UT (Tax & Chancery) UT-2023-000031 - [2024] UKUT 00168 (TCC)

The FTT – despite a section in the Decision headed “Statutory purpose of Sch 13 FA 1996” ([123]-[126]) – did not clearly identify the purpose of paragraph 14A Schedule 13.

The language used by the FTT in its discussion of the construction of paragraph 14A contains echos of the earlier case law in the line of cases leading up to the decisions of the House of Lords in Barclays Mercantile Business Finance Limited v Mawson [2004] UKHL 51 (“BMBF”) and UBS AG v HMRC [2016] UKSC 13 (“UBS”). We refer, in particular, to the FTT’s repeated references to terms in the legislation being regarded as either a “legal” or a “commercial” concept (see, for example, [164], [165], [166], [170], [171]). That language bears the hallmarks of Lord Hoffmann’s judgment in MacNiven v Westmoreland Investments Ltd (“MacNiven”) [2001] UKHL. However, the legal/commercial dichotomy is recognized in later decisions as “not being a substitute for a close analysis of what the statute means” (BMBF [38] per Lord Nicholls) but as a “particular gloss” on the approach to statutory construction (Campbell [85]).

At points, the FTT refers to some factors that are taken into account in its analysis that we would not regard as material to the construction of paragraph 14A. For example, in the list of factors which the FTT takes into account in deciding that “the amount payable on the transfer”, the FTT refers to the need to preserve tax symmetry ([166(5)], [167(4)]) for which we can find no justification in the legislation.

For the reasons that we give below in relation to Ground [1], the purpose of paragraph 14A is derived from paragraph 14A(1). It is that a person who sustains a loss from a discount on a strip should be entitled to relief for that loss. The intention is to give relief for “real commercial outcomes” as described by Lewison J in Berry (Berry [52]) or “real economic outcomes” as described in Andrew (Andrew [93]).

The term “loss” is clearly defined in paragraph 14(3)(b) as the excess of “the amount paid” by the taxpayer for the strip over “the amount payable on the transfer”. We accept Ms Nathan KC’s argument that the term “loss” is not capable of purposive interpretation. The statute defines what a “loss” is by the formula in paragraph 14(3)(b).

However, as we describe in relation to Ground [1], that does not mean that the inputs into the formula are not capable of a purposive interpretation. Effect can be given to the purpose in considering the inputs into the formula.

For example, the FTT was aware of the commercial / legal dichotomy no longer representing a bright line aid to construction in the case law, expressly referring at [162] to “[t]he difficulty posed by the commercial/legal dichotomy as noted by the Special Commissioners in Campbell at [85], citing Lord Millet in Arrowtown” (in turn citing BMBF).

The FTT explicitly acknowledged at [163] the case law in stating that: “…there is no categorical definition to a statutory word as being either intrinsically ‘commercial’ or ‘legal’; so the meaning of ‘loss’ in any one provision depends on its particular statutory context.”

This wording closely mirrors that of the Supreme Court in UBS – “it all depends on the construction of the provision in question” (UBS [65]), as well as, more broadly, the FTT’s discussion of the case law in general. This assists when understanding the next sentence in the Decision at [163] - “The term ‘loss’ can be a commercial concept in one context, and a legal concept in another” - and later related passage at [166] - ‘I conclude that the amount payable on the transfer is a commercial concept’.

Mr Davey says that I must view the scheme as a composite whole and adopt a purposive construction of para 14A(3). On doing so, it is clear that both the amount paid by Investec to the NA Trust in order to cash cancel the Call Option and the amount received by Mr Andrew from Investec on the transfer of the gilt strips should be treated as amounts payable on the transfer of the gilt strips within para 14A(3).

This is a pre-planned scheme, which in accordance with the authorities that I have discussed, I should treat as a composite whole.

Mr Andrew acquired the gilt strips. Following the implementation of the steps in the scheme, it was always intended that Investec would acquire the entire interest in the gilt strips free of any rights under the Call Option. Under the terms of the scheme, it did so by the means of two steps: the acquisition of the gilt strips subject to the Call Option from Mr Andrew; and the cash cancellation of the Call Option by the NA Trust.

The payment of the cash cancellation price was an integral part of the arrangements for the transfer of the gilt strips to Investec. When Investec acquired the gilt strips from Mr Andrew and paid him £30,740, it was always the case that it would also make the cash cancellation payment. That is how parties intended the scheme to operate and that is how it did in fact operate. There was a theoretical possibility that the NA Trust would not elect to cash cancel the Call Option, but it was no more than that.

Against that background, I regard the cash cancellation payment as part of the ‘amount payable on the transfer’ of the gilt strips for the purposes of para 14A(3). Furthermore, in my view, that approach is consistent with a purposive interpretation of para 14A. As I have described, the purpose of the provision is to give effect to real economic outcomes. It would defeat that purpose if, on a transfer of gilt strips, a part of the purchase price which the transferor of gilt strips directs to be paid to a third party is not taken into account in determining the amount of any loss. In my view, there could be little argument that such a payment must be an ‘amount payable on the transfer’ of the gilt strips. The amount paid by way of cash cancellation in this case was, in reality, much the same. The scheme operated to transfer the entire interest in the gilt strips to Investec. The cash cancellation payment was just a part of the overall price paid by Investec to acquire the gilt strips which, through the design of the Call Option, was diverted to the Trust.

For these reasons, in my view, the amount payable on the transfer for the purposes of para 14A(3) is the aggregate of the amount paid by Investec to Mr Andrew (£30,740) and the amount of the cash cancellation payment paid by Investec to the NA Trust (£1,840,442). On that basis, Mr Andrew made a loss of £3,805.94 [rather than £1,844,248 as claimed by Mr Andrew] for the purposes of para 14A(3).”

We agree with this analysis.

Our conclusions are sufficient to dismiss this ground of appeal, but we should also address some of Ms Nathan KC’s specific arguments.

Ms Nathan KC contends that “in reaching the conclusion that the term “The amount payable on the transfer” was a commercial concept, the FTT failed to analyse the statute, the overall scheme of Schedule 13 or the statutory purpose”. In so far as this contention simply restates the proposition that the FTT misconstrued the statutory phrase “the amount payable on the transfer”, we reject the submission for the reasons given above.

Contrary to the Appellant’s contention, the FTT was not adopting an a priori approach to the exercise of statutory construction with which it was tasked; on the contrary, the FTT was carrying out the exercise of construing the specific statutory wording before it in its own context having regard to surrounding legislative context and relevant applicable authorities. It was seeking to give a purposive interpretation to paragraph 14A and the overall scheme of Schedule 13 – one that gives effect to real economic outcomes.

Our analysis also disposes of the Appellant’s argument that paragraph 4 of Schedule 13 defines transfer by reference to a common feature of the three specified terms - ‘sale, exchange, gift’ - and an ‘ejusdem generis’ catchall - namely ‘or otherwise’. Ms Nathan KC submits that these words are all means by which an interest in property is transferred. Thus, it is submitted that only a transaction which involves a transfer of an interest in property should be included in the definition of ‘transfer’ and only an amount payable in connection with such a transaction can be an ‘amount payable on the transfer’ for the purposes of paragraph 14A(3)(b).

However, the grant and assignment of the option were simply two steps, necessary although insufficient, in a composite transaction effecting a transfer of the entire interest in the gilts to Investec. The assignment of the option was a part of the transfer of the gilts under the scheme. On a realistic view, the grant and assignment of an option to purchase the gilt strips, and the exercise of the option were all parts of the means by which the gilt strips were transferred from the Appellant (and eventually purchased or acquired by Investec).

A purposive interpretation of the payment on the ‘transfer’ means that the ‘transfer’ should not be artificially divided or separated so that only the payment in respect of the exercise of the option could be considered the amount payable on the transfer. The payment for the assignment of the option was a necessary step in a composite scheme designed to effect a transfer of the gilt strips for which a series of transactions and payments was required. The payment for the assignment of the option to Investec was properly construed to be part of the amount payable on the transfer of the gilts from the Appellant and to it.

Further, the ratio of Wimpey in a property law context – that a grant of an option is not a transfer of an interest in property which is the subject of the option – is of no real assistance in the interpretation of ‘amount payable on the transfer’ in a taxing statute. The fact that the grant or assignment of an option might not constitute a transfer of property in its own right or in isolation does not undermine the interpretation that the payment for the grant or assignment of the option was part of the ‘amount payable on the transfer’ of the gilts. In this case, the payment for the assignment of the option was part of the payment necessary to effect the transfer and acquisition of the gilt strips.

Thus, we consider there was no material error in the FTT’s analysis at [172]-[174]:

The FTT conducted a realistic appraisal of the commercial reality or substance of the arrangements in light of the words of the statute, properly construed: see Whipple LJ in Good v HMRC [2023] 1 WLR 2062 at [55]:

This approach also disposes of the timing argument relied on by Ms Nathan KC in her written submissions: the amount paid by Investec to the Trustee on the grant of the Option (around £1.35 million) cannot be part of the amount payable on the transfer of the gilt strips because at the time of the grant of the Option, the Appellant had not acquired the gilt strips. The commercial reality was that the outcome of the transfer and preceding steps were pre-planned and the timing of the steps was part of a commercial unity by which the transfer of the strips from the Appellant to Investec would be effected. There was no doubt as to the transactions and outcomes that would occur at any step in the chain – all the choices as to the steps, parties and timings were circumscribed with the ultimate purpose – the eventual transfer – pre-planned.

For these reasons, we dismiss Ground 3 – there was no material error in the FTT’s construction of ‘the amount payable on the transfer’ for the purposes of paragraph 14A(3)(b), Schedule 13 FA 1996 and its application to the facts of this case.

The FTT stated at [112], [157] and [170]-[171] of the Decision:

Ms Nathan KC submitted that the FTT erred in concluding:

She contended that the FTT misunderstood the Appellant’s case. Ms Nathan KC argued that Campbell was not the lone rock on which the Appellant built his case. Rather, it was an example of the correct articulation of the leading authorities on statutory construction in the context of legislation expressed in materially the same terms as paragraph 14A.

Ms Nathan KC relied upon Campbell, where the Special Commissioners considered paragraph 2, Schedule 13, FA 1996, which then provided for loss relief on relevant discounted securities and defined the term “sustains a loss from the discount on a relevant discounted security” i.e. in terms which were materially the same as those in paragraph 14A. Despite noting that one step in the series of transactions entered into by the taxpayer was “wholly tax motivated” and “purely to generate the loss for which the Appellant seeks relief and for no other reason”(at [67]), the Special Commissioners concluded that the taxpayer had suffered a loss as defined by paragraph 2.

Having considered the line of authorities following Ramsay (WT Ramsay Ltd v IRC [1982] AC 300), and the relevance of a commercial/legal dichotomy, the Special Commissioners reached the following conclusion:

“79…We take this passage to confirm that the Ramsay doctrine is a canon of construction and its application will vary according to the statutory term or phrase under scrutiny and the context of the case before the Court which is invited to apply it….

…

85.

We acknowledge, however, as we must, that the commercial/legal dichotomy has given rise to problems. Lord Millett said that

“The supposed dichotomy between legal and commercial concepts has caused great difficulty. In Barclays Mercantile neither Peter Gibson LJ nor Carnwath LJ could understand it, and counsel were unable to explain it.” (Arrowtown, para 148).

However we consider that such problems arise due to an attempt to elevate that dichotomy to an exhaustive principle which treats all terms as having either an intrinsic “commercial” or “legal” meaning independent of their statutory context rather accepting that the dichotomy is a useful but particular gloss on the concept of the Ramsay doctrine as one of statutory construction.”

(emphasis added)

Ms Nathan KC submitted that none of the above is to deny that, depending on the context, a term used in a statute should be construed by reference to a commercial or a legal meaning. However, there is no rule of statutory construction which requires an a priori categorisation of terms into commercial or legal categories. Whether, in construing the language of the statute, such a construction is appropriate will “vary according to the statutory term or phrase under scrutiny and the context of the case before the Court.”

Applying that approach, the Special Commissioners in Campbell went on to analyse the language of paragraph 2 at [86]-[89], concluding as follows at [94]:

“94.

We summarise our conclusions as follows. The circumstances in which a person sustains a loss from the discount on a relevant discounted security and the amount of such loss are specifically articulated in paragraph 2 of Schedule 13, subject to paragraph 8 when the transfer is to a connected person. The Appellant sustained a loss under the express terms of the statute. The concept of sustaining a loss in paragraph 2 is an artificial construct which encompasses situations such as gifts which would not either in ordinary parlance or in a commercial sense be regarded as giving rise to a loss. The decided cases do not support the implication of an additional condition that the transactions resulting in the loss should not have been for the sole purpose of producing a loss or otherwise avoiding tax.”

(emphasis added)

Ms Nathan KC emphasised that the Appellant put the approach to statutory construction in UBS at the forefront of his case to the FTT rather than Campbell. Campbell was only relied on as an example of the correct application of the UBS approach to paragraph 2, Schedule 13, FA 1996 which used materially similar statutory language to paragraph 14A.

She contended that the Appellant’s submissions before the FTT on the authorities on statutory construction, both in his skeleton argument, and in oral submissions, focused on UBS and the preceding leading authorities on statutory construction. As the Appellant stated in paragraph 64 of the skeleton argument for the FTT, the leading statement of the correct approach to statutory interpretation is that of Lord Reed in UBS, at [65]-[66]:

‘65. As was noted in Barclays Mercantile [2005] 1 AC 684, para 35, there have been a number of cases since Ramsay in which it was decided that elements inserted into a transaction without any business or commercial purpose did not prevent the composite transaction from falling within a charge to tax, or bring it within an exemption from tax, as the case might be. ... In each case the court considered theoverall effect of the composite transaction, and concluded that, on the trueconstruction of the relevant statute, the elements which had been insertedwithout any purpose other than tax avoidance were of no significance. But itall depends on the construction of the provision in question. Someenactments, properly construed, confer relief from taxation even where thetransaction in question forms part of a wider arrangement undertaken solelyfor the purpose of obtaining the relief. The point is illustrated by thedecisions in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311and Barclays Mercantile itself.

66.

The position was summarised by Ribeiro PJ in Arrowtown Assets 6 ITLR 454, para 35,in a passage cited in Barclays Mercantile [2005] 1 AC 684, para 36: “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”’

(Emphasis added)

Again, Ms Nathan KC relied upon the Appellant’s skeleton argument at paragraph 65, citing Lord Reed’s caution in UBS highlighting the dangers of the use of ‘reality’ in statutory interpretation which is not rooted in the language of the statute, at [67]-[68]:

“67.

References to “reality” should not, however, be misunderstood. In the first place, the approach described in Barclays Mercantile and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook [1967] 2 QB 786. On the contrary, as Lord Steyn observed in McGuckian [1997] 1 WLR 991, 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements.

68.

Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application.”

(emphasis added)

She submitted that the Supreme Court has recently re-affirmed the UBS approach to statutory construction in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 (‘Rossendale’), stating the court’s task as follows at [16]:

“16.

Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.” (Emphasis added)

Ms Nathan KC argued that the FTT misunderstood the place within the Appellant’s arguments of Campbell. In his speech in BMBF, Lord Nicholls analysed the Ramsay principle from [26] onwards. Lord Nicholls then went on to state at [38]:

“MacNiven shows the need to focus carefully upon the particular statutory provision and to identify its requirements before one can decide whether circular payments or elements inserted for the purpose of tax avoidance should be disregarded or treated as irrelevant for the purposes of the statute. In the speech of Lord Hoffmann in MacNiven it was said that if a statute laid down requirements by reference to some commercial concept such as gain or loss, it would usually follow that elements inserted into a composite transaction without any commercial purpose could be disregarded, whereas if the requirements of the statute were purely by reference to its legal nature (in MacNiven , the discharge of a debt) then an act having that legal effect would suffice, whatever its commercial purpose may have been. This is not an unreasonable generalisation, indeed perhaps something of a truism, but we do not think that it was intended to provide a substitute for a close analysis of what the statute means. It certainly does not justify the assumption that an answer can be obtained by classifying all concepts a priori as either "commercial" or "legal". That would be the very negation of purposive construction: see Ribeiro PJ in Arrowtown, at paras 37 and 39 and the perceptive judgment of the special commissioners (Theodore Wallace and Julian Ghosh) in Campbell v Inland Revenue Comrs [2004] STC (SCD) 396.”

(emphasis added)

According to Ms Nathan KC, what one must take from this is that there is no rule of statutory construction which requires one to categorise a priori and interpret a word used in a statute as either commercial or legal. Rather, one has to analyse the words of the statute (and that too purposively) to determine their meaning. That is what the Special Commissioners did in Campbell, but what the FTT failed properly to do in this case, when analysing paragraph 14A.

She submitted that it was only after submissions on multiple leading authorities that the Appellant came on to Campbell. The relevance of Campbell was not that it was central to the Appellant’s case, nor that it was the authority most relied upon by the Appellant, nor that it identified a commercial/legal dichotomy applicable to matters of statutory construction. The relevance of Campbell was as an illustration of the application of the correct approach to statutory construction, as set out above, in the context of paragraph 2, Schedule 13, FA 1996, which was expressed in materially similar terms to paragraph 14A. In short, Campbell was an illustration of the correct approach, applied correctly.