campbell) was repealed; and

the availability of loss relief for losses on gilt strips was maintained without any anti-avoidance provisions into para 14A as was then ‘newly’ enacted from 10 July 2003.

‘[Schedule 39] seeks to stop widespread and aggressive exploitation of the relevant discounted securities regime by high net-worth individuals using marketed schemes. The schedule’s purpose is to put the taxation of relevant discounted securities on the same footing as the taxation of normal interest-bearing securities, and to ensure European Union capability by extending the special treatment of UK gilt strips to strips of overseas Government securities.’ (Standing Committee B debate, 17 June 2003 (Col 611))

‘1. The clause and schedule remove relief for losses and expense for most relevant discounted securities (“RDS”). RDS are securities issued at a discount of more than ½% a year. RDS held on 26^th March 2003 which are listed on a stock exchange are protected. The special treatment of UK gilt strips, apart from expenses, is retained and extended to strips of other overseas government securities.’

‘There are special rules in the RDS legislation for “gilt strips”. These are created when the interest coupon on a gilt is detached from the principal, and dealt in separately. The right to receive an interest payment in the future has a present value lower than the amount of interest due, so a gilt strip falls to be treated as a RDS. To avoid people deferring tax on gilt interest, which is payable twice a year, by investing in a strip where the profit would only be taxable on redemption or sale, legislation requires a strip to be treated as if it were transferred each year on 5^th April for its market value, and the reacquired.’

First, para 14A(1) is the relieving provision, which confines the availability of the relief to cases where the taxpayer ‘sustains a loss in any year of assessment from the discount on a strip’.

Secondly, para 14A(2) sets the period within which claims for relief can be made.

Thirdly, para 14A(3) defines where a ‘loss from the discount on a strip’ occurs, that term clearly referencing the language of para 14A(1).

It is argued that para 14A(3)(b) is an ‘A-B’ calculation where both ‘A’ and ‘B’ are quantified. Crucially, there is no independent definition of ‘a loss in any year of assessment from the discount on a strip’ contained in para 14A(1); it is para 14A(3) which provides the definition of ‘a loss from a discount on a strip’.

In other words, the ‘loss from a discount on a strip’ is intended to be a composite term; it is impermissible to dissociate part of the composite term and seek to interpret that dissociated element in isolation. rather than simply a ‘loss’ to be the relevant statutory concept.

‘(1) Subject to sub-paragraph (2), in this Schedule references to a transfer, in relation to a security, are references to any transfer of the security by way of sale, exchange, gift or otherwise.

[…]

For the purposes of this Schedule a transfer or acquisition of a security made in pursuance of an agreement shall be deemed to take place at the time when the agreement is made, if the person to whom the transfer is made, or who makes the acquisition, becomes entitled to the security at that time.

If an agreement is conditional, whether on the exercise of an option or otherwise, it shall be taken for the purposes of this paragraph to be made when the condition is satisfied (whether by the exercise of the option or otherwise).’

The appellant granted the option to the Trustee on 19 November 2003; clause 4.3 of the Option obliged the appellant to sell the gilt strips to the Trustee.

Clause 10.1 contained a power for either party to assign the benefit of the Option; the appellant acknowledged that the benefit of the Option had been assigned from the Trustee to Hambros by an acknowledgement of a notice of assignment, which obliged the appellant to transfer the gilt strips to Hambros on the exercise of the Option.

The transfer of the gilt strips to Investec ‘by way of sale, exchange, gift or otherwise’ was only capable of occurring following the execution of the deed which assigned the benefit of the Option from the Trustee to Investec on 25 November 2003, which was days after the premium for the grant of the Option had been paid.

Reports, including consultation papers, which evidence the mischief behind a provision: section 24.9 relying on Balhaj v DPP at [22].

Reports of legislative debates, outside the rule in Pepper v Hart, to supply the context or identify the mischief at which legislation is aimed: section 24.12 relying on Presidential Insurance at [23]-[24].

Explanatory notes may be used to understand the background to and context of the legislation and mischief at which it is aimed: section 24.14 relying on R (Westminster CC) at [5].

In Scottish Provident where the Inner House of Court of Session considered s 155(2) of the Finance Act 1994 which provided for the calculation of a loss on the holding of certain qualifying contracts by stating:

Section 155(4) FA 1994 defined amounts A and B by reference to payments becoming due to the company in an accounting period and payments becoming due by the company in an accounting period.

The Inner House held at [42] that where s 155(2) adopted an ‘A-B’ calculation of losses, it employed a legal concept ‘being a construct which has a specific statutory meaning’ and that a commercial meaning did not fall to be given to ‘loss’.

In Campbell, the Special Commissioners considered para 2(2)(b) Sch 13 FA 1996, which was expressed in materially similar terms to para 14A(3)(b) of Sch 13 FA 1996, and held at [86] that para 2(2) was:

The Special Commissioners held at [87] that once the terms contained in para 2(2)(b) had been construed, the loss had been automatically ascertained, and that just as with s 155 in Scottish Provident, para 2(2) had a specific statutory meaning which did not indicate that a commercial meaning fell to be given to the term ‘loss’.

Hambros/ Appellant: Hambros had transferred £1.5 million to the appellant; and the appellant had transferred back to Hambros the same or a similar sum.

Hambros / Trustee: Hambros transferred £1,338,749 to the Trustee; and the trustee transferred back to Hambros the same or a similar sum.

Investec /Appellant and Trustee: Investec had transferred approximately £1.5 million to the appellant and the trustee (£150,400 to appellant, and £1,347,049 to trustee); Investec had received from the appellant the Gilt Strips which had been purchased for £1.5 million.

Appellant /Trustee: the appellant had transferred £150,000 to the Trustee; the Trustee had transferred to the appellant the Interest Free Loan of £128,000, and the appellant remained a life tenant of the trust.

Grant Thornton /Appellant: Grant Thornton had advised on and implemented the Scheme; the Appellant had paid Grant Thornton a fee.

Appellant /HMRC: the appellant had asserted that he suffered a loss of £1,349,600, being the difference between £1.5 million (the sum for which the Gilt Strips were originally purchased) and £150,400 (the sum transferred by Investec to the Appellant on exercising the option).

The starting point is that the pre-planned and co-ordinated nature of the arrangements is clear, with Grant Thornton’s material setting out the various steps involved in the self-described ‘tax avoidance’ planning, and the supposed fiscal implications of the same. In the circumstances, the arrangements fall to be analysed as a composite transaction.

Analysing the arrangements as a composite transaction, the next step is to consider whether, as contended, the appellant sustained a ‘loss’ of £1,349,600 for para 14A relief purposes, and this involves taking into account para 14A(3).

In the context of the present case, a loss only has the potential to arise if the appellant has paid a sum (‘£X’) for the Gilt Strips, then transferred them, and the ‘amount payable on the transfer’ (£Y’) is less than the sum paid for the Gilt Strips in the first place. That difference is referred to in para 14A(3) as ‘the excess’.

The loss for the purposes of claiming relief is taken to be equal to ‘the excess’ by para 14A(3): ‘The loss shall be taken to be equal to the amount of the excess …’.

In the present case, £X is £1,500,000, being the sum the appellant paid for the Gilt Strips. The question arises: what constitutes £Y, i.e. ‘the sum payable on the transfer’?

Viewed realistically, £Y is not the £150,400 claimed by the appellant, which is merely the amount transferred by Investec to the appellant on the exercise of the Option, but in addition, the amount paid by Investec for the assignment of the Option: £1,347,049.

Thus, £Y equals £1,497,449 (being £150,400 plus £1,347,049). This is because:

‘… to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic [i.e that tax statutes generally draw their life-blood from real world transactions with real world economic effect].’

‘The family silver’ of circa £100,000 was the outlays for taking part in the Scheme.

The outlays comprised Grant Thornton’s fees of £88,125 (£75,000 plus VAT of £13,125), and around £21,565 paid to Hambros, being interest payments of £10,851 (on the appellant’s loan account) and £3,214 (on the Trust’s loan account), plus Hambros’ arrangement fee of £7,500 (see §55(1)). In addition, there was £400 payable to Cobbetts for completing the Trust Return (§15).

It is inferred that the VAT on Grant Thornton’s fees would have been reclaimed, by Pertemps, given that the fees were arranged to be paid by Pertemps, making the net outlays £75,000 plus £21,565, a total of £96,565 plus the £400 for the Trust tax return, and the total was the sum understood by Mr Watts as his ‘family silver’ put on the line.

The ‘tax saving’ was annotated by Mr Watts in the second table of figures estimated to be £540,000 (§16), and the same figure was confirmed by Grant Thornton in the document on ‘Using Gilt Strips’ as the ‘tax saving’ (§26).

In completing the financial questionnaire for Grant Thornton’s compliance procedure, Mr Watts described his attitude as ‘adventurous’ (§32), which was a reference to the risk involved in participating in the Scheme, where the anticipated ‘tax saving’ might be challenged.

I find as a fact that Mr Watts understood the Arrangements as costing him in outlays circa £100,000 for the chance of obtaining the ‘tax saving’ quantified at £540,000.

I also find that Mr Watts understood that at the end of the series of transactions, the £1.5m he borrowed from Hambros to purchase the Gilt Strips would be fully repaid by proceeds from a third-party purchaser, and the ‘economic loss’ would be ‘Nil’ as annotated in his handwriting against the first table of figures (§16).

In relation to the £150,000 into Cobbetts’ client account as ‘additional’ sum settled into the Trust, Mr Watts received £128,000 as interest-free loan out of the settlement. While the Trust’s client account is not produced, it can be inferred that when Mr Watts applied to the Trustee for a loan in January 2004, the Trustee had already paid £13,820 (see §55(1)(e)) into Mr Watts’ Call Deposit account with Hambros to cover the majority of the impending interest payments on the appellant’s and the Trust’s loan accounts of £10,851 and £3,214 respectively.

The Trust would be left with just over £8,000 after the interest payments in December 2003 and the loan advancement in January 2004. The £128,000 interest-free loan was paid into Pertemps’ account, in line with the fact that the sum of £150,000 into the Trust had originated from Pertemps; and the ‘loan’ has not been repaid to date.

Further, Mr Watts was given to understand by Grant Thornton that the money in the Trust was ‘yours as of right’ (§23), and that was how in reality the Trustee dealt with the trust funds, be it the advance of an interest-free loan without any terms for repayment (save that of when being recalled), or the application of the trust fund towards meeting the interest charge on Mr Watts’ loan account without any documentation (or not produced if any existed). The appearance of independence of the trustee in not advancing the full £130,000 applied for by Mr Watts, as confessed by the Trustee, ‘helps to demonstrate the robustness of the planning’ (§64).

There was also the £11,500 paid into the Call Deposit account with Hambros, and that would be to meet Hambros’ arrangement fee of £7,500 and towards the purchase price of the Gilt Strips which was £1,503,749.79 (see 55(1)(b)), and therefore £3,749.79 over the £1.5m loan advanced, and also towards the interest payment on the loan on 23 December 2003 of £245.59 (i.e. £10,821 plus £3,214 minus £13,820.18 from Trust).

Another way of understanding the family silver put on the line of circa £100,000 would be to consider the sums paid out by Mr Watts / Pertemps, namely the initial sums of £11,500 and £150,000, then the £75,000 (net) of fees to Grant Thornton; a total of £236,500 minus what the Trust advanced as a ‘loan’ of £128,000 and possibly left in the trust fund of circa £8,500, giving the overall costs of £100,000.

The numerous documents executed to implement the Scheme were inter-related like the interlinking parts of the Meccano sets: the transactions in the Scheme were pre-planned to follow in a prescribed sequence from the purchase of the Gilt Strips by Mr Watts to the transfer of the same to a third-party buyer.

The series of pre-planned transactions took place from 5 November 2003 to 26 November 2003; the flow of funds (at §55) is a clear indication of the movement of monies to implement the preordained steps in a short period spanning three weeks.

In relation to the condition inserted in the Scheme, viz the FTSE 100 index reaching beyond 5,101, this contingency to suggest that there was no composite transaction was a part of that composite transaction, chosen not for any commercial reason but solely to enable the Scheme to claim that there was no composite transaction. The composite effect of the Scheme falls to be considered as it was intended to operate, ‘without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned’: SPI at [22]-[23].

In respect of the likelihood that a third-party purchaser might not be identified, the Tribunal is not to be ‘distracted by any peripheral steps inserted’ which are in fact ‘irrelevant to the way the scheme was intended to operate’; ‘it can be disregarded if the parties have proceeded on the basis that it should be disregarded’: Astall at [34].

‘Therefore, where there is in truth one transaction, the tribunal is entitled to read the contracts together for the purpose of determining their legal effect’: Ingenious Games at [110]. There was, in truth, only one transaction in the present case, pertaining to the transfer of the Gilt Strips from the appellant to Investec, for the purpose of determining the legal effect of the transfer as ‘a commercial unity’: Astall [34].

‘A person who sustains a loss in the year of assessment from the discount on a strip shall be entitled to relief from income tax on the amount of his income for that year according to the amount of the loss.’

‘To avoid people deferring tax on gilt interest, which is payable twice a year, by investing in a strip where the profit would only be taxable on redemption or sale, legislation requires a strip to be treated as if it were transferred each year on 5^th April for its market value, and the reacquired.’ (see §126)

‘(4) A person who holds a strip on the 5^th April in any year of assessment, and who (apart from this sub-paragraph) does not transfer or redeem it on that day, shall be deemed for the purposes of this Schedule –

to have transferred that strip on that day;

‘We acknowledge, however, as we must, that the commercial/legal dichotomy has given rise to problems. Lord Millet (at para 148) said that –

“The supposed dichotomy between legal and commercial concepts has caused great difficulty. In Barclays Mercantile neither Peter Gibson LJ nor Carnwath LJ could understand it, and counsel were unable to explain it.”

However we consider that such problems arise due to an attempt to elevate that dichotomy to an exhaustive principle which treats all terms as having either an intrinsic “commercial” or “legal” meaning independent of their statutory context rather than accepting that the dichotomy is useful but particular gloss on the concept of the Ramsay doctrine as one of statutory construction.’

First, there is a notional disposal by reference to a deemed transfer in order to account for the gilt interest accrued in a given tax year, which indicates that the concepts of profit and loss are legal constructs as defined by the statute.

Secondly, the deemed value of transfer is by reference to the market value of a gilt strip at the date of the deemed transfer; the deemed value of transfer is therefore by reference to a ‘commercial’ concept, which is that of the market value in the real world.

The statutory wording directs the focus of construction on ‘payable’ (as distinct from ‘receivable’).

In a case of actual disposal, ‘the amount payable on the transfer’ is referable to the amount payable by the transferee to acquire the gilt strips, (not the amount receivable by the transferor on the disposal of the gilt strips).

This is consistent with the concept of using market value as ‘the amount payable on the transfer’ in a case of deemed transfer (such as for accounting the annual profit or loss on gilt strips, or the transfers between connected parties).

The amount payable on transfer is a commercial concept by reference to market value or a bona fide amount payable by a third-party purchaser.

A commercial concept for ‘the amount payable on the transfer’ is essential to preserving tax symmetry, since the amount payable by the transferee to acquire the gilt strips would be the acquisition cost for the transferee, either for calculating its deemed disposal charge on the 5^th April in the year of acquisition, or indeed on redemption or eventual disposal, if it were to take place in the same tax year as the acquisition.

The statutory wording requires me to give the term ‘transfer’ a wide practical meaning as directed in SPI, where the short question is whether the Citibank option gave it an entitlement to gilts, and Lord Nicholls observed at [19]:

By giving the term ‘transfer’ in the statutory wording of ‘the amount payable on the transfer’ a wide practical meaning: the grant of the Option to the Trust, and the subsequent assignment of the Option by the Trust to Investec are to be viewed as a series of transactions intended to operate as a commercial unity.

In terms of the legal instruments required to effect the ‘transfer’, as Mr Davey submits, the ‘transfer’ of the Gilt Strips required both of the events to have occurred: assignment of the Option to Investec and the exercise of the Option by Investec. It follows therefore that the consideration paid at each event, namely the payment of £1,347,049 by Investec to the Trustee fon the assignment of the Option was an essential part of ‘the amount payable on the transfer’ for the purposes of para 14A(3)(b).

In terms of tax symmetry, the acquisition cost of the Gilt Strips for Investec should equate to ‘the amount payable on the transfer’ for para 14A(3)(b) purposes. Whether it is for accounting or tax purposes, it is inconceivable that Investec would have only used £150,400 as its acquisition cost (as argued for the appellant). For Investec, the acquisition cost for the Gilt Strips must have been the sum of the two parts: £1,347,049 to the Trustee, and £150,400 to Mr Watts. Tax symmetry therefore demands ‘the amount payable on the transfer’ to encompass £1,347,049, which was over 91% of the total consideration paid by Investec for Gilt Strips, and not just referable to £150,400.

In terms of the appellant’s ‘family silver’, Mr Watts considered that he was out of pocket to the tune of £100,000, not in the sum of £1,347,049, because the consideration paid on the assignment of the Option, being money into the trust was, as confirmed to Mr Watts: ‘yours by right’. The Trust borrowed from Hambros on the grant of the Option to repay 90% of Mr Watts’ loan from Hambros, and Investec paid the Trust the £1,347,049 on assignment of the Option to enable the Trust’s loan with Hambros to be repaid. It was all designed to come out in the wash, and Mr Watts quite correctly understood the family silver he had put on the line amounted to £100,000 (for entering the Scheme) and not £1,347,049, which falls to be viewed as more than 90% of ‘the amount payable on the transfer’ of the Gilt Strips to Investec.

‘Lord Hoffmann, in [MacNiven] articulated the commercial/legal dichotomy thus (at para 58):

“The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before Ramsay. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say “You had better ask a lawyer”. For example, stamp duty is payvale upon a “conveyance or transfer on sale” (see para 1(1) of Sch 13 to the Finance Cat 1999). Although slightly expanded by a definition in para 1(2), the statutory language defines the document subject to duty essentially by reference to external [our emphasis added] legal concepts such as “conveyance” and “sale”. If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept.’

We take this passage to confirm that the Ramsay doctrine is a canon of construction and its application will vary according to the statutory term or phrase under scrutiny and the context of the case before the court which is invited to apply it. Lord Hoffmann’s dictum and dichotomy does not suggest that certain terms or phrases have an intrinsic quality which makes them “commercial” (and susceptible to the application of the Ramsay doctrine) or “legal” (and invulnerable to such application). Rather Lord Hoffmann observes that certain terms and phrases bear “external” legal meanings. An extreme example would be where a particular term expressly bears the meaning given to it in another statute. In [MacNiven] itself, the meaning of the term “payment” had the narrow (legal) meaning of “discharge of a debt”, not due to some express statutory reference but because of the context of the relevant provision in s 338 of the Income and Corporation Taxes Act 1988, where such a meaning was required to preserve symmetry between debtor and creditor in relation to interest payments on a loan.’

‘I would only add by way of caution that although a word may have a “recognised legal meaning”, the legislative context may show that it is in fact being used to refer to a broader commercial concept.’

‘[42] I see no reason to hold that the new approach to statutory interpretation applies only if there is a composite transaction consisting of several elements destined to lead to a particular result. Mr Prosser [for the taxpayers] urged s to accept that the language of practical certainty is derived from the jurisprudence on pre-ordained transactions for the purposes of [Ramsay] jurisprudence. This, he submits, that purposive interpretation should be confined to composite transactions, just as the transaction in SPI was a composite transaction. In my judgment, the principle is that set out in the first sentence of [32] of Mawson. This principle is not expressed to be limited to which composite transactions. It can thus apply to a single multi-faceted transaction which on its face operates in a particular way but which when examined against the facts of the case does not operate as a transaction to which the statute was intended to apply.’ (italics added)