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|Judgments - Commissioners of Inland Revenue v. McGuckian
Lord Cooke of Thorndon Lord Clyde
(ORIGINAL APPELLANTS AND CROSS-RESPONDENTS)
(ORIGINAL RESPONDENT AND CROSS-APPELLANT)
This appeal concerns a claim by the appellants, the Commissioners of Inland Revenue, against the respondent, Mr. McGuckian, for income tax upon a dividend paid on 27 November 1979 (in the tax year 1979-80) by Ballinamore Textiles Ltd. ("Ballinamore"), a company incorporated and resident in the Republic of Ireland.
At all times Mr. McGuckian and his wife have been resident and domiciled in the United Kingdom. In the early 1970s they each owned 500 £1 shares in Ballinamore, the entire issued share capital at the time. Over the years, Ballinamore made profits and had built up reserves which were available to be distributed by way of dividend. In 1976, or thereabouts, Mr. McGuckian was introduced to a Mr. Taylor, an English solicitor well known as a tax consultant. Acting on his advice, in 1976 and 1977 a number of steps (the details of which are not relevant) were taken whereby the shares in Ballinamore previously owned by Mr. and Mrs. McGuckian were transferred to the trustee of a settlement. At all material times the trustee of the settlement was a Guernsey company, Shurltrust Ltd. The beneficiaries of that settlement were Mr. and Mrs. McGuckian and the income was payable to Mrs. McGuckian.
In November 1979 Ballinamore had income available for distribution by way of dividend amounting to £400,055. On 23 November 1979 Shurltrust (the trustee which owned the Ballinamore shares) assigned to Mallardchoice Ltd. ("Mallardchoice") the right to any dividend payable by Ballinamore in 1979. Mallardchoice was a United Kingdom company associated with the tax consultant, Mr. Taylor. The consideration for the assignment was expressed to be £396,054. This sum represents 99 per cent. of the dividend in fact paid by Ballinamore.
On 27 November 1979 Ballinamore declared a dividend of £400,055. on the shares held by Shurltrust. Ballinamore gave a cheque for that amount to a Dublin solicitor for Mallardchoice. The solicitor paid the cheque into his client account out of which he then paid 99 per cent. of that sum (i.e. £396,054) to Shurltrust. The solicitor then paid the balance of one per cent. (less his own fee of £200) to an agent for Mallardchoice.
Thereafter there followed a long period during which the Inland Revenue sought to discover what had taken place. There was prolonged correspondence between them and Mr. Taylor who took every step to obfuscate what had happened and obstruct the revenue in discovering the true facts. Eventually, two weeks before the expiry of the six-year period applicable to the raising of assessments in respect of the year 1979-80 an assessment to income tax was made on Mr. McGuckian for 1979-80 in the amount of £400,055. The notice of assessment referred to Chapter III, Part XVII of the Income and Corporation Taxes Act 1970 which contains the charging provisions of section 478 but does not include the charging provisions of section 470. At the date of the assessment, the Revenue had not discovered the existence of the settlement.
Mr. McGuckian appealed against the assessment. The appeal came before the special commissioner, Mr. O'Brien, before whom the Crown contended, first, that the transactions between Shurltrust and Mallardchoice were a sham and, secondly, that there was a liability to tax under the Act of 1970, section 470. The revenue did not argue before the special commissioner that the principle stated in W. T. Ramsay Ltd. v. Inland Revenue Commissioners  A.C. 300 applied. The special commissioner held that the transactions were not a sham and that, since the notice of assessment stated that the tax liability arose under section 478, he could not uphold it under section 470.
In the Court of Appeal the Crown contended that although the transactions were not a sham they fell to be disregarded under the Ramsay principle. The Crown further argued that the special commissioner should have upheld the assessment under section 470 and that, even if the special commissioner did not have the power so to do, the Court of Appeal had the necessary power to remit the case to him with a direction that he should uphold an assessment under section 470. The Court of Appeal (Sir Brian Hutton L.C.J., Kelly and Carswell L.JJ.) by a majority rejected the Crown's argument based on the Ramsay principle, Kelly L.J. dissenting. However, it held that it did have power to remit the case to the special commissioner with a direction that he uphold the assessment under section 470.
The Crown appeal to your Lordships against the dismissal of their claim based on the Ramsay principle. Mr. McGuckian cross-appeals against the order remitting the case to the special commissioner. Your Lordships heard argument only on the Crown's appeal and at the conclusion of the hearing indicated that, since the Crown's appeal would succeed, the issues raised by the cross-appeal did not fall for decision.
Section 478 of the Income and Corporation Taxes Act 1970 provides, so far as relevant, as follows:
(1) The taxpayer (or his or her spouse) has made a "transfer of assets" by virtue of which income became payable to a person resident outside the United Kingdom. It is agreed that this condition was satisfied since Mr. and Mrs. McGuckian transferred the shares in Ballinamore to Shurltrust, whereby the dividends declared by Ballinamore were potentially payable to a non-resident, Shurltrust.
(2) There is income of the non-resident. Shurltrust received £396,054., being 99 per cent. of the consideration for the assignment of the right to the Ballinamore dividends. Prima facie, this sum, being the proceeds of sale of the dividends, would be capital. However, the Crown submits that, by virtue of the Ramsay principle  A.C. 300, the sum falls to be regarded for tax purposes as income. This is the central issue in the dispute.
(3) The taxpayer (or his or her spouse) has power to enjoy the income of the non-resident. It is agreed that this requirement is satisfied.
(4) It is by virtue or in consequence of the transfer, or the transfer with associated operations, that the taxpayer has power to enjoy the income. Again, it is accepted that Mr. and Mrs. McGuckian had power to enjoy the income under the settlement by virtue or in consequence of the transfer of the shares by them to Shurltrust.
(5) The taxpayer cannot take advantage of the defence in section 478(3) afforded to transactions which did not have a tax avoidance objective. It is agreed that this defence is not open to the taxpayer.
The crucial question, therefore, is whether in the present case the moneys received by Shurltrust as consideration for the assignment of the right to the dividends from Ballinamore fall to be treated as "income" of Shurltrust. Prima facie those moneys, being the price of the sale by Shurltrust of its right to the future dividends of Ballinamore, constitutes capital not income. However, the Crown argue that, applying the Ramsay principle, that sale of the right to the dividends by Shurltrust to Mallardchoice, though not a sham, has to be disregarded for tax purposes. The sale was an artificial transaction inserted for the sole purpose of gaining a tax advantage: the reality of the transaction was the payment of a dividend by Ballinamore to the shareholder, Shurltrust, which received it as income.
My Lords, in my judgment nothing in this case turns on the exact scope of the Ramsay principle. The case falls squarely within the classic requirements for the application of that principle as stated by Lord Brightman in Furness v. Dawson  A.C. 474, 527D-E:
In the present case, since the Ramsay principle was not invoked before the special commissioner there is no express finding on those issues of fact. However, there can be no doubt the only possible conclusion on the facts is that the requirements are satisfied. No business purpose for the assignment of the dividend rights to Mallardchoice has been suggested. Given the genesis of the composite transaction in the mind of the tax consultant, Mr. Taylor, the only possible inference is that the assignment was inserted for the sole purpose of gaining a tax advantage. Mr. Nugee, for the taxpayer, contended that the transaction was part of a larger, and different, tax scheme designed in 1976 with a view to avoiding an anticipated wealth tax. He submits that a "pre-ordained series of transactions" to avoid that wealth tax has not been demonstrated. But, whether or not that be right, the sale and assignment for value to Mallardchoice of the future right to the 1979 dividend was a discrete transaction directed to that dividend alone which was carried through by artificial and pre-ordained steps inserted for no business purpose. As such, the liability for tax on the indirect receipt of such dividend by Shurltrust has to be determined by stripping out the artificial steps and applying the provisions of the Taxes Acts to the real transaction, i.e. the payment of a dividend to the shareholder, Shurltrust, which received such dividend as income.
It follows that the Crown's claim to tax under section 478 must succeed unless there is some other statutory provision which demonstrates that section 478 does not apply. It was the main burden of Mr. Nugee's submissions that section 470 has that effect. It provides:
Mr. Nugee submits that the assignment to Mallardchoice was a sale or transfer by the owner of the securities (Shurltrust) of the right to receive an interest in the Ballinamore shares (the 1979 dividend to be declared). As a result, the effect of section 470 is that "for all the purposes of the Tax Acts" the dividend paid by Ballinamore is to be treated as the income of Mrs. McGuckian (as income beneficiary under the settlement) and is not to be deemed to be the income of any other person (i.e. it is not the income of Shurltrust). On this premise, it is submitted, section 478 could not apply since section 478 only applies to "income of a person resident . . . out of the United Kingdom": Mrs. McGuckian (whose income it is deemed to be under section 470) was resident in the United Kingdom. He further submitted that since, if the Crown had assessed Mr. and Mrs. McGuckian under section 470, they would have been taxable, neither section 478 nor the Ramsay principle apply since no tax advantage was in fact gained as a result of the assignment.
As Mr. Nugee frankly conceded, these arguments had no ethical merit. The taxpayers are seeking to avoid liability under section 478 because, they say, they should have paid tax under section 470. The only reason they were not assessed under section 470 was because of the dubious stalling tactics adopted by their agent, Mr. Taylor, which prevented the Crown from learning in time of the existence of the settlement and therefore of the facts necessary to raise a section 470 assessment. But, as Mr. Nugee rightly submitted, liability to tax depends on statutory construction not moral disapproval. What then are the legal merits of these submissions?
First, in my judgment Mr. Nugee's basic premise is not correct. Section 470 only applies where "the owner of any securities . . . sells or transfers the right to receive any interest . . ." As I have already said, the Ramsay principle applies to the present case. In consequence, the artificial step inserted (i.e. the assignment by Shurltrust to Mallardchoice for value) falls to be disregarded in construing the relevant taxing provisions. Therefore, applying the Ramsay principle, the basic requirement to bring section 470 into operation (i.e. the sale of the right to the dividend to Mallardchoice) has to be disregarded. Accordingly, section 470 does not apply to this case and the income is not to be deemed to be the income of Mrs. McGuckian.
Next, Mr. Nugee submitted that since the dividend would in any event have been taxable under section 470, section 478 does not apply. He based this submission on the words in the preamble to section 478, "For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax . . ." He submitted that section 478 does not apply unless tax has in fact been avoided. In my judgment, there is no warrant for this submission. The words quoted refer not to the intention of the transferor of the assets or the effect of such transfer but to the intention of Parliament in enacting the section. That parliamentary intention is certainly relevant in construing the section. But the words of subsection (1) make it clear that the actual avoidance of tax is not a precondition to the application of the section. The income is deemed to be the income of the United Kingdom resident "whether it would or would not have been chargeable to income tax apart from the provisions of this section". It is therefore clear that section 478 can still apply even though the effect of the transfer of assets abroad would not have been successful in avoiding United Kingdom income tax.
Finally, Mr. Nugee submitted that the Ramsay principle only requires the artificial steps inserted for tax purposes to be disregarded if, apart from the Ramsay principle, they would have been effective to achieve a tax advantage. My Lords, I emphatically reject this submission. The approach pioneered in Ramsay and subsequently developed in later decisions is an approach to construction, viz. that in construing tax legislation, the statutory provisions are to be applied to the substance of the transaction, disregarding artificial steps in the composite transaction or series of transactions inserted only for the purpose of seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the artificial steps but what was its purpose. Having identified the artificial steps inserted with that purpose and disregarded them, then what is left is to apply the statutory language of the taxing Act to the transaction carried through stripped of its artificial steps. It is irrelevant to consider whether or not the disregarded artificial steps would have been effective to achieve the tax saving purpose for which they were designed.
For these reasons, I would allow the appeal and uphold the assessment in the sum of £396,054. being the amount received by the shareholder, Shurltrust. The Crown formally sought to uphold the assessment in relation to the remaining one per cent. of the dividend, £400,001, paid by way of fees to the solicitor and to Mallardchoice. In my judgment that claim is unsustainable since the £400,001 was not, in fact, received by Shurltrust.
The respondents must pay the appellants' costs in the Court of Appeal and before your Lordships.
LORD LLOYD OF BERWICK
I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Browne-Wilkinson, Lord Steyn, Lord Cooke of Thorndon and Lord Clyde. For the reasons they give I too would allow the appeal.
It matters how a court should approach the construction and application of a tax statute, notably in respect of the impact of the legislation on schemes for tax avoidance. In this case the approach to be adopted may well be determinative of the appeal. In his excellent speech counsel for the taxpayer referred to the often quoted observations of Lord Tomlin in Inland Revenue Commissioners v. Duke of Westminster  A.C. 1, 19. Lord Tomlin said that every man is entitled if he can to order his affairs so that the tax under a tax statute is less than it would otherwise be. The case was authority for the proposition that whatever the substance of the arrangements may have been, their fiscal effect had to be in accordance with the legal rights and obligations they created. Counsel for the taxpayer invited your Lordships to approach the appeal in this way, He said that the principle first laid down in W. T. Ramsay Ltd. v. Inland Revenue Commissioners  A.C. 300, and developed in later House of Lords decisions, amounted to "an extreme form of statutory interpretation." It was implicit in this argument that the foundation of the principle is somewhat suspect. Counsel said that while the actual decisions of the House of Lords must be respected the scope of the underlying principle should not be extended beyond those decisions. I understood his argument to be a plea for damage limitation. I would reject this approach as a false foundation for the consideration of this appeal.
It is necessary to distinguish between two separate questions of law. The first is whether there is a special rule applicable to the construction of fiscal legislation. The second question is whether there is a rule precluding the court from examining the substance of a composite tax avoidance scheme. I consider first the construction of tax statutes.
Towards the end of the last century Pollock characterised the approach of judges to statutory construction as follows: "Parliament generally changes the law for the worse, and that the business of judges is to keep the mischief of its interference within the narrowest possible bounds": Essays on Jurisprudence and Ethics (1882), 85. Whatever the merits of this observation may have been when it was made, or even earlier in this century, it is demonstrably no longer true. During the last 30 years there has been a shift away from literalist to purposive methods of construction. Where there is no obvious meaning of a statutory provision the modern emphasis is on a contextual approach designed to identify the purpose of a statute and to give effect to it. But under the influence of the narrow Duke of Westminster doctrine tax law remained remarkably resistant to the new non formalist methods of interpretation. It was said that the taxpayer was entitled to stand on a literal construction of the words used regardless of the purpose of the statute: Pryce v. Monmouthshire Canal and Railway Cos. (1879) 4 App. Cas. 197, 202-203; Cape Brandy Syndicate v. Inland Revenue Commissioners  1 K.B. 64, 71; Inland Revenue Commissioners v. Plummer  A.C. 896. Tax law was by and large left behind as some island of literal interpretation. The second problem was that in regard to tax avoidance schemes the courts regarded themselves as compelled to adopt a step by step analysis of such schemes, treating each step as a distinct transaction producing its own tax consequences. It was thought that if the steps were genuine, i.e. not sham or simulated documents or arrangements, the court was not entitled to go behind the form of the individual transactions. In combination those two features--literal interpretation of tax statutes and the formalistic insistence on examining steps in a composite scheme separately--allowed tax avoidance schemes to flourish to the detriment of the general body of taxpayers. The result was that the court appeared to be relegated to the role of a spectator concentrating on the individual moves in a highly skilled game: the court was mesmerised by the moves in the game and paid no regard to the strategy of the participants or the end result. The courts became habituated to this narrow view of their role.
On both fronts the intellectual breakthrough came in 1981 in Ramsay, and notably in Lord Wilberforce's seminal speech which carried the agreement of Lord Russell of Killowen, Lord Roskill and Lord Bridge of Harwich. Lord Wilberforce restated the principle of statutory construction that a subject is only to be taxed upon clear words at  A.C. 300, 323C-D. To the question "what are clear words?" he gave the answer that the court is not confined to a literal interpretation. He added "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." This sentence was critical. It marked the rejection by the House of pure literalism in the interpretation of tax statutes.
In other words, if it was shown that a scheme was intended to be implemented as a whole, legal analysis permitted the court in deciding a fiscal question to take into account the composite transaction.