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g a z e t t e
s e p t e m b e r 1986
Recent Developments in Tax Avoidance
Parti
by
Paul McE l h i nne y, B . A . (Mo d ), Solicitor
Dav id Kennedy, Barrister-at-law
M
ost practitioners will by now be aware that in
recent times the English courts have significantly
altered their previously neutral attitude to pre-planned
tax avoidance arrangements. In a series of decisions in
the first half of this decade culminating in the case of
Furniss
-v-
Dawson
the
House of Lords adopted a new
approach which severely limits the effectiveness of
artificial avoidance arrangements in the U.K. This new
judicial attitude is founded on the principle that when
parties enter into an arrangement involving a series of
legal steps or transactions, designed to avoid tax, those
steps in the series which are inserted purely to avoid tax
and for no commercial purpose will be disregarded and
treated as ineffective for tax purposes. For example, in
Furniss
, the taxpayers wished to sell company shares to
a third party. Instead of making a direct sale, the shares
were exchanged for shares in an Isle of Man company,
to avoid capital gains tax, and that company sold the
shares on to the third party. The House of Lords
disregarded the share exchange and treated the
arrangement as a direct sale to the third party liable to
tax. The novel aspect of this approach is that it involves
the disregard of genuine legal transactions which are not
a sham, and is directed against tax avoidance, which is
legal and not evasion, which is a criminal offence. The
new approach does not at the time of writing represent
the law in Ireland. However, it would appear that the
matter will be considered by the Irish courts before
long.
The purpose of this article is not to discuss the
development of this new approach, or to analyse its
operation and practitioners are referred to the extensive
literature on this topic.
2
Instead, this article discusses
developments in the U.K. and in Ireland since the new
approach was adopted in the U.K. Certain recent
decisions in the U.K. have limited the previously wide
scope of the approach. In Ireland, there are signs that
the judicial attitude to tax avoidance may be changing.
This article will be followed by a second which will
examine recent developments in certain other common
law jurisdictions, and will discuss the potential effect of
the adoption of the new approach on certain common
Irish avoidance arrangements.
Recent Developments
— U
.K.
(i) Government & Inland Revenue Statements
The U.K. Government and Inland Revenue have been
reluctant to dispel the uncertainty surrounding the scope
of the new approach. However, certain limited
statements have been made. In 1982, the CCAB met
with the Revenue and expressed their concern that
Inspectors were trying to apply the new approach in
cases where this was not appropriate.
3
The Revenue
asked the CCAB for examples and they indicated that
Ramsay's
case did not in their view apply to "Swiss
roundabouts"
4
and generally, the routing of assets
through a company within the same group which had
allowable capital losses and had not been acquired after
these had arisen. Later that year, the Revenue stated
that Inspectors had been informed of the need for
discretion in applying the new approach. It was also
stated that the
Ramsay
principle was such that it was not
possible for the Revenue to set limits to its application in
advance of events and known facts. It was far better to
allow the judgments to speak for themselves.
5
Following
the decision in
Furniss
-v-
Dawson
, in March 1984 a
deputy chairman of the Board of Inland Revenue stated
that Inspectors had been instructed to apply the new
approach with "care and responsibility" and that
Inspectors had been told to refer to Head Office
(Somerset House) before using the new approach to
settle an appeal or to disturb existing Revenue practice.
6
Several relevant statements were made by Govern-
ment Ministers on the passage of the U.K. Finance Bill
1984 through the House of Commons. Mr. Peter Rees,
Chief Secretary to the Treasury said,
inter alia
1
:
" . . . the emerging principles do not in any way
affect the treatment of
covenants, leasing transac-
tions, and other straightforward
commercial
transactions.
Nor is there any question of the
Inland Revenue challenging, for example, the tax
treatment of
straightforward transfers of assets
between members
of the same group
of
companies".
(Italics added)
Mr. Rees also stated that the Revenue would not seek
to re-open cases where assessments were properly settled
in accordance with the prevailing practice and had
become final before
Ramsay's
case. Mr. John Moore
subsequently indicated that the new approach did not
apply to "genuine film financing, using
bona fide
leasing with capital allowances".
8
However, the U.K.
Government have refused to issue a codification of
Inland Revenue practice following
Furniss
which tax-
payers could clearly understand
9
or to adopt a statutory
clearance procedure.
10
More recently, in September 1985, a comprehensive
guidance note was published by the Institute of
Chartered Accountants in England and Wales following
discussions between the Inland Revenue and the
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