Some tax avoidance schemes do work…
“Some tax avoidance schemes do work. They avoid tax by adopting a legitimate, justifiable and commercially sensible structure to achieve a result which could be achieved by other legitimate and justifiable means. Where, however, that structure is artificial or has no purpose other than the avoidance of tax, it will be examined with particular care. Intermediate steps only inserted as part of the tax planning process will more readily not be respected and will, or at least, may be disregarded to determine whether what truly occurred falls within the scope of the relevant part of the statute construed purposively. If it does, the tax may not be avoided and the legislation will bite triggering fiscal liability.”
The above quotation is from the recent judgement of J. Gordon Reid QC of the First Tier Tribunal in the .recent case of Trustees of the Morrison 2002 Maintenance Trust and Others v CIR. The first sentence could come as a surprise to readers of Treasury and HMRC pronouncements on the subject and to observers of recent developments in the tax world. But there it is in black and white – confirmation of what we have been saying all along: some tax avoidance schemes do work.
It will probably not be a surprise to most readers of this blog that the Tribunal Judge found for HMRC in the case in question. The scheme involved made use of a succession of Scottish and Irish trusts and option arrangements, the consequence of which was purported to be the avoidance of Capital Gains Tax (CGT) on large gains on the disposal of quoted shares. The question before the Tribunal was whether the scheme was defeated by what has become known as the Ramsay principle (following the case of WT Ramsay Ltd v CIR [1982] AC 300). This principle has been refined in a succession of subsequent cases, but one of the neatest (and most frequently quoted) summaries of it appears in the Hong Kong case of Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA in which Ribeiro PJ stated:
“The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
As J. Gordon Reid QC and other judges now apply it in the courts and tribunals, it is a kind of judicial smell test. In this case the particular scheme was designed to defeat the Ramsay principle by the insertion of a step which meant that the operation of the scheme was not precisely known at the time the overall plan was put into place. Unfortunately for the appellants in this case, the Ramsay principle has moved on and is not being interpreted in so slavish a manner. So while some tax avoidance schemes do indeed work, namely those that employ “legitimate, justifiable and commercially sensible structures”, those that are based on artificial steps that have no apparent purpose other than the avoidance of tax are most unlikely to succeed.