John Astall & Graham Edwards v Revenue & Customs Commissioners (2007)
A security was not a "relevant discounted security" within the meaning of the Finance Act 1996 Sch.13 para.3 because it was a "practical certainty" that the terms upon which it might possibly be redeemed at a deep gain would never occur.
The appellant tax payers (X) appealed against amendments made to their income tax self-assessments by the respondent commissioners, disallowing losses for the tax year 2001-2002. X had participated in a tax avoidance scheme, promoted by a tax advisory company, that was based on the definition of "relevant discounted securities" under the Finance Act 1996 Sch.13 para.3. Under the scheme, each of the appellants had settled a small sum into a trust under which he had a life interest, and then lent money to the trust in return for a security issued by one of the trustees. The security was redeemable after 15 years at 118 per cent of the issue price, but it could be redeemed between one and two months after issue at 100.1 per cent of the issue price. Furthermore, if a condition relating to the dollar-sterling exchange rate, which was designed to have an 85 per cent chance of being satisfied, was satisfied within one month of the security's issue and a notice to transfer the security to a purchaser was given, the security's term became 65 years with the same redemption price. However, the purchaser had an early redemption option under which it could redeem the security at 5 per cent of the redemption price on seven days' notice. In each case, the tax advisor did not seek a purchaser for the security until after it was issued. The object of the scheme was to enable each of the appellants to claim the difference between the security issue price and 6 per cent of that price as a loss on the security, while the difference remained in the trust. In each case following the issue of the security, the market change condition was satisfied, notice to transfer the security to a purchaser was given, the transfer was effected, and the purchaser then gave the requisite notice and redeemed the security at 5 per cent of the redemption value. The issue for determination was whether X had sustained losses from the discount on a relevant discounted security within the meaning of Sch.13 to the 1996 Act, with particular regard to (i) the market change condition; (ii) the decision not to seek purchasers until after the issue of the security; (iii) the terms of the security, including in particular those for its early redemption.
(1) The market change condition was purely inserted as an intended anti-Ramsay device; it was not inserted for any commercial reason, WT Ramsay Ltd v Inland Revenue Commissioners (1982) AC 300 considered. The dollar/sterling exchange rate was irrelevant to the security, which was in sterling. The condition was fully within the principle established in Scottish Provident Institution v Inland Revenue Commissioners (2004) UKHL 52, (2004) 1 WLR 3172, and could be ignored, Scottish Provident applied. On that basis, the consequences of it not being satisfied, namely that the early redemption option would have been exercised, also had to be ignored. (2) The decision not to seek purchaser in advance for the security was a course of action, or inaction, chosen not for any commercial reason, but solely to enable X to claim that there was no composite transaction. On the facts, it was a practical certainty that at the time of issue of the security, the tax advisor would have succeeded in finding willing and able purchasers within the required timescale. The possibility of not finding a purchaser was ignored. (3) A purposive construction of the definition of "relevant discounted security" had to have regard to real possibilities of redemption, not ones written into the document creating the security that the parties knew, and any reasonable person having the knowledge available to the parties knew, would never occur, Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) (2004) UKHL 51, (2005) 1 AC 684 applied. The scheme was entirely artificial and X had no commercial purpose in entering into it other than generating an artificial loss to set against taxable income. Its terms were structured so that it fell within the definition of a relevant discounted security for tax purposes. However, it was a practical certainty that the security would cease to exist within two months of its issue. The purpose of the legislation was to tax gains on securities that were issued at a deep discount and, conversely, to relieve losses on such securities. The difference between the issue price and the redemption price had to give rise to a possibility of making a gain that could be objectively seen to exist. In the instant case, the security never had that possibility. (4) The scheme had been designed so that the premium on early redemption could only be paid by means of a circular transaction involving the payment by of the capital that had been put into the trust for no other purpose. The relevant statutory provision, construed purposively, did not apply to such a transaction.