The Gazette 1986

222 / 330

g a z e t t e s e p t e m b e r 1986
Institute and the Law Society as to the implications of
the new approach for each body." The Revenue
indicated their willingness to co-operate and to give
guidance on the application of the new approach to
certain specific instances. It was also stated that
taxpayers should not be burdened with unnecessary
uncertainty in judging the likely tax consequences of
their actions and that uncertainty could also make the
job of the Inland Revenue more difficult. The Inland
Revenue also gave an indication of their attitude to
certain tax planning arrangements, in particular the use
of capital losses, 'hive-downs' and the effect of anti-
avoidance legislation.12 It was however emphasised that
each situation would depend on its own facts, and no
definite answers could be given.
(ii) Case Law
(A) Post-/?amjay
The new approach has been argued with discretion by
the Inland Revenue following Ramsay's case. The
Courts do not appear to have relied exclusively on the
new approach, and have struck down tax avoidance
arrangements using normal principles of construction
whenever possible. For example, in I.R.C. -v- Garvin13
Lord Wilberforce described the impunged arrangement
as a complicated tax avoidance scheme, yet a House of
Lords composed of three of the five law lords who had
handed down the Ramsay decision less than a fortnight
earlier did not apply the new approach. Similarly, in
Pilkington -v- I.R.C.14 the House of Lords struck down
a scheme to allow the taxpayer Company to obtain
group relief on losses sustained by a company in another
group on the wording of the legislation despite the fact
that arguments based on the new approach had been
addressed to the Court at their request.15 There are also
numerous other cases where avoidance arrangements
have been struck down16 or upheld17 where the new
approach has not been applied.
More recently, in two related decisions the House of
Lords declined to apply the new approach. Coates
(Inspector of Taxes) -v- Arndale Properties Ltd)*
involved an arrangement to transfer a lease upon which
there was an unrealised capital loss to a property dealing
company in the same group and for that Company to
elect to treat the lease as trading stock and to
subsequently sell the lease, thereby converting the
unrealised capital loss into a realised trading loss. The
House of Lords held that the company acquiring the
lease did not trade and had no intention of trading with
the lease, and that as a result it never acquired the lease
as trading stock and the arrangement failed. Lord
Templeman said 19:
"In these circumstances it is unnecessary to
consider the application of the principles
enumerated by your Lordships' House in I.R.C.
-v- Burmah Oil Company Limited and Furniss
(Inpsector of Taxes) -v- Dawson to a case where
the legislature has made express provision for the
mitigation of tax by the conversion of a capital
loss into a trading loss provided certain conditions
are fulfilled."
In the parallel case of Reed -v- Nova Securities
Limited20 the House of Lords struck down a similar
arrangement on the same grounds, again without
reference to the new approach.
However, there are a number of recent cases where
the new approach has been applied. In the case of
Cairns -v- McDiarmid2] the Court of Appeal applied
the new approach to income tax and struck down one of
the Rossminister ."advance interest" schemes.22 The
Court held, firstly, that the relevant interest was not
"annual interest" and hence not deductible, and,
secondly, that the Ramsay principle applied. Sir John
Donaldson M.R. said that although the transaction was
not a sham, it lacked all reality and was "out of this
world". Its sole purpose was tax avoidance, and it was
wholly artificial.
In Young -v- Phillips23 Nichols J. struck down an
attempt to avoid Capital Gains Tax on the transfer of
shares in three U.K. family companies by the issue of
bonus shares on renounceable letters of allotment
carrying most of the value of the company and the
subsequent sale of the letters in the Channel Islands.
The taxpayers argued that the sale was not chargeable to
U.K. Capital Gains Tax, on the grounds that the sale of
the letters was a disposal of assets situated outside the
United Kingdom.
A preordained series of transactions designed to achieve
this was carried out and this included a number of steps
involving cash subscriptions for shares in the company
and in a Jersey company incorporated for the purpose.
The cash was derived from a bank loan, and having
been passed around between the various parties was
repaid on the same day. Nichols J. held in favour of the
Inland Revenue on the grounds that the letters were
situated in the U.K., being documents evidencing rights
against U.K. Companies and exercisable in the U.K.
Nichols J. also applied the new approach and held that
the arrangement was a preordained series of transac-
tions. He therefore disregarded the steps inserted solely
to avoid tax, thereby exposing the arrangement as a sale
of shares chargeable to Capital Gains Tax.
In the case of The Magnavox Electronic Company
Limited (In Liquidation) -v- Hall24 a contract of sale
entered into prior to liquidation of the taxpayer
Company's factory was not completed due to lack of
funds on the part of the purchaser. The Company
meanwhile went into liquidation. The liquidator was
entitled to rescind the contract, but this would have
resulted in the loss of the benefit of setting off any
capital gains on the disposal against trading losses to the
date of liquidation. To keep the contract alive, the
benefit of the original purchaser's interest was assigned
to a company set up for that purpose by the liquidator.
The factory was later sold to a third party under revised
terms. Nichols J. held, firstly, that the original contract
had been terminated and replaced by a new contract and
that the date of disposal was post-liquidation. The
benefit of the pre-liquidation losses was therefore lost.
The judge also decided that the use of the intermediate
company fell within the new approach. There had beeri
a preordained series of transactions into which were
inserted steps which had no commercial purpose other
212