Judgments - Her Majesty’s Commissioners of Inland Revenue (Appellants) v. Scottish Provident Institution (Respondents) (Scotland)

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    Applying the construction

    20.  Mr Aaronson submitted, as had been argued successfully before the special commissioners and the Inner House, that even if the parties intended that both options should be exercised together, as contemplated in Ms Harrold's memorandum of 27 June 1995, the court could treat them as a single transaction only if there was "no practical likelihood" that this would not happen. On this point, SPI has the benefit of the findings of fact by the special commissioners to which we have referred in paragraph 16 above. The commissioners adopted (at para 24) the analogy of horserace betting:

    "If the chance of the price movement occurring was similar to an outsider winning a horse race we consider that this, while it is small, is not so small that there is no reasonable or practical likelihood of its occurring; outsiders do sometimes win horse races."

    21.  Mr Aaronson said that a test of "no practical likelihood" derived from the speech of Lord Oliver of Aylmerton in Craven v White [1989] AC 398, 514 and assented to by Lords Keith of Kinkel and Jauncy of Tullichettle. In that case, however, important parts of what was claimed by the Revenue to be a single composite scheme did not exist at the relevant date. As Lord Oliver said (at p 498):

    "[T]he transactions which, in each appeal, the Inland Revenue seeks now to reconstruct into a single direct disposal from the taxpayer to an ultimate purchaser were not contemporaneous. Nor were they pre-ordained or composite in the sense that it could be predicated with any certainty at the date of the intermediate transfer what the ultimate destination of the property would be, what would be the terms of any ultimate transfer or even whether an ultimate transfer would take place at all."

    22.  Thus there was an uncertainty about whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together. Here, the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the SPI option at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. From the point of view of the money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.

    23.  We think that it would destroy the value of the Ramsay principle of construing provisions such as section 150A(1) of the 1994 Act as referring to the effect of composite transactions if their composite effect had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. We would be back in the world of artificial tax schemes, now equipped with anti-Ramsay devices. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.

    24.  It follows that in our opinion the special commissioners erred in law in concluding that their finding that there was a realistic possibility of the options not being exercised simultaneously meant, without more, that the scheme could not be regarded as a single composite transaction. We think that it was and that, so viewed, it created no entitlement to gilts and that there was therefore no qualifying contract.

    25.  Mr Aaronson submitted that SPI have merely taken legitimate advantage of a gap in the transitional provisions of the 1996 Act. Paragraph 25 of Schedule 15 has the effect of preventing a company from claiming that a loss made after 1 April 1996 as a result of the exercise of an option granted before that date is an income loss. But it applies only to companies which would have been liable to tax before 1 April 1996 if the transaction had produced a gain: see para 25(1)(b). SPI was not so liable and Mr Aaronson submits that it was entitled to order its affairs to take advantage of its position.

    26.  It may be that if the Citibank option had stood alone, it would have been a qualifying contract and SPI would have sailed through the gap. Mr Moynihan QC, for the Inland Revenue, advanced a number of arguments of a more or less technical nature which he said would have prevented this from happening. But we need not discuss these points because SPI chose to enter into arrangements which, viewed as a whole, did not create a qualifying contract at all. On this ground we would allow the appeal.


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