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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.
LORD COOKE OF THORNDON
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.
LORD CLYDE
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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