The Gazette 1986

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.

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 211

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