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Session 2000-01
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| Judgments - Macniven (Her Majesty's Inspector of Taxes) v. Westmoreland Investments Limited
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HOUSE OF LORDSLord Nicholls of Birkenhead Lord Hoffmann Lord Hope of Craighead Lord Hutton Lord Hobhouse of Wood- borough OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSEMACNIVEN (HER MAJESTY'S INSPECTOR OF TAXES) (APPELLANT) v. WESTMORELAND INVESTMENTS LIMITED (RESPONDENTS) ON 8 FEBRUARY 2001 [2001] UKHL 6 LORD NICHOLLS OF BIRKENHEAD My Lords, 1. On this appeal the Inland Revenue Commissioners pray in aid what is loosely called the Ramsay principle. This is a reference to the decision in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300. So it is necessary first to remind oneself what the House decided in that case. An initial point to note is that the very phrase 'the Ramsay principle' is potentially misleading. In Ramsay the House did not enunciate any new legal principle. What the House did was to highlight that, confronted with new and sophisticated tax avoidance devices, the courts' duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation: see Lord Wilberforce, at [1982] AC 300, 326.2. Ramsay brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. 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. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties' intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force. 3. This development had already been foreshadowed in the dissenting judgment of Eveleigh LJ in Floor v Davis [1978] Ch 295 and in decisions of the House in Inland Revenue Commissioners v Plummer [1980] AC 896 and Chinn v Hochstrasser [1981] AC 533. In Furniss v Dawson [1984] AC 474, 526, Lord Brightman set out his understanding of the rationale of this approach in these terms:
5. Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision? Thus, in Ramsay the taxpayer company sought to create an allowable loss to offset against a chargeable gain it had made on a sale-leaseback transaction. It sought to do so without suffering any financial detriment, by embarking on and carrying through a scheme which created both a loss which was allowable for tax purposes and a matching gain which was not chargeable. In rejecting the efficacy of this contrived 'loss-creating' scheme, Lord Wilberforce, at [1982] AC 300, page 326, observed that a loss which comes and goes as part of a pre-planned, single continuous operation 'is not such a loss (or gain) as the legislation is dealing with'. In Inland Revenue Commissioners v Burmah Oil Co Ltd (1981) 54 TC 200, 220, Lord Fraser of Tullybelton described this passage as the ratio of the decision in Ramsay. 6. As noted by Lord Steyn in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991, 1000, this is an exemplification of the established purposive approach to the interpretation of statutes. When searching for the meaning with which Parliament has used the statutory language in question, courts have regard to the underlying purpose that the statutory language is seeking to achieve. Likewise, Lord Cooke of Thorndon regarded Ramsay 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: see [1997] 1 WLR 991, 1005. 7. The Ramsay principle or, as I prefer to say, the Ramsay approach to ascertaining the legal nature of transactions and to interpreting taxing statutes, has been the subject of observations in several later decisions. These observations should be read in the context of the particular statutory provisions and sets of facts under consideration. In particular, they cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive, Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in Ramsay. Failure to recognise this can all too easily lead into error. In particular, the much-quoted observation of Lord Brightman in Furniss v Dawson [1984] AC 474, 527, seems to have suffered in this way. Lord Brightman described, as the 'limitations of the Ramsay principle', that there must be a pre-ordained series of transactions, or a single composite transaction, containing steps inserted which have no business purpose apart from the avoidance of a liability to tax. Where those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. 8. My Lords, I readily accept that the factual situation described by Lord Brightman is one where, typically, the Ramsay approach will be a valuable aid. In such a situation, when ascertaining the legal nature of the transaction and then relating this to the statute, application of the Ramsay approach may well have the effect stated by Lord Brightman. But, as I am sure Lord Brightman would be the first to acknowledge, the Ramsay approach is no more than a useful aid. This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute. I have already mentioned where this led in Ramsay. In Furniss v Dawson [1984] AC 474 it led to the conclusion that, within the meaning of the Finance Act 1965, the disposal of shares was in favour of Wood Bastow and not, as the taxpayer contended, in favour of Greenjacket. The present case 9. On the present appeal the relevant question is whether the transactions between the taxpayer, Westmoreland Investments Ltd, and the sole shareholders of its parent company, the trustees of the Electricity Supply Pension Scheme, constituted payments of interest within the meaning of section 338 of the Income and Corporation Taxes Act 1988. Westmoreland suffered badly in the commercial property slump of the 1970s. It borrowed heavily from the pension scheme trustees. By the late 1980s it owed the trustees over £70 million, including more than £40 million accrued interest. Its liabilities greatly exceeded its assets. All the liabilities were due to the pension scheme trustees. 10. As matters stood, Westmoreland was valueless. But it had one potential asset: its substantial accrued interest liability. Under section 338 payments of interest, other than interest on bank loans, may be set against profits, and any unused excess may be carried forward under section 75 of the Taxes Act 1988. If Westmoreland could pay to the pension scheme trustees the £40 million arrears of interest, the company would have value as a company with substantial established tax losses. Others might be interested in acquiring Westmoreland, and using it as a vehicle for making profits. The purchaser of Westmoreland could transfer income producing assets to Westmoreland and take advantage of Westmoreland's losses to shelter against tax any future profits on which tax would otherwise be payable. 11. But first Westmoreland had to pay the arrears of interest to the pension scheme trustees. Obviously, Westmoreland was quite unable to make any such payments out of its own resources, or to borrow money for this purpose from a third party. So, the trustees of the pension scheme, to whom Westmoreland was indebted, passed money round in a circle. The genesis of the scheme, and details of its implementation in three instalments, are set out in the judgment of Peter Gibson LJ at [1998] STC 1131, 1137-1139. For present purposes it suffices to note that the trustees loaned the necessary money to Westmoreland; Westmoreland used this in paying the outstanding arrears of interest to the trustees, having deducted tax for which it accounted to the Inland Revenue; and the trustees, as the trustees of a tax exempt superannuation scheme, reclaimed this tax from the Inland Revenue. 12. The Special Commissioners found that the steps involved in these transactions were genuine. There was no question of any of the steps being sham. Carnwath J held in favour of the Crown. The payments of interest in 1988 to 1990, made wholly out of money borrowed from the trustees, were not payments of interest for the purpose of section 338, and the commissioners were wrong to allow them as charges on income. The Court of Appeal, comprising Peter Gibson, Pill and Mummery LJJ, reversed the judge's decision. 13. My Lords, I confess that during the course of this appeal I have followed the same road to Damascus as Peter Gibson LJ. Like him, my initial view, which remained unchanged for some time, was that a payment comprising a circular flow of cash between borrower and lender, made for no commercial purpose other than gaining a tax advantage, would not constitute payment within the meaning of section 338. Eventually, I have found myself compelled to reach the contrary conclusion. My reasons are as follows. 14. Section 338(1) provides, in short, that charges on income shall be allowed as deductions against profits in computing the corporation tax of a company. 'Charges on income' are defined in section 338(2) as 'payments of any description mentioned in subsection (3) below'. So far as relevant, subsection (3) provides that 'the payments referred to in subsection (2)(a) above are - (a) any yearly interest ...'. Prima facie, payment of interest in section 338 has its normal legal meaning, and connotes simply satisfaction of the obligation to pay. In the present case, Westmoreland's obligation to pay the accrued interest to the trustees was discharged by satisfaction. Thus, if the Inland Revenue are to succeed, payment in section 338 must bear some other meaning. Ultimately, applying in full the purposive Ramsay approach to interpretation, I can find no justification for giving payment in section 338 some other meaning. Moreover, I am unable to see what that other meaning could be. 15. I must elaborate a little. In the ordinary case the source from which a debtor obtains the money he uses in paying his debt is immaterial for the purpose of section 338. It matters not whether the debtor used cash in hand, sold assets to raise the money, or borrowed money for the purpose. Does it make a difference when the payment is made with money borrowed for the purpose from the very person to whom the arrears of interest are owed? In principle, I think not. Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor. Once that is accepted, as I think it must be, I do not see it can matter that there was no business purpose other than gaining a tax advantage. A genuine discharge of a genuine debt cannot cease to qualify as a payment for the purpose of section 338 by reason only that it was made solely to secure a tax advantage. There is nothing in the language or context of section 338 to suggest that the purpose for which a payment of interest is made is material. 16. This is not surprising. Payments of interest, other than interest on a bank loan, have the advantageous tax consequence of constituting charges on income. But, hand in hand with this, they have the consequence that tax must be deducted from the payment and paid to the Inland Revenue. In the ordinary course, therefore, an exchange of cheques between creditor and debtor does not give rise to a tax advantage. The tax benefit of being able to treat the payment as a charge on income is offset by the obligation to account to the Inland Revenue for tax on the payment. This being so, there is no basis on which Parliament can be taken to have intended that payment in section 338 should bear some special meaning which would exclude the case where the interest debt is satisfied with money borrowed for the purpose from the creditor. 17. This is confirmed by noting that this, indeed, is not the feature which makes the Westmoreland transactions themselves unattractive to the Inland Revenue. The feature which makes the Westmoreland transactions unattractive to the Inland Revenue is different. It is the ability of the pension scheme trustees to reclaim the tax deducted by Westmoreland from the payments. But that is the consequence of the tax exempt status of the pension scheme. The concept of payment in section 338(3)(a) cannot vary according to the tax status of the person to whom the interest is owed. 18. For these reasons, and those set out in the speech of my noble and learned friend Lord Hoffmann, I would dismiss this appeal. I also agree with Lord Hoffmann's reasons for rejecting the three subsidiary points on which the Inland Revenue sought to place some reliance. Westmoreland's cross-appeal does not arise. LORD HOFFMANN My Lords, The issue 19. The question in this appeal is whether certain payments of interest made by a property investment company named Westmoreland Investments Ltd ("WIL") in the years 1988 to 1990 were "charges upon income" within the meaning of section 338 of the Income and Corporation Taxes Act 1988 and therefore allowable deductions in computing its profits or losses for the purposes of corporation tax. I speak of them as payments in the sense that there is no dispute that WIL transferred money to the lender and that its liability for interest was thereby discharged. As between the parties, the interest was paid. But the dispute between the taxpayer and the Crown is whether the interest was "paid" within the meaning of section 338. It arises because WIL paid the interest out of money which it had been lent by the lender for the specific purpose of enabling it to pay. The interest liability was replaced by a liability for an additional capital sum. The transaction was circular: WIL borrowed capital and paid it back as interest. And the only purpose of the transaction was to produce an allowable deduction for corporation tax. The Crown says that this does not count as a payment for the purposes of the Act. It must be disregarded under the principle in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300. The main issue in this appeal is therefore the meaning, scope and applicability of that principle. The Crown also says that the taxpayer's claim is defeated by three specific anti-avoidance provisions in the Taxes Act. I shall deal with these after considering the main point. The statutory provisions. 20. My Lords, I set out first the relevant provisions of section 338 as it stood at the relevant time. It has since been substantially amended.
21. A company is therefore allowed a deduction in respect of bank interest immediately it is debited in the books of the bank. It does not matter whether the liability has been discharged or not. But other yearly interest is deductible only when it has been paid. Why the distinction? It reflects the difference in the way in which the Crown recovers tax from the recipient of the interest. In the ordinary case of yearly interest, the person who pays must deduct the tax and account to the revenue: see section 349(2). But this rule does not apply to banks: see section 349(3)(a). A person who pays interest to a bank does not deduct tax. The interest is part of the bank's trading income and must be brought into account in the computation of profits when it falls due and is debited to the borrower in its books. In both cases, therefore, the provisions of section 338 and 349 synchronise the payer's right to a deduction and Crown's right to treat the interest as a taxable receipt of the payee. The facts 22. My Lords, the relevant facts can be briefly summarised. WIL was owned by the Electricity Supply Pension Scheme ("the scheme"), an approved superannuation scheme which is exempt from income tax. In the early 70's it used WIL as a vehicle for some very ill-advised property investments. These were financed by money lent to WIL by the scheme. After the final liquidation of its properties in 1988, WIL had virtually no assets and a huge indebtedness to the scheme. This included over £40 million arrears of interest. 23. It might have been thought that the scheme had no option but to allow WIL to go quietly into liquidation. But even in its moribund state, WIL was not without its attractions. There was at the time a market in companies with established tax losses. If profit-earning assets were transferred to such companies, they could avoid tax until they had exhausted the right of set-off against losses carried forward from the earlier years. People were prepared to pay for tax loss companies, which were on offer at a very substantial discount to the expected savings they could provide. The difficulty for the scheme was that although WIL's losses were only too real, they were partially represented in the company's accounts by unpaid arrears of interest. Under section 338, these sums became deductable only when paid. But WIL had no money with which to pay the interest and no assets upon which money could be raised. 24. The scheme therefore lent WIL the money with which to pay the interest. On 28 January 1988 it lent £20m, repayable "as and when the company is able" with interest at 2% over base rate. On the same day WIL paid the scheme £14,760,600 net of tax (representing a gross payment of £20,220,000 interest) and accounted to the Inland Revenue for £5,459,400 tax. If nothing more had happened, the Crown would no doubt have viewed matters with equanimity. Any deduction allowed to WIL, giving rise to established losses which could be set off against such profits as might be earned at some future date, would have been more than compensated by a solid and immediate payment of tax in the same amount. But the scheme was exempt from income tax and therefore entitled to reclaim the tax from the Inland Revenue. On 17 October 1989 and 3 January 1990 the exercise was repeated. The scheme made loans to WIL which it immediately used to pay arrears of interest due under the earlier loans, accounting to the Inland Revenue for tax which was then reclaimed by the scheme. 25. As a result of these transactions, the scheme was able to find a purchaser for the shares and loan debts of WIL. On 20 December 1990 a development company bought the shares for a nominal sum and the indebtedness of over £100m for 2p in the £. The scheme realised £2m for assets which otherwise would have been worth nothing. The findings of the Special Commissioners. 26. The Special Commissioners made the following findings:
The Commissioners therefore held that the interest had been "paid" within the meaning of section 338(1) of the Act and gave rise to an allowable deduction. The case for the Crown 27. Mr McCall QC, who appeared for HM Inspector, said he did not challenge the findings of the Commissioners that the loans and payments were real in the sense that the interest debt was discharged and replaced by a loan. The transactions were not a pretence. But they had no commercial purpose. They were purely for the purpose of avoiding tax and therefore fell within the Ramsay principle. Under that principle, they should be disregarded. Whatever might be their legal effect as between the parties, the absence of a commercial purpose meant that they did not count as payments within the meaning of section 338. Ramsay: a principle of construction? 28. Everyone agrees that Ramsay is a principle of construction. The House of Lords said so in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991. But what is that principle? Mr McCall formulated it as follows in his printed case:
29. My Lords, I am bound to say that this does not look to me like a principle of construction at all. There is ultimately only one principle of construction, namely to ascertain what Parliament meant by using the language of the statute. All other "principles of construction" can be no more than guides which past judges have put forward, some more helpful or insightful than others, to assist in the task of interpretation. But Mr McCall's formulation looks like an overriding legal principle, superimposed upon the whole of revenue law without regard to the language or purpose of any particular provision, save for the possibility of rebuttal by language which can be brought within his final parenthesis. This cannot be called a principle of construction except in the sense of some paramount provision subject to which everything else must be read, like section 2(2) of the European Communities Act 1972. But the courts have no constitutional authority to impose such an overlay upon the tax legislation and, as I hope to demonstrate, they have not attempted to do so. Ramsay: the fountainhead 30. As is well known, the Ramsay case [1982] AC 300 was concerned with a tax avoidance scheme designed to manufacture a capital loss to set off against a capital gain. The question before the House was whether a transaction by which the taxpayer company acquired certain shares for £185,034 and almost immediately sold them for £9,387, gave rise to a "loss accruing on a disposal of an asset" within the meaning of section 23(1) of the Finance Act 1965. Both the acquisition and sale of the shares formed part of a pre-planned series of transactions by which the alleged loss was exactly balanced by a gain which was alleged to fall within an exemption from the charge. The aggregate effect was that the taxpayer suffered no loss except the payment of a fee to the promoters of the scheme. 31. It was not disputed that the transaction included a genuine purchase of the shares for £185,034 and a genuine sale of the same shares for £9,387. The taxpayer said that that was the end of the matter. To look at the transaction as a whole would be to commit the heresy condemned by Lord Tomlin in Inland Revenue Commissioners v Duke of Westminster [1936] AC 1, 19 as the "doctrine that the Court may ignore the legal position and regard what is called 'the substance of the matter". At first, the revenue agreed. Its attack on the scheme concentrated on whether the counterbalancing gain really was outside the charge to tax. In the House of Lords, however, Mr Millett QC argued that no loss within the meaning of the Act had accrued at all. The House accepted the argument. Lord Wilberforce said, at p 323, that while Lord Tomlin's statement was a "cardinal principle", it did not require a court to "look at a document or a transaction in blinkers". The capital gains tax was, see p 326:
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