House of Lords
Session 1997-98
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Judgments - Commissioners of Inland Revenue v. McGuckian

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      While Lord Tomlin's observations in the Duke of Westminster case [1936] A.C. I still point to a material consideration, namely the general liberty of the citizen to arrange his financial affairs as he thinks fits, they have ceased to be canonical as to the consequence of a tax avoidance scheme. Indeed, as Lord Diplock observed, Lord Tomlin's observations tells us little or nothing as to what method of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would otherwise be payable: Inland Revenue Commissioners v. Burmah Oil Co. Ltd. (1981) T.C. 200, 214-215.

      The new Ramsay principle was not invented on a juristic basis independent of statute. That would have been indefensible since a court has no power to amend a tax statute. The principle was developed as a matter of statutory construction. That was made clear by Lord Wilberforce in Ramsay and is also made clear in subsequent decisions in this line of authority: see the review in the dissenting speech of Lord Goff of Chieveley in Craven v. White [1989] A.C. 398, 520C-521E. The new development was not based on a linguistic analysis of the meaning of particular words in a statute. It was founded on a broad purposive interpretation, giving effect to the intention of Parliament. The principle enunciated in Ramsay was therefore based on an orthodox form of statutory interpretation. And in asserting the power to examine the substance of a composite transaction the House of Lords was simply rejecting formalism in fiscal matters and choosing a more realistic legal analysis. Given the reasoning underlying the new approach it is wrong to regard the decisions of the House of Lords since Ramsay as necessarily marking the limit of the law on tax avoidance schemes.

      That brings me to the facts. The assessment under appeal was made upon Mr. McGuckian under section 478 of the Income and Corporation Taxes Act 1970. The assessment is in respect of income tax upon a dividend of IR£400,055 paid on 27 November 1979 (in the tax year 1979-80) by Ballinamore Textiles Ltd. Mr. and Mrs. McGuckian were resident and domiciled in the United Kingdom. Together they initially owned all the shares in Ballinamore, a company incorporated and domiciled in the Republic of Ireland. Ballinamore had made profits, and it had reserves, which were available to be distributed as dividends. But if dividends had been paid in the normal course to Mr. and Mrs. McGuckian it would have been taxable. Relying on the advice of a tax consultant, steps were taken by Mr. and Mrs. McGuckian to avoid liability to pay income tax on the dividends. A reorganization of the affairs of Mr. and Mrs. McGuckian was undertaken to create a framework for the contemplated tax avoidance scheme. They arranged that in future all the shares in Ballinamore would be held by a settlement. The trustee of the settlement was a Guernsey company, Shurltrust Ltd. Mrs. McGuckian was the income beneficiary of the trust which held the shares in Ballinamore. If Ballinamore had simply paid the dividends to its shareholder, Shurltrust, the dividends would have been income of Mrs. McGuckian and would have been taxable on her husband. But, relying on the Duke of Westminster doctrine, the taxpayer was advised that he could avoid such tax liability by the adoption of a number of other steps as a part of an overall scheme.

      Concentrating on the assessment under appeal, the position is that late 1979 the scheme was implemented by the adoption of the following steps:

    (1) Shurltrust (of which Mrs. McGuckian was the income beneficiary) assigned the right to the dividend payable by Ballinamore in 1979 to Mallardchoice Ltd., a United Kingdom company associated with the tax consultant. The consideration payable for the assignment was £396,504.

     (2) Ballinamore thereupon declared a dividend of £400,055.

     (3) Ballinamore paid the dividend of £400,055 to Mallardchoice.

     (4) Having received £400,055 Mallardchoice paid £396,054 (99 per cent. of the dividend) to Shurltrust which kept it. The difference of 1 per cent. represented fees and commission.

In the Court of Appeal Carswell L.J. said [1994] S.T.C. 888, 921E, that "in theory at least, the directors could have decided to declare higher or lower dividends than those expected by the . . . assignee." That cannot be right. Mallardchoice would not have agreed to pay £396,054 for a dividend unless there was certainty that it was going to be paid. There is only one reasonable interpretation of the primary facts: the four steps were inextricably limited as parts of a single composite transaction.

      Neither the individual steps nor the composite transaction were simulated or sham transactions in the sense in which those terms are understood in contract law or trust law: see Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786. On the contrary, tax avoidance was the spur to executing genuine documents and entering into genuine arrangements. But this appeal is concerned with a different question, namely the fiscal effectiveness of the composite tax avoidance scheme.

      It is now necessary to consider how the composite transaction should be categorized. The declaration of the dividend was an ordinary commercial decision. But the other steps--the assignment to Mallardchoice, the payment to Mallardchoice and the payment by Mallardchoice to Shurltrust--were not taken for any business or commercial reason. Those steps were taken in order to avoid tax. I would respectfully differ from the conclusion of Sir Brian Hutton L.C.J. and Carswell L.J. that the assignment was "the whole substance and raison d'etre of the transaction." Like Kelly L.J. I am satisfied that the assignment was merely a means to an end, a step taken in an attempt to achieve the payment of £396,054 to Shurltrust as capital. Tax avoidance was the only conceivable explanation for the assignment.

      That brings me directly to the question whether section 478 is applicable. Counsel for the taxpayer advanced two grounds upon which he contended that section 478 is inapplicable. First, he argued that section 478 does not apply because what Shurltrust received was capital. Secondly, he argued that section 478 is not applicable because section 470 applies. I will consider these arguments in turn.

      On a formalistic view of the individual tax avoidance steps, and a literal interpretation of the statute in the spirit of the Duke of Westminster case [1936] A.C. 1, it is possible to say that the money which reached Shurltrust was capital. But the court is no longer compelled to look at transactions in blinkers, and literalism has given way to purposive interpretation. Like Lord Cooke of Thorndon, and for the reasons he has given, I would even without the benefit of the detailed legal analysis in the Ramsay line of authority have inclined to the view that the more realistic interpretation of the undisputed facts is that what Shurltrust received was income. But, if the Ramsay principle [1982] A.C. 300, is taken into account, as it must be, there is no room for doubt. The limits of the principle were summarized by Lord Brightman in Furness v. Dawson [1984] A.C. 474. In his leading speech Lord Brightman said (at p. 527D-E):

    ". . . . First, there must be a pre-ordained series of transactions, or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. . . . Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax--not 'no business effect.' If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied."

The governing principle, as Lord Wilberforce observed in Ramsay [1982] A.C. 300, 326, is that the court is not obliged to adopt "a step by step, dissecting approach which the parties themselves may have negated." In the present case the objective of the composite transaction was that Shurltrust should receive the dividend. It is a classic case for the application of the Ramsay principle. For fiscal purposes the steps involving Mallardchoice can be disregarded. The fiscal focus can therefore be on the end result, viz the receipt by Shurltrust of 99 per cent. of the dividend as income. The scheme was therefore an ineffective tax avoidance scheme.

      That brings me to the second suggested escape route from the applicability of section 478. Counsel for the taxpayer relied on the opening words of section 478 viz "For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax . . . ." He argued that section 478 can only be invoked if there has been an actual avoidance of liability to income tax. Counsel submitted that this condition is not satisfied: section 470 was applicable but the revenue did not invoke it. I am persuaded by the submissions of counsel for the Commissioners of Inland Revenue that this argument must fail for two reasons. First, once the Ramsay principle is applied there is no scope for the application of section 470 because for fiscal purposes the assignment to Mallardchoice is disregarded. Secondly, I would reject the argument that it is a condition precedent to section 478 applying that there must be proof of an actual avoidance of tax liability. Such a construction treats section 478 as a power of last resort and it substantially emasculates the effectiveness of the power under section 478 . Nothing in the language or purpose of section 478 compels such a construction. Properly construed the opening words of section 478 merely provide that there must be an intention to avoid liability for tax. The sensible construction is that section 478 can be applied even if there are other provisions which could be invoked to prevent the avoidance of tax. That the revenue authorities should have overlapping taxation powers is an unremarkable consequence. And such a construction cannot cause any unfairness to the taxpayer since he cannot be taxed twice in respect of the same income.

      For these reasons, I regard an assessment IR£396,054 as correct. I would allow the appeal to that extent.


My Lords,

      While a broad distinction between capital and income is deeply embedded in revenue law, the line can be notoriously difficult to draw, as the division is necessarily to some degree artificial and has to be worked out pragmatically by courts, lawyers and accountants. In many cases the price received for an assignment of the right to receive a dividend may be classified as a capital receipt; but it would be unsafe to assume that this will invariably be so. The circumstances surrounding the transaction may require the conclusion that the receipt is income. I think it plain that such is the case here.

      Mr. and Mrs. McGuckian, residents of the United Kingdom, owned and controlled the Irish company Ballinamore, which had accumulated undistributed profits. For fiscal reasons, apparently including the avoidance of apprehended wealth tax, their shares were transferred to the Guernsey company, Shurltrust Ltd. Mrs. McGuckian was the income beneficiary of the trust upon which Shurltrust held the shares. A scheme was devised by a taxation consultant whereby from time to time Shurltrust would assign its rights to dividends during specified periods to Mallardchoice, an ad hoc and virtually assetless United Kingdom company formed by the consultant, for a price representing on each occasion the planned dividend less only commission or fees; on the declaration of the dividend, the company would pay it out to a Dublin solicitor who would in fact act for all parties but receive it on behalf of Mallardchoice, and he would immediately pay it to Shurltrust, after deducting commission or fees, in satisfaction of the price. In the transaction to which the present appeal relates the assignment by Shurltrust to Mallardchoice was dated 23 November 1979 and applied to dividends to be declared during the remainder of 1979. The consideration expressed was £396,054. On 27 November 1979 Ballinamore declared a dividend of £400,055, which the solicitor received and paid to his client account for Mallardchoice; on or about the same day he paid the £396,054, which represented 99 per cent. of the dividend, to Shurltrust.

      My Lords, it seems to me that one has only to recount those facts to show that what was received by Shurltrust was essentially income. The dividend was intended to be for the benefit of Shurltrust and the circular route by which the payment was made was no more than machinery for giving effect to that intention. The assignment was created simply as a bridge or vehicle for attaining that end. The money was unmistakably traceable through a single link. Whether a receipt is income for tax purposes is a question of mixed fact and law. In this instance the facts, in my view, admit of only one reasonable answer.

      I would lean towards that conclusion without the guidance of authority, but the matter is clinched by the authority of W. T. Ramsay Ltd v. Inland Revenue Commissioners [1982] A.C. 300 and the subsequent cases in the same line. As Lord Wilberforce said in Ramsay, at pp. 323-324:

    "Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. 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. For this there is authority in the law relating to income tax and capital gains tax: see Chinn v. Hochstrasser [1981] A.C. 533 and Inland Revenue Commissioners v. Plummer [1980] A.C. 896."

      The principle of looking on a planned series of steps as a whole transaction appears to be, as one would expect, perfectly natural and orthodox. It is surely decidedly more natural and less extreme than the decision which in 1935 a majority of their Lordships felt forced to reach in the Duke of Westminster's case. One can well understand that in Ramsay this House was unwilling to carry the latter decision further. Nor can the position of the taxpayer plausibly be improved for the purposes of the Ramsay principle by the argument that the planned series of steps in question were incidental to an even wider scheme of tax avoidance devised against wealth tax.

      The majority of the Court of Appeal in Northern Ireland (Sir Brian Hutton L.C.J. and Carswell L.J.) took the view that the assignment was "the whole substance and raison d'être of the transaction" and "the end result intended by the parties": see [1994] S.T.C. 888, 921C, 935D. I respectfully prefer the view of Kelly L.J. (at p. 942) that it was nothing more than a means to the end of achieving payment to Shurltrust of almost all the dividend, in the hope that it would be treated as capital for tax purposes.

      Once that point is reached, I think it follows that Shurltrust as owner of the securities did not, within the purview and spirit of section 470 of the Income and Corporation Taxes Act 1970, sell or transfer the right to receive any dividend payable. In the particular context, the assignment merely provided a conduit by which the dividend was to reach Shurltrust. Section 470 therefore does not apply. Section 478 of that Act (relating to the avoidance of income tax by transactions resulting in the transfer of income to persons abroad) does, however, catch the previous transfers of the shares to Shurltrust for the reasons to be given by my noble and learned friend Lord Clyde. Accordingly I would hold that the assessment of Mr McGuckian under that section was correct.

      I would also associate myself with all that my noble and learned friend, Lord Steyn, whose speech I have seen in draft, has said about statutory interpretation. The principle which your Lordships have been developing in Ramsay [1982] A.C. 300, Inland Revenue Commissioners v. Burmah Oil Co. Ltd. (1981) 54 T.C. 200, and Furniss v. Dawson [1984] A.C. 474 is not uncommonly seen as special to the construction of taxing Acts. Perhaps more helpfully, however, it may be recognised as an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation. So, in Ramsay, Lord Wilberforce said, [1982] A.C. 300, 326, that it was well and indeed essentially within the judicial function to determine whether there was such a loss (or gain) as the legislation was dealing with. In Burmah, p. 221, Lord Fraser of Tullybelton echoed those words in saying that there was no real loss and no loss in the sense contemplated by the legislation. In Furniss Lord Brightman said at p. 527 that in conditions which he defined the court must look at the end result: precisely how it would be taxed depended on the terms of the taxing statute.

      Craven v. White [1989] A.C. 398, where the facts were distant from those of the present case, is a difficult case, partly because of the differences of opinion in your Lordships' House, but at least it can be said that one cardinal point of agreement was that essentially the question is one of construction: see Lord Keith of Kinkel, at p. 479; Lord Templeman, at p. 487; Lord Oliver of Aylmerton, at pp.505 and 510; Lord Goff of Chieveley, at p. 520; and Lord Jauncey of Tullichettle, at p. 533.

      My Lords, this approach to the interpretation of taxing Acts does not depend on general anti-avoidance provisions such as are found in Australasia. Rather, it is antecedent to or collateral with them. In Furniss [1984] A.C. 474, 527 Lord Brightman spoke of certain limitations (a preordained series of transactions including steps with no commercial or business purpose apart from the avoidance of a liability to tax). The present case does fall within these limitations, but it may be as well to add that, if the ultimate question is always the true bearing of a particular taxing provision on a particular set of facts, the limitations cannot be universals. Always one must go back to the discernible intent of the taxing Act. I suspect that advisers of those bent on tax avoidance, which in the end tends to involve an attempt to cast on other taxpayers more than their fair share of sustaining the national tax base, do not always pay sufficient heed to the theme in the speeches in Furniss, especially those of Lords Scarman, Roskill and Bridge of Harwich, to the effect that the journey's end may not yet have been found. I will profit from the example of Lord Roskill in Furniss, at p. 515, by refraining from speculating about whether a sharper focus on the concept of "wages" in the light of the statutory purpose and the circumstances of the case would or would not have led to a different result in the Duke of Westminster case.

      For these reason I, too, would allow the appeal and restore the assessment as to the £396,054.


My Lords,

      The assessment to tax here was made under section 478 of the Income and Corporation Taxes Act 1970. The opening few lines of that section set out the purpose to be served by the enactment. That purpose is the prevention of avoidance by individuals ordinarily resident in the United Kingdom of liability to income tax by means of certain kinds of transaction. It is not required that the transaction should itself be carried out with that purpose. The statute is simply expressing the purpose of the section, not of the substance of the transaction.

      The substance of the transaction is described in the first few lines of the section. There has to be a transfer of assets. Subsection (8)(b) explains that "'assets' includes property or rights of any kind, and 'transfer', in relation to rights, includes the creation of those rights . . ." Further, the transfer has to be one by virtue or in consequence whereof income becomes payable to persons resident or domiciled out of the United Kingdom. That suggests that but for the transfer the income would not have been payable to that person. Finally, so far as this part of the section is concerned, it is provided that the result of income becoming payable to such persons may be achieved either by the transfer alone or by the transfer in conjunction with any associated operation. The expression "associated operation" is defined in subsection (4) as meaning:

    ". . . in relation to any transfer, an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets."

All of the provisions which I have noted so far are expressed in very wide terms. In the present case the income with which we are concerned is income coming by way of dividend from Ballinamore. The person resident or domiciled out of the United Kingdom is Shurltrust.

      I then turn to subsection (1) with which the present case is concerned. Subsection (1) relates to an individual ordinarily resident in the United Kingdom whose liability to income tax may be avoided by the transfers with which the section is concerned. It also relates to income of a person resident or domiciled out of the United Kingdom. That at least includes, and may only comprise, the income which, as was mentioned earlier, is expressed to be payable to such a person. The subsection is then concerned with the situation where such an individual as I have already described has power to enjoy any income of a person resident or domiciled out of the United Kingdom. A power to enjoy income arises in a variety of circumstances detailed in subsection (5) and it is not disputed that the Respondent has power to enjoy any income of Shurltrust if there was any income. The subsection then provides a hypothesis that if that income was the income of the individual received by him in the United Kingdom it would be chargeable to income tax. It then finally provides, on the basis that that hypothesis is satisfied, that where by virtue or in consequence of any such transfer as I have already described, with or without any associated operations, such an individual has power to enjoy that income it shall be deemed to be his income, whether or not it would have been chargeable to income tax apart from the provisions of section 478. That last phrase seems to me to answer any argument that an assessment under section 478 cannot lie where an assessment under another section is open, such as, as was contended in the present case, an assessment under section 470.

      As a result of the transfer of the shares to Shurltrust and all the later associated operations 99 per cent. of the dividend for the year 1979-80 found its way to Shurltrust. In 1976 and 1977 a transfer and associated operations was made whereby the right to any dividends of Ballinamore became payable to Shurltrust. The operations which were effected in 1979 related in part to the dividend and in part to assets representing the dividend, but for the purposes of section 478(1) the operations did not have the effect in substance or reality of doing anything else than making the income which was payable to Shurltrust in respect of the 1979/80 dividend to be paid, to the extent of 99 per cent. of it, to Shurltrust. The income payable to Shurltrust was the income of Shurltrust for the purposes of the section.

      Section 478 is expressly designed to prevent avoidance of income tax in the circumstances to which it relates. It seems to me in the circumstances of the present case that the section can and should be applied here to recognise the real substance of the whole transaction. The assignment is accepted to have been genuine. Its effect in diminishing the extent of the dividend passing through to Shurltrust has to be recognised. Thus the 1 per cent. of the dividend is effectively carried to others. But the effect of the whole transaction was to carry 99 per cent. of the dividend to Shurltrust, by a circuitous route whereby it was not the original dividend but money representing that percentage of the original dividend which ended up in its hands. It seems to me sufficient to resolve the present case by considering the terms of the section and the express recognition therein of the propriety of taking into account the whole succession of steps which lead to the end result. This approach in effect accords with the guidance laid down by Lord Wilberforce in W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300, 323-324. An assessment in the sum of IR £396,054 is correct. I would allow the appeal to that extent.


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