John Astall & Graham Edwards v Revenue & Customs Commissioners (2008)
A security issued as part of a tax avoidance scheme was not a "relevant discounted security" within the meaning of the Finance Act 1996 Sch.13 para.3 because the terms upon which it might possibly be redeemed at a deep gain would never occur.
The appellant taxpayers (X) appealed against a decision ((2008) STC (SCD) 142) that a security issued as part of a tax avoidance scheme was not a "relevant discounted security" within the meaning of the Finance Act 1996 Sch.13 para.3. In outline the scheme involved X settling a small sum on trust and lending money to the trust in return for a security issued by one of the trustees. The terms of the security were that it was redeemable in 15 years at 118 per cent of the issue price but X could redeem the security at 100.1 per cent of the issue price between one and two months after issue. 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 and a notice to transfer the security was given, the term of the security became 65 years, with the same redemption price, but the purchaser could redeem it at 5 per cent of the redemption price, about 6 per cent of the issue price, on seven days' notice. The object was that X claimed the difference between the issue price and 6 per cent of the issue price, less a turn for the purchasing bank, as a loss on a "relevant discounted security" within Sch.13 para.3, while the difference remained in the trust for the benefit of X. The Special Commissioner concluded that 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 but that the difference between the issue price and the redemption price had to give rise to a possibility of making a gain that could objectively be seen to exist, and that the security in question never had that possibility, since it was a practical certainty that there would be a loss given the terms for redemption. He concluded that the market change condition could be ignored since it was not inserted for any commercial reason, and the 85 per cent chance of the condition being satisfied was favourable enough to make the risk one which X were willing to accept. X contended that the Special Commissioner's conclusion that a sale within the time limit was practically certain was one which no reasonable tribunal could have reached and therefore was erroneous in law.
The Special Commissioner did not come to factual conclusions which he was not entitled to do, nor did he incorrectly apply the law. In the light of the evidence, the Special Commissioner could not have come to any other conclusion. 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. On the facts he found that there was never a possibility of the securities making a gain looked at objectively. Thus, it was a practical certainty that there would be a loss. The Special Commissioner had come to his conclusion on the facts, that there would never be a deep gain in reality, and there was no basis for challenging his factual findings. On the facts of the security and in the light of all the evidence X had not established that the security fell within the definition of a "relevant discounted security". (2) In the tax avoidance context it was necessary to consider the language of the statute and the facts of the transactions and also to determine whether those analyses of the facts fell within the language of the taxing statute as construed, WT Ramsay Ltd v Inland Revenue Commissioners (1982) AC 300 HL, MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd (2001) UKHL 6, (2003) 1 AC 311 and Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) (2004) UKHL 51, (2005) 1 AC 684 considered and Scottish Provident Institution v Inland Revenue Commissioners (2004) UKHL 52, (2004) 1 WLR 3172 applied. The Special Commissioner, relying on Scottish Provident, had been entitled to take into account the lack of commercial reason for choosing the market change condition by reference to changes in the dollar/sterling exchange rate and the fact that, whilst there was a commercial risk that that would not be achieved, the odds were favourable enough to make it a risk that the parties were willing to accept in the interest of the scheme; he was equally entitled to take into account as part of the facts that the creation of the market change condition was inserted as an anti- Ramsay device just like the decision of the promoter of the scheme not to seek purchasers for the security until after it had been issued. The Special Commissioner had not wrongly considered that Scottish Provident created a new test or principle, but fully appreciated the derivation of the principle from Ramsay. (3) In the case of one of X it could not be said that there was no reasonable likelihood of the exercise of the option for early redemption before the occurrence of the transfer event. In that case the Special Commissioner had been entitled to hold that early redemption would always require a circular transaction using the capital of the trust and that such an artificial arrangement was not within the relevant statutory provisions construed purposively.