Astall v Revenue & Customs (2009)
Certain zero coupon loan notes, which were issued on terms designed to satisfy the definition of a "relevant discounted security" within the provisions of the Finance Act 1996 Sch.13, did not meet those statutory requirements, purposively construed, since some of the terms had no practical reality and could therefore be disregarded.
The appellant taxpayers (X) appealed against a decision ((2008) EWHC 1471 (Ch), (2008) STC 2920) that certain securities did not qualify as "relevant discounted securities" as defined by the Finance Act 1996 Sch.13. X were parties to schemes designed to create an artificial loss to offset against taxable income. A loss incurred on a "relevant discounted security" was deductible for income tax purposes. To qualify, the security had to be capable of being redeemed for an amount which included a "deep gain" within the Finance Act 1996 Sch.13 para.3(3). X set up trusts to which they lent money in return for the issue of zero coupon loan notes. The terms of issue provided that the holder could, subject to a "market change condition", transfer the security to a third party who could redeem the security at approximately five per cent of the issue price. After the securities were issued, the market change condition occurred and a bank (H) agreed to purchase the securities for just under five per cent of the nominal amount of the notes, leaving X with a substantial loss, and proceeded to redeem the securities. The Special Commissioner held that risk of the market change condition not being satisfied could be ignored, as could the risk of not finding a purchaser for the security. Therefore it was practically certain that the securities would be redeemed within two months of their issue by a purchaser who was aware of the scheme in such a way as to give rise to a large loss for the taxpayers. Furthermore, there was no "deep gain" on the early redemption of the securities because the only way in which the redemption premium could be paid was out of the capital of the trust. The Special Commissioner considered that the relevant statutory provisions, construed purposively, did not apply to such a transaction. The judge upheld that decision. X submitted that Sch.13 para.3 defined a relevant discounted security by reference to its terms of issue; the court had to have regard to all the terms of issue and could not ignore any of those terms for whatever reason; the question whether a security was such a security should be considered in isolation from the rest of the transaction and without reference to the motives and intentions of the holder.
(1) Taxing statutes were to be purposively construed, unless it was clear that that was not intended by Parliament, Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) (2004) UKHL 51, (2005) 1 AC 684 and Scottish Provident Institution v Inland Revenue Commissioners (2004) UKHL 52, (2004) 1 WLR 3172 followed. The court had to apply that interpretation to the actual transaction in issue, evaluated as a commercial unity, and not be distracted by any peripheral steps inserted by the actors that were in fact irrelevant to the way the scheme was intended to operate. Scottish Provident showed that a real commercial possibility that had been injected into a transaction could be disregarded if the parties had proceeded on the basis that it should be disregarded. The proper approach was that set out in Mawson, namely to determine the nature of the transaction to which the statute was intended to apply and then to decide whether the actual transaction, which might involve considering the overall effect of a number of elements intended to operate together, answered to the statutory description. (2) There was no good reason for not applying the principles of purposive interpretation to Sch.13. It was clear from its terms that the application of para.3 would not depend only on the terms of issue of the securities. The mere fact that the parties intended to obtain a tax advantage was not in itself enough to make the statutory relief inapplicable. The purpose of Sch.13 para.2 and para.3 was to give income tax relief on a security otherwise fulfilling the statutory conditions on which a deep gain could also be made. The Special Commissioner's finding that the parties were willing to take the risk of the market change condition not occurring meant that for practical purposes that risk could be ignored. The transaction, viewed realistically, had as its primary objective the devaluation of the security in order to create a loss for income tax purposes. Similar reasoning applied to the Special Commissioner's finding that a purchaser was a practical certainty. X's challenge to that finding failed. Thus the risk of not finding a purchaser could be disregarded. The Special Commissioner was also right that the securities did not involve a "deep gain" for the purposes of Sch.13 para.3(3) because the amount payable on redemption was to be funded out of moneys previously provided by X as capital of the trusts. It was outside the statutory purpose and thus outside the statutory definition of "deep gain" purposively construed if the term relied on did not on the facts entail any real gain to the holder and had been inserted merely to obtain a tax advantage. Moreover, the court was entitled to have regard to the full sequence of the transaction, vital elements of which were not at arm's length, Carreras Group Ltd v Stamp Commissioner (2004) UKPC 16, (2004) STC 1377 considered.