The Gazette 1986

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. 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- Garvin 13 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 down 16 or upheld 17 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." (ii) Case Law (A) Post-/?amjay

In the parallel case of Reed -v- Nova Securities Limited 20 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- McDiarmid 2] 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- Phillips 23 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 Company Limited (In Liquidation) -v- Hall 24 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 of shares chargeable to Capital Gains Tax. In the case of The Magnavox Electronic

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