Timothy Watts v The Commissioners for HMRC

‘166. The relevant question in this appeal is, in my view, not so much whether the meaning of ‘loss’ in sub-para 14A(1) is a commercial or a legal concept, but whether ‘the amount payable on the transfer’ for para 14A(3) purposes is a commercial concept. I conclude that ‘the amount payable on the transfer’ is a commercial concept for the following reasons:

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 5th 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.

I reject therefore the submission put forward for the appellant, that ‘the amount payable on the transfer’ was only the £150,400 paid by Investec to Mr Watts, and did not include the amount paid to the Trust of £1,347,049 by Investec. The facts, which fall to be viewed realistically in accordance with case law principles to determine this appeal are as follows:

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 on 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.’

The Appellant’s argument

The Option was granted by the Appellant to the Trustee on 19 November 2003.

The premium for the grant of the Option was paid by the Trustee to the Appellant’s account on 21 November 2003.

It was not until 25 November 2003 that the Trustee executed the deed which assigned to Investec, inter alia, the benefit of the Option.

On the same date, Investec gave the Appellant notice of its exercise of the Option.

Investec then paid the Appellant the exercise price for the Option on 27 November 2003.

Clause 4.3 of the Option obliged the Appellant to sell the gilt strips to the Trustee. See also clause 6.2(a) to like effect.

Clause 10.1 of the Option contained a power for either party to assign the benefit of the Option.

By an acknowledgment of a notice of assignment, the Appellant acknowledged that the benefit of the Option had been assigned from the Trustee to Hambros. This notice obliged the Appellant, upon the exercise of the Option and payment of the exercise price, to transfer the gilt strips to Hambros.

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. That deed which came into existence on the 25 November 2003, several days after the premium for the grant of the Option had been paid.

Accordingly, the payment of the premium on 21 November could not have been “an amount payable on a transfer” of the gilt strips to Investec on 25 November, which had then not yet occurred and which, when the sum was paid, could not have effected the transfer of the gilt strips to Investec.

The FTT – despite a section in the Decision headed “Statutory purpose of Sch 13 FA 1996” ([123]-[126]) – did not clearly identify the purpose of paragraph 14A Schedule 13.

The language used by the FTT in its discussion of the construction of paragraph 14A contains echos of the earlier case law in the line of cases leading up to the decisions of the House of Lords in Barclays Mercantile Business Finance Limited v Mawson [2004] UKHL 51 (“BMBF”) and UBS AG v HMRC [2016] UKSC 13 (“UBS”). We refer, in particular, to the FTT’s repeated references to terms in the legislation being regarded as either a “legal” or a “commercial” concept (see, for example, [164], [165], [166], [170], [171]). That language bears the hallmarks of Lord Hoffmann’s judgment in MacNiven v Westmoreland Investments Ltd (“MacNiven”) [2001] UKHL. However, the legal/commercial dichotomy is recognized in later decisions as “not being a substitute for a close analysis of what the statute means” (BMBF [38] per Lord Nicholls) but as a “particular gloss” on the approach to statutory construction (Campbell [85]).

At points, the FTT refers to some factors that are taken into account in its analysis that we would not regard as material to the construction of paragraph 14A. For example, in the list of factors which the FTT takes into account in deciding that “the amount payable on the transfer”, the FTT refers to the need to preserve tax symmetry ([166(5)], [167(4)]) for which we can find no justification in the legislation.

For the reasons that we give below in relation to Ground [1], the purpose of paragraph 14A is derived from paragraph 14A(1). It is that a person who sustains a loss from a discount on a strip should be entitled to relief for that loss. The intention is to give relief for “real commercial outcomes” as described by Lewison J in Berry (Berry [52]) or “real economic outcomes” as described in Andrew (Andrew [93]).

The term “loss” is clearly defined in paragraph 14(3)(b) as the excess of “the amount paid” by the taxpayer for the strip over “the amount payable on the transfer”. We accept Ms Nathan KC’s argument that the term “loss” is not capable of purposive interpretation. The statute defines what a “loss” is by the formula in paragraph 14(3)(b).

However, as we describe in relation to Ground [1], that does not mean that the inputs into the formula are not capable of a purposive interpretation. Effect can be given to the purpose in considering the inputs into the formula.

For example, the FTT was aware of the commercial / legal dichotomy no longer representing a bright line aid to construction in the case law, expressly referring at [162] to “[t]he difficulty posed by the commercial/legal dichotomy as noted by the Special Commissioners in Campbell at [85], citing Lord Millet in Arrowtown” (in turn citing BMBF).

The FTT explicitly acknowledged at [163] the case law in stating that: “…there is no categorical definition to a statutory word as being either intrinsically ‘commercial’ or ‘legal’; so the meaning of ‘loss’ in any one provision depends on its particular statutory context.”

This wording closely mirrors that of the Supreme Court in UBS – “it all depends on the construction of the provision in question” (UBS [65]), as well as, more broadly, the FTT’s discussion of the case law in general. This assists when understanding the next sentence in the Decision at [163] - “The term ‘loss’ can be a commercial concept in one context, and a legal concept in another” - and later related passage at [166] - ‘I conclude that the amount payable on the transfer is a commercial concept’.

Mr Davey says that I must view the scheme as a composite whole and adopt a purposive construction of para 14A(3). On doing so, it is clear that both the amount paid by Investec to the NA Trust in order to cash cancel the Call Option and the amount received by Mr Andrew from Investec on the transfer of the gilt strips should be treated as amounts payable on the transfer of the gilt strips within para 14A(3).

This is a pre-planned scheme, which in accordance with the authorities that I have discussed, I should treat as a composite whole.

Mr Andrew acquired the gilt strips. Following the implementation of the steps in the scheme, it was always intended that Investec would acquire the entire interest in the gilt strips free of any rights under the Call Option. Under the terms of the scheme, it did so by the means of two steps: the acquisition of the gilt strips subject to the Call Option from Mr Andrew; and the cash cancellation of the Call Option by the NA Trust.

The payment of the cash cancellation price was an integral part of the arrangements for the transfer of the gilt strips to Investec. When Investec acquired the gilt strips from Mr Andrew and paid him £30,740, it was always the case that it would also make the cash cancellation payment. That is how parties intended the scheme to operate and that is how it did in fact operate. There was a theoretical possibility that the NA Trust would not elect to cash cancel the Call Option, but it was no more than that.

Against that background, I regard the cash cancellation payment as part of the ‘amount payable on the transfer’ of the gilt strips for the purposes of para 14A(3). Furthermore, in my view, that approach is consistent with a purposive interpretation of para 14A. As I have described, the purpose of the provision is to give effect to real economic outcomes. It would defeat that purpose if, on a transfer of gilt strips, a part of the purchase price which the transferor of gilt strips directs to be paid to a third party is not taken into account in determining the amount of any loss. In my view, there could be little argument that such a payment must be an ‘amount payable on the transfer’ of the gilt strips. The amount paid by way of cash cancellation in this case was, in reality, much the same. The scheme operated to transfer the entire interest in the gilt strips to Investec. The cash cancellation payment was just a part of the overall price paid by Investec to acquire the gilt strips which, through the design of the Call Option, was diverted to the Trust.

For these reasons, in my view, the amount payable on the transfer for the purposes of para 14A(3) is the aggregate of the amount paid by Investec to Mr Andrew (£30,740) and the amount of the cash cancellation payment paid by Investec to the NA Trust (£1,840,442). On that basis, Mr Andrew made a loss of £3,805.94 [rather than £1,844,248 as claimed by Mr Andrew] for the purposes of para 14A(3).”

We agree with this analysis.

Our conclusions are sufficient to dismiss this ground of appeal, but we should also address some of Ms Nathan KC’s specific arguments.

Ms Nathan KC contends that “in reaching the conclusion that the term “The amount payable on the transfer” was a commercial concept, the FTT failed to analyse the statute, the overall scheme of Schedule 13 or the statutory purpose”. In so far as this contention simply restates the proposition that the FTT misconstrued the statutory phrase “the amount payable on the transfer”, we reject the submission for the reasons given above.

Contrary to the Appellant’s contention, the FTT was not adopting an a priori approach to the exercise of statutory construction with which it was tasked; on the contrary, the FTT was carrying out the exercise of construing the specific statutory wording before it in its own context having regard to surrounding legislative context and relevant applicable authorities. It was seeking to give a purposive interpretation to paragraph 14A and the overall scheme of Schedule 13 – one that gives effect to real economic outcomes.

Our analysis also disposes of the Appellant’s argument that paragraph 4 of Schedule 13 defines transfer by reference to a common feature of the three specified terms - ‘sale, exchange, gift’ - and an ‘ejusdem generis’ catchall - namely ‘or otherwise’. Ms Nathan KC submits that these words are all means by which an interest in property is transferred. Thus, it is submitted that only a transaction which involves a transfer of an interest in property should be included in the definition of ‘transfer’ and only an amount payable in connection with such a transaction can be an ‘amount payable on the transfer’ for the purposes of paragraph 14A(3)(b).

However, the grant and assignment of the option were simply two steps, necessary although insufficient, in a composite transaction effecting a transfer of the entire interest in the gilts to Investec. The assignment of the option was a part of the transfer of the gilts under the scheme. On a realistic view, the grant and assignment of an option to purchase the gilt strips, and the exercise of the option were all parts of the means by which the gilt strips were transferred from the Appellant (and eventually purchased or acquired by Investec).

A purposive interpretation of the payment on the ‘transfer’ means that the ‘transfer’ should not be artificially divided or separated so that only the payment in respect of the exercise of the option could be considered the amount payable on the transfer. The payment for the assignment of the option was a necessary step in a composite scheme designed to effect a transfer of the gilt strips for which a series of transactions and payments was required. The payment for the assignment of the option to Investec was properly construed to be part of the amount payable on the transfer of the gilts from the Appellant and to it.

Further, the ratio of Wimpey in a property law context – that a grant of an option is not a transfer of an interest in property which is the subject of the option – is of no real assistance in the interpretation of ‘amount payable on the transfer’ in a taxing statute. The fact that the grant or assignment of an option might not constitute a transfer of property in its own right or in isolation does not undermine the interpretation that the payment for the grant or assignment of the option was part of the ‘amount payable on the transfer’ of the gilts. In this case, the payment for the assignment of the option was part of the payment necessary to effect the transfer and acquisition of the gilt strips.

Thus, we consider there was no material error in the FTT’s analysis at [172]-[174]:

The FTT conducted a realistic appraisal of the commercial reality or substance of the arrangements in light of the words of the statute, properly construed: see Whipple LJ in Good v HMRC [2023] 1 WLR 2062 at [55]:

This approach also disposes of the timing argument relied on by Ms Nathan KC in her written submissions: the amount paid by Investec to the Trustee on the grant of the Option (around £1.35 million) cannot be part of the amount payable on the transfer of the gilt strips because at the time of the grant of the Option, the Appellant had not acquired the gilt strips. The commercial reality was that the outcome of the transfer and preceding steps were pre-planned and the timing of the steps was part of a commercial unity by which the transfer of the strips from the Appellant to Investec would be effected. There was no doubt as to the transactions and outcomes that would occur at any step in the chain – all the choices as to the steps, parties and timings were circumscribed with the ultimate purpose – the eventual transfer – pre-planned.

For these reasons, we dismiss Ground 3 – there was no material error in the FTT’s construction of ‘the amount payable on the transfer’ for the purposes of paragraph 14A(3)(b), Schedule 13 FA 1996 and its application to the facts of this case.

The FTT stated at [112], [157] and [170]-[171] of the Decision:

Ms Nathan KC submitted that the FTT erred in concluding:

She contended that the FTT misunderstood the Appellant’s case. Ms Nathan KC argued that Campbell was not the lone rock on which the Appellant built his case. Rather, it was an example of the correct articulation of the leading authorities on statutory construction in the context of legislation expressed in materially the same terms as paragraph 14A.

Ms Nathan KC relied upon Campbell, where the Special Commissioners considered paragraph 2, Schedule 13, FA 1996, which then provided for loss relief on relevant discounted securities and defined the term “sustains a loss from the discount on a relevant discounted security” i.e. in terms which were materially the same as those in paragraph 14A. Despite noting that one step in the series of transactions entered into by the taxpayer was “wholly tax motivated” and “purely to generate the loss for which the Appellant seeks relief and for no other reason” (at [67]), the Special Commissioners concluded that the taxpayer had suffered a loss as defined by paragraph 2.

Having considered the line of authorities following Ramsay (WT Ramsay Ltd v IRC [1982] AC 300), and the relevance of a commercial/legal dichotomy, the Special Commissioners reached the following conclusion:

“79…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….

…

85.

We acknowledge, however, as we must, that the commercial/legal dichotomy has given rise to problems. Lord Millett 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.” (Arrowtown, para 148).

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 accepting that the dichotomy is a useful but particular gloss on the concept of the Ramsay doctrine as one of statutory construction.”

(emphasis added)

Ms Nathan KC submitted that none of the above is to deny that, depending on the context, a term used in a statute should be construed by reference to a commercial or a legal meaning. However, there is no rule of statutory construction which requires an a priori categorisation of terms into commercial or legal categories. Whether, in construing the language of the statute, such a construction is appropriate will “vary according to the statutory term or phrase under scrutiny and the context of the case before the Court.”

Applying that approach, the Special Commissioners in Campbell went on to analyse the language of paragraph 2 at [86]-[89], concluding as follows at [94]:

“94.

We summarise our conclusions as follows. The circumstances in which a person sustains a loss from the discount on a relevant discounted security and the amount of such loss are specifically articulated in paragraph 2 of Schedule 13, subject to paragraph 8 when the transfer is to a connected person. The Appellant sustained a loss under the express terms of the statute. The concept of sustaining a loss in paragraph 2 is an artificial construct which encompasses situations such as gifts which would not either in ordinary parlance or in a commercial sense be regarded as giving rise to a loss. The decided cases do not support the implication of an additional condition that the transactions resulting in the loss should not have been for the sole purpose of producing a loss or otherwise avoiding tax.”

(emphasis added)

Ms Nathan KC emphasised that the Appellant put the approach to statutory construction in UBS at the forefront of his case to the FTT rather than Campbell. Campbell was only relied on as an example of the correct application of the UBS approach to paragraph 2, Schedule 13, FA 1996 which used materially similar statutory language to paragraph 14A.

She contended that the Appellant’s submissions before the FTT on the authorities on statutory construction, both in his skeleton argument, and in oral submissions, focused on UBS and the preceding leading authorities on statutory construction. As the Appellant stated in paragraph 64 of the skeleton argument for the FTT, the leading statement of the correct approach to statutory interpretation is that of Lord Reed in UBS, at [65]-[66]:

‘65. As was noted in Barclays Mercantile [2005] 1 AC 684, para 35, there have been a number of cases since Ramsay in which it was decided that elements inserted into a transaction without any business or commercial purpose did not prevent the composite transaction from falling within a charge to tax, or bring it within an exemption from tax, as the case might be. ... In each case the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 and Barclays Mercantile itself.

66.

The position was summarised by Ribeiro PJ in Arrowtown Assets 6 ITLR 454, para 35,in a passage cited in Barclays Mercantile [2005] 1 AC 684, para 36: “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”’

(Emphasis added)

Again, Ms Nathan KC relied upon the Appellant’s skeleton argument at paragraph 65, citing Lord Reed’s caution in UBS highlighting the dangers of the use of ‘reality’ in statutory interpretation which is not rooted in the language of the statute, at [67]-[68]:

“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 [1967] 2 QB 786. On the contrary, as Lord Steyn observed in McGuckian [1997] 1 WLR 991, 1001, 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 added)

She submitted that the Supreme Court has recently re-affirmed the UBS approach to statutory construction in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 (‘Rossendale’), stating the court’s task as follows at [16]:

“16.

Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.” (Emphasis added)

Ms Nathan KC argued that the FTT misunderstood the place within the Appellant’s arguments of Campbell. In his speech in BMBF, Lord Nicholls analysed the Ramsay principle from [26] onwards. Lord Nicholls then went on to state at [38]:

“MacNiven shows the need to focus carefully upon the particular statutory provision and to identify its requirements before one can decide whether circular payments or elements inserted for the purpose of tax avoidance should be disregarded or treated as irrelevant for the purposes of the statute. In the 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: see Ribeiro PJ in Arrowtown, at paras 37 and 39 and the perceptive judgment of the special commissioners (Theodore Wallace and Julian Ghosh) in Campbell v Inland Revenue Comrs [2004] STC (SCD) 396.”

(emphasis added)

According to Ms Nathan KC, what one must take from this is that there is no rule of statutory construction which requires one to categorise a priori and interpret a word used in a statute as either commercial or legal. Rather, one has to analyse the words of the statute (and that too purposively) to determine their meaning. That is what the Special Commissioners did in Campbell, but what the FTT failed properly to do in this case, when analysing paragraph 14A.

She submitted that it was only after submissions on multiple leading authorities that the Appellant came on to Campbell. The relevance of Campbell was not that it was central to the Appellant’s case, nor that it was the authority most relied upon by the Appellant, nor that it identified a commercial/legal dichotomy applicable to matters of statutory construction. The relevance of Campbell was as an illustration of the application of the correct approach to statutory construction, as set out above, in the context of paragraph 2, Schedule 13, FA 1996, which was expressed in materially similar terms to paragraph 14A. In short, Campbell was an illustration of the correct approach, applied correctly.

that Campbell was central to the Appellant’s case ([112]);

that Campbell was the authority most relied upon by the Appellant ([170]), and

that the dispute between the parties in their construction of the meaning of “loss from the discount on a strip” under sub-paragraph 14A(1) Schedule 13 of the FA 1996 exemplified the commercial/legal dichotomy in Campbell ([157]).

Before this Tribunal, four pages of the Appellant’s skeleton argument contained direct quotations from Campbell. Ms Nathan KC expressly submitted in relation to ground 3 that “[t]he FTT should have followed the approach of the Special Commissioners in Campbell” and had failed to pay close attention to the statutory language.

Mr Justice Lewison in Berry (himself following the approach of the Court of Appeal in Astall v Revenue and Customs Commissioners [2009] EWCA Civ 1010 (“Astall”) at [41]-[42] and [44]-[45] (Berry at [36]));

Judge Greenbank in Andrew; and

Judge Beare in Pitt v Revenue and Customs Commissioners [2022] UKFTT 00222 (TC) (“Pitt”).

The Ramsay principle is a general principle of statutory construction (Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 at [35]; Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] STC 1 at [36], [2005] 1 AC 684 at [36]).

To decide on a purposive construction exactly what transaction will answer to the statutory description; and

To decide whether the transaction in question does so (Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] STC 1 at [36], [2005] 1 AC 684 at [36]).”

“The ground of the [Campbell] decision, 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-finding tribunal should ignore the reality of the transactions that in fact took place. …

… The relevant point about Campbell is that the provisions of Schedule 13 [FA 1996] were too closely articulated in relation to the reality of the taxpayer’s transactions 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.”

“…a purposive interpretation of paragraph 14A [of Schedule 13 FA 1996] should, as identified by Lewison J in Berry, seek to give relief to a person who sustains a loss from a discount on a strip where that loss reflects a real commercial outcome. This will normally involve a taxpayer suffering some real economic detriment. In practical terms, in the context of a transaction (such as in Campbell) which is not self-cancelling, the way in which this is achieved is by ensuring that the inputs into the formula in paragraph 14A(3) reflect the reality of the transaction (as described in the extract from Malcom Gammie QC's submissions to which Lewison J refers in Berry at [43]).”

“… (4) the ratio of Campbell was that there was no room for the purpose of the taxpayer in entering into the transactions to inform the construction of the term "loss". The ratio was not that, in applying paragraph 2 of Schedule 13, the relevant court or tribunal should ignore the reality of the transactions which had in fact taken place.

…

the purpose of paragraph 23 of Schedule 13 [FA 1996] is to provide relief for genuine commercial losses (or “real commercial outcomes” as Lewison J put it). This is not an example of a provision … which operates algebraically without reference to economic reality (see Berry at paragraph [52]).”

“…even if it is accepted that the concept of ‘loss’ for para 14A purposes takes on a legal meaning as conferred by the statute, the so-called ‘A-B calculation’ central to Ms Nathan KC’s submissions is not ‘invulnerable’ to Ramsay application.”

..(2) 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. ...”

…Notwithstanding the aforesaid, I am bound by the Upper Tribunal in Berry, which is concerned directly with para 14A Sch 13 to FA 1996 as relevant to the present case, unlike Campbell which was concerned with para 2 of Sch 13, and which had been repealed by the relevant time when the Scheme was implemented. Against the backdrop of Berry UT, I now come to the most difficult part of this decision, which is to decide whether the concept of ‘loss’ in sub-para 14A(1) of Sch 13, nevertheless, has a notional element to it.

“In my judgment:

The Ramsay principle is a general principle of statutory construction (Collector of Stamp Revenue v Arrowtown Assets Ltd (2004) ITLR 454 (§ 35); Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 (§ 36)).

The principle is twofold; and it applies to the interpretation of any statutory provision:

To decide on a purposive construction exactly what transaction will answer to the statutory description; and

To decide whether the transaction in question does so (Barclays Mercantile Business Finance Ltd v Mawson (§ 36)).

It does not matter in which order these two steps are taken; and it may be that the whole process is an iterative process (Barclays Mercantile Business Finance Ltd v Mawson (§ 32); Astall v HMRC [2010] STC 137 (§ 44)).

Although the interpreter should assume that a statutory provision has some purpose, the purpose must be found in the words of the statute itself. The court must not infer a purpose without a proper foundation for doing so (Astall v HMRC (§ 44)).

In seeking the purpose of a statutory provision, the interpreter is not confined to a literal interpretation of the words, but must have regard to the context and scheme of the relevant Act as a whole (WT Ramsay Ltd v Commissioners of Inland Revenue (1981) 54 TC 101, 184; Barclays Mercantile Business Finance Ltd v Mawson (§ 29)).

However, the more comprehensively Parliament sets out the scope of a statutory provision or description, the less room there will be for an appeal to a purpose which is not the literal meaning of the words. (This, I think, is what Arden LJ meant in Astall v HMRC (§ 34). As Lord Hoffmann put it in an article on Tax Avoidance: “It is one thing to give a statute a purposive construction. It is another to rectify the terms of highly prescriptive legislation in order to include provisions which might have been included but are not actually there”: See Mayes v HMRC [2010] STC 1 (§ 30)).

In looking at particular words that Parliament uses what the interpreter is looking for is the relevant fiscal concept: (MacNiven v Westmoreland Investments Ltd [2001] STC 237 (§§ 48, 49)).”

Although one cannot classify all concepts a priori as “commercial” or “legal”, it is not an unreasonable generalisation to say that if Parliament refers to some commercial concept such as a gain or loss it is likely to mean a real gain or a real loss rather than one that is illusory in the sense of not changing the overall economic position of the parties to a transaction: WT Ramsay Ltd v Commissioners of Inland Revenue (1981) 54 TC 101 , 187; Inland Revenue Commissioners v Burmah Oil Co Ltd (1981) 54 TC 200 , 221; Ensign Tankers Ltd v Stokes [1992] 1 AC 655 , 673, 676, 683; MacNiven v Westmoreland Investments Ltd (§§ 5, 32); Barclays Mercantile Business Finance Ltd v Mawson (§ 38).” [Emphasis added]

Although the interpreter should assume that a statutory provision has some purpose, the purpose must be found in the words of the statute itself. The court must not infer a purpose without a proper foundation for doing so (Astall v HMRC (§ 44)).”

“…In the 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: see Ribeiro PJ in Arrowtown, at paras 37 and 39 and the perceptive judgment of the special commissioners (Theodore Wallace and Julian Ghosh) in Campbell v Inland Revenue Comrs [2004] STC (SCD) 396.” (emphasis added)

First, the Ramsay principle must be applied in construing paragraph 14A. This is not in dispute between the parties.

Second, the purpose of paragraph 14A is to be derived from paragraph 14A(1) namely that a person who sustains a loss from a discount on a strip should be entitled to relief from income tax for that loss, but that “loss” in that context should reflect what Lewison J describes as “real commercial outcomes” (Berry: [52]). (I will return to the meaning of this phrase below.)

Third, although the motivation of the taxpayer may not be relevant to the application of paragraph 14A(3) once the inputs into the calculation required by that sub-paragraph have been determined, regard must be had to the reality of facts of the particular case in determining those inputs. It is therefore necessary to determine the “amount paid [by the taxpayer] for the strip” and the “amount payable on the transfer” in the context of the facts viewed realistically, bearing in mind that the purpose of the provision is that any loss should reflect the economic outcome. 14 (4) Finally, Lewison J reaches his conclusion (Berry: [58]) on an analysis of the effect of the scheme as a composite whole. Lewison J finds that the scheme was a self-cancelling scheme. On that basis, Mr Berry could not have made a loss within paragraph 14A; the purchase price and sale price of the gilt strips were the same.”

Ground 4 – the FTT erred in rejecting the relevance of the extra statutory materials on which the Appellant relied as an aid to statutory construction and, in particular, in seemingly relying on Investors Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896 in so doing ([176])

The FTT Decision

As a concluding remark, it is not just Lord Hoffmann’s speech in MacNiven that reverberates in the writing up of this decision, but his speech in Investors Compensation Scheme (‘ICS’) as concerns the use of extrinsic material to aid the construction of contractual terms. Suffice it to say that I see parallels in Lord Hoffmann’s comments (and criticism) in ICS when considering the extent and the relevance of extrinsic material being deployed in aiding statutory construction, of which the appellant has supplied me with in ample quantity.

The Appellant’s submissions

Our Analysis

“I have no difficulty in finding that the absurd result delivered by the multi-faceted transaction as implemented in this case does not operate as a transaction to which paragraph 14A of Schedule 13 was intended to apply.”

Amendments to Schedule 13 FA 1996

Schedule 13 underwent three key stages of amendments since its introduction in FA 1996, and these are central to Ms Nathan KC’s submissions. The details of these amendments as put forward by Ms Nathan KC are set out in Annex 3. The gist of the amendments is as follows:

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.

The short points I take from this part of Ms Nathan KC’s lengthy submissions are: (1) 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.

Statutory purpose of Sch 13 FA 1996

Ms Nathan KC then took me through parliamentary material behind the amendments to Sch 13 for the submission that the mischief of para 14A as introduced into Sch 13 FA 1996 with effect from 10 July 2003. Section 182 and Schedule 39 to the Finance Act 2003 (‘FA 2003’) was to address tax avoidance by purchasers of relevant discounted securities. The Paymaster General summarised the purpose of Schedule 39 FA 2003 as follows:

The Explanatory Notes to the Finance Bill 2003 are brought in to aid statutory construction, and some of the paragraphs in the Explanatory Notes that have been referred to are set out in Annex 4. In the appellant’s post-hearing submissions on Pitt, it is emphasised that the strength of his case is different from that of the taxpayer in Pitt, due to the appellant’s submissions on (a) the legislative history leading to the introduction of para 14A in Sch 13, and (b) the mischief of para 14A as stated in the Explanatory Notes to the Finance Bill 2003.

The main point from this part of the appellant’s submission is that the purpose of para 14A did not contain any anti-avoidance element, and it was a ‘special treatment’ reserved to the gilt strips to retain the availability of loss relief as contained in para 14A, and that this is consistent with the contents of the Explanatory Note which relate to clause 181 and Sch 39 to the Finance Bill 2003:

It is further submitted that the issue of avoidance or deferral of taxation in relation to gilt strips was specifically considered in the context of the newly introduced para 14A, as explained at paragraph 23 of the Explanatory Note to the Finance Bill 2003:

Relying on the Explanatory Notes to the Finance Bill 2003 cited in her submissions, Ms Nathan KC says that there is no indication that either Sch 13 as originally enacted, or the amendments made in 1999 and 2003, were directed at any mischief which could be remedied by restricting the meaning of ‘loss from a discount of a strip’ in para §4A(3)(b) beyond the clearly drawn statutory definition. The statutory context shows that when Parliament took action in 1999 and 2003 to address concerns about avoidance on relevant discounted securities, it left the formula for the calculation of losses for gilt strips unchanged, which can be contrasted with the significant amendments made in 2004 to introduce anti-avoidance provisions.

“… to an objective observer, the Decision has treated the extrinsic material judiciously, fairly, and as comprehensively as the scope of such consideration can be accommodated proportionality in a dispositive decision that is already lengthy. See for example, the engagement in the Decision with the appellant’s submissions in reliance on extrinsic material at §§ 123-126; at §§ 133-135; and at §§ 158-159. Annexes 3 and 4 were specifically set out to provide excerpts of the extrinsic material relied upon by the appellant.”