Case No. GLC 67/00
Neutral Citation No: [2000] EWHC Ch 451
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 2nd November 2000

Before:

MR JUSTICE PATTEN
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Between:

	Griffin (Her Majesty’s Inspector of Taxes)	Appellant	
	and		
	Citibank Investments Limited	Respondent	

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Mr G Aaronson QC and Ms Camilla Bingham instructed by Jane Westbook of Citibank for the Respondent

Mr C McCall QC and Mr M Furness QC instructed by Solicitors of Inland Revenue of Somerset House, London, WC2 for the Appellant
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JUDGMENT : APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

Mr Justice Patten:

Introduction

1.	This is an appeal by the Crown from a decision of the Special Commissioners (Mr T H K Everett and Dr A N Brice) allowing an appeal by the taxpayer, Citibank Investments Limited (“CIL”) against three assessments to corporation tax for the years 1994, 1995 and 1996.  Each of these assessments was based in part on gains received in respect of two option contracts which were purchased by CIL from Citibank International Plc (“CIP”) on 29th December 1994 with an expiration date of 29th April 1996.  The contention of the taxpayer both before the Special Commissioners and before me is that the gains arising from the options fall to be treated as capital gains rather than profits or gains chargeable to tax under Schedule D of the Income and Corporation Taxes Act 1988 (“the 1988 Act”).  Specifically CIL relies upon the provisions of S.128 of that Act which exempts from a charge to tax under Schedule D gains arising in the course of dealing in “qualifying options” as defined.

2.	For the Crown Mr McCall QC accepts that if taken in isolation each of the two option contracts was a “qualifying option” within the meaning of s.128 but he contends that by the application and operation of the principle laid down by the House of Lords in WT Ramsay Limited v IRC [1982] AC300 the two option contracts fall to be treated for fiscal purposes as one composite transaction the legal nature and effect of which does not satisfy the statutory definition of a “qualifying option” within the meaning of s.128.

3.	The appeal therefore raises for my decision the question of what is the nature and scope of the Ramsay principle following its subsequent elaboration and explanation in the cases of IRC v Burmah Oil Company Limited [1981] 54 TC200; Furniss v Dawson [1984] AC 474 and Craven v White [1989] AC398.  In particular I have to decide the apparently novel issue of whether the two ingredients identified by Lord Brightman in his speech in Furniss v Dawson (at p 527 D-E) are essential features of every series or combination of transactions to which the Ramsay principle can apply or whether, notwithstanding the decision in Furniss v Dawson, there remains an underlying and residual principle contained in Lord Wilberforce’s speech in Ramsay which can justify the construction and treatment of the two options in this case as some different kind of legal animal notwithstanding the absence of inserted, non-commercial steps which are usually the hallmark of a tax avoidance scheme.  The resolution of this issue raises difficult questions both of principle and of authority. 

4.	The Legislation:
At the time relevant to this appeal section 128 of the 1998 Act provided as follows:

128.  Commodity and financial futures etc.: losses and gains

Any gain arising to any person in the course of dealing in commodity or financial futures or in qualifying options, which., apart from this section would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, shall not be chargeable to tax under that Schedule.

In this section “commodity or financial futures” and “qualifying options” have the same meaning as in section [143 of the 1992 Act]’, and the reference to a gain arising in the course of dealing in commodity or financial futures includes any gain which is regarded as arising in the course of such dealing by virtue of subsection (3) of that section.

5.	A “qualifying option” is defined in s.143 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), Section 143(2) provides that:

(b) “qualifying option” means a traded option or financial option as defined in Section 144(8).

6.	The definition of a financial option is contained in S.144(8)(c) of the 1992 Act.

(c) “financial option” means an option which is not a trade option, as defined in paragraph (b) above, but which……
(i)	relates to currency, shares, securities or an interest rate and is granted (otherwise than as agent) by a member of a recognises stock exchange, by an authorised person within the meaning of the Financial Services Act 1986……

7.	Before the Special Commissioners Mr Aaronson QC took two points which I ought to deal with now simply in order to dispose of them.  The first was that the option contracts were “commodity or financial futures” within the meaning of s.128 of the 1988 Act.  The second was that some support for the taxpayer’s argument might be derived from Schedule 5AA of the 1988 Act which was added by the Finance Act 1997 in relation to profits and gains realised on or after the 5th March 1997.  The schedule operates to bring within a charge to tax under Case V1 of Schedule D disposals of options comprising two or more unrelated transactions designed to produce a guaranteed return:  see Schedule 5AA para 2(i).  These provisions would now take options of the kind under consideration outside the exception provided by S.128.

8.	Neither of these points was relied on before me in support of the taxpayer’s appeal and I need therefore say no more about them.

9.	The Facts
The principal facts found by the Special Commissioners are set out in paragraphs 13-33 of their decision and can be summarised as follows:

(1)	CIL is a company within the Citibank group of companies.  Its main function is to hold investments.  Its activities are not taxable under Case 1 of Schedule D and the option transactions which are the subject of this appeal did not constitute trading transactions;

(2)	CIP is another company within the Citibank group.  It caries on the trade of a banker and dealer in financial instruments and is recognised as a writer of options under the provisions prescribed by ISDA of which CIP was a founder member.  At all material times CIP was an authorised person within the meaning of the Financial Services Act 1986;
(3)	ISDA (the International Swap Dealers Association Inc.) was established in 1984 with twelve members including CIP.  In 1987 it published a Master Agreement and certain Definitions.  These Definitions were revised and re-published in 1991.  They were intended for use with agreements such as the ISDA Master Agreement and in confirmations of individual transactions governed by those agreements.  The 1991 ISDA Definitions were produced as part of the documents on this appeal and it was common ground before me that they were designed for and routinely used as the standard terms and conditions of option agreements such as the ones under consideration;
(4)	In February 1994 Citibank NA, a company in the Citibank group, took advice from Arthur Anderson about the corporation tax consequences of what was called the equity box structure.  The purpose of the equity box structure, the circumstances leading up to the purchase of the two options, and the details of the contractual arrangements are set out by the Special Commissioners in paragraphs 17-33 of their decision and because they are relevant to a number of arguments addressed to me on this appeal I set them out in full:

17.	In February 1994 Citibank NA, a company in the Citibank group, consulted a leading firm of chartered accountants about the corporation tax consequences of a proposed structure which was called the equity box structure.  Under that structure any United Kingdom company would enter into a combination of transactions with Citibank in same-dated European equity linked options.  (In this context the phrase “European options” means options which can only be exercised on one day (usually the last) of their term.)  The combination of transactions proposed would enable the company to establish a known return on the exercise of the options, regardless of the actual movement in the underlying index.  Because the return could be ascertained at the outset, Citibank could price the transactions as if they were a deposit of money.
The advice was that, although each case had to be judged on its own facts, a number of factors indicated that trading was not taking place and so capital treatment for tax purposes would be appropriate. 

18.	In December 1994 the Appellant received the sum of £150M as the result of the realisation of a substantial investment.  As the money was not required until April 1996 (when certain borrowings had to be repaid) consideration was given as to how it might best be invested.  At that time the Appellant had capital losses so there were advantages in receiving funds in the form of capital gains rather than as income liable to corporation tax.

19.	In December 1994 a presentation was made to the Board of Directors of the Appellant describing the equity box structure which, it was said, would provide returns in the form of capital gains.  The investment would be in two European options with the same inception and maturity dates.  Both options would be linked to the FTSE 100 Share Index; one would be a capped call option and the other would be a floored put option.  The effect of using these options in combination meant that there would always be a guaranteed payment of a predetermined amount when the options were exercised.  An amount could, therefore, be agreed at the outset to reflect the appropriate rate for the period.  If £150M were invested by the Appellant in December 1994, and if the transactions were effected with International under and ISDA Agreement, then in April 1996 there would be a return (of capital and uplift) amounting to £161.88M.  It was an essential part of the equity box scheme that the standard ISDA documentation should be used for all transactions. 

20.	The presentation went on to discuss two other ways in which the £150M of surplus funds could be invested by the Appellant; these were the making of a deposit investment and the repayment of existing borrowings.  The making of a deposit investment would mean that tax would be payable on the interest which meant that the net return would be £7.96M as compared with £11.88M for the equity box scheme.  The repayment of existing borrowing would mean that tax relief would be foregone which would mean that the net return would be £9.37M as compared with £11.88M for the equity box scheme; penalty costs on prepayment of the borrowings would also have to be considered and these amounted to about £950,000.00.

21.	After considering the presentation, on 16 December 1994 the Board of Directors of the Appellant resolved to purchase from International a call option linked to the FTSE 100 Index at a premium not exceeding £75M and a put option linked to the FTSE 100 Index at a premium not exceeding £85M and to confirm the purchase by the execution of trade confirmation documents. 

					The transactions – 29 December 1994

22.	On 29 December 1994 International sent to the Appellant a document headed “OTC Equity Option Confirmation”.  (“OTC” means “over the counter”).  The confirmation stated that it set forth the terms and conditions of the transaction entered into.  It specifically provided that the definitions and provisions contained in the 1991 ISDA Definitions were incorporated in the confirmation.  The confirmation went on to say that, if the Appellant and International were, or were to become, parties to a Master Agreement in the form published by ISDA, then the confirmation supplemented, formed part of, and was subject to such agreement.  In this way the ISDA 1991 Definitions were made part of the agreement to be entered into by the Appellant and International. 

23.	On 11 April 1995 the Appellant and International did enter into  a Master Agreement (the Agreement) in the form published by ISDA in 1992.  The agreement was stated to be effective from 29 December 1994 and, at the hearing, both parties treated it as having been made on that date.

24.	Clause 1(c) of the Agreement recorded that all transactions entered into in reliance on the Agreement formed a single transaction between the parties.  This clause was not specific to the Agreement in issue in this appeal but was a general provision which would apply however many transactions two parties undertook under one agreement.  It normally had relevance to the netting provisions (which provided that where amounts were payable by each party to the other the obligations were automatically discharged by the party by whom the larger amount was payable paying to the other the excess of the amount he owed over the amount owed by the other party).  The netting provisions were not used in the transactions between the Appellant and International.

25.	Clause 5 of the Agreement contained provisions which were applicable in events of default and termination.  Events of default included failure to pay or deliver, and bankruptcy.  Clause 6 provided that, where an event of default occurred, the non defaulting party could, by notice, designate an early termination date in respect of all outstanding transactions.  When an early termination date occurred then the parties could elect a payment method and a payment measure.  Under the payment method elected by the Appellant and International any amount owing to a defaulting party were to be deducted from the amounts owing to a non-defaulting party and the balance only was payable.  The payment measure elected by the Appellant and International was the market quotation measure under which quotations would be obtained from four reference market makers of an amount which would have the effect of preserving the economic equivalent of payment or delivery;  the quotation showing the highest and lowest values would be disregarded and the others averaged. 

26.	Clause 9 of the Agreement provided that the Agreement could not be transferred by either party without the prior written consent of the other party.

27.	The Agreement incorporated the 1991 ISDA Definitions.  Section 8.4 of those Definitions dealt with the exercise of options and provided for the delivery of a notice  of exercise by the buyer to the seller; delivery could be orally or by telephone. 

28.	Also on 29 December 1994 the Appellant as buyer, and International as seller, signed two trade confirmations.  One was for 330,181 European style call options expiring on 29 April 1996 where the underlying index was the FTSE 100 Index.  The strike price was 3,000 and the payoff was capped at the FTSE 100 level of 3,500.  The premium paid was £69,338.103.00 and the settlement amount was shown as the lesser of the number of options times 500 (the result expressed as pounds sterling) or the FTSE Index less 3,000 multiplied by the number of options (the result expressed as pounds sterling).  Under this provision the amount that International would be liable to pay to the Appellant on 29 April 1996 would, depending on the movement of the FTSE 100 Index, be between £0 and £165,090,500.00.

29.	The second trade confirmation was for 330,181 European style put options expiring on 29 April 1996 where the underlying index was the FTSE level 3000.  The strike price was 3,500 and payoff was capped at FTSE level 3000.  The option premium was £80,661,897.00 and the settlement amount was the lesser of 500 multiplied by the number of options (the result expressed as pounds sterling) or 3500 less the FTSE Index multiplied by the number of options (the result expressed as pounds sterling).  Under this provision the amount that International would be liable to pay to the Appellant on 29 April 1996 would, depending on the movement of the FTSE 100 Index, be between £165,090,500.00 and £0.

30.	Thus, the aggregate amount paid by the Appellant to International on 29 December 1994 was £150M (being the total of £69,338,103.00 and £80,661,897.00).  The amounts paid for the purchase of the options represented the fair market value at the time the purchases were made when call options were cheaper than put options.  Depending upon whether the FTSE 100 Index moved up or down, a greater or lesser amount would be paid on the exercise of the call option and the put option respectively.  Taking the two arrangements together, however, the result would always be that International would, on 29 April 1996, be liable to pay to the Appellant the sum of £165,090,500.00.

31.	Internally the Appellant dealt with the transactions as options and not loans. 

                     The exercise of the options – 29 April 1996

32.	There was no written evidence of the exercise of the options on 29 April 996.  However, we accept the oral evidence of Mr Golden that it was market practice up to 1994 to accept exercise of options under the ISDA agreements orally or by telephone and that, after 1994, the primary method of exercise was by telephone.  We note that section 5.2 of the 1994 ISDA Equity Option Definitions provides that oral telephonic notice is preferable to written notice.  We also accept the unchallenged written evidence of Mr Schweitzer that it was not unusual to exercise options by way of telephone call or orally and that it was not unusual to assume exercise. 

33.	We therefore find that, on the balance of probabilities, the options were validly exercised on 29 April 1996.

10.	The December 1994 presentation was made with the assistance of a document headed “Investment in Equity Box” which is in the appeal bundle.  The so-called rationale of the equity box structure was to provide an “alternative investment structure, using equity options, providing returns in the form of capital gains rather than taxable interest income.  These returns are effectively tax-sheltered by the existing losses and thus realise the value of the unused tax losses”.

11.	The requirement to use the standard ISDA terms as part of the equity box structure is illustrated by a diagram headed “Transaction Structure”.  The two other investment possibilities referred to in paragraph 20 of the decision of the Special Commissioners are to be found on the page headed “Alternatives” in the same document. 

12.	I shall refer in more detail later in this judgment to the precise terms of the ISDA Master Agreement and Definitions so far as they are relevant to the issues canvassed on this appeal.

13.	The issues of the Appeal
As I have already mentioned the Crown concedes that each of the two options if taken separately would be a “qualifying option” within the meaning of s.128 of the 1988 Act as defined and that in order to succeed Mr McCall must persuade me that the proper legal analysis is to treat both options as part of a single composite transaction under which CIL has paid over the premiums amounting to £150m for a pre-determined fixed return of £165,090,500m payable in April 1996 without regard to the then state of the share market as recorded in the FTSE 100 Index.  Such an agreement, says Mr McCall, would not be an option which “relates to shares” within the meaning of s.144(8)(c)(i) of the 1992 Act and cannot therefore be a qualifying option.

14.	The issues to be decided on this appeal therefore appear to be as follows:

(i)	do the two options constitute a single composite transaction for the purpose of applying the Ramsay principle;
(ii)	if so, is that composite transaction one to which the Ramsay doctrine can apply having regard to the decision of the House of Lords in Furniss v Dawson; and
(iii)	if it can so apply, does it have the effect of taking the two options, when regarded as a single composite transaction, outside the definition of a qualifying option within the meaning of s.128 of the 1988 Act. 

15.	The Ramsay Principle
Before turning to the specific questions posed in paragraph 9 above it is important to make one or two general observations about the origin and purpose of what for convenience I have called the Ramsay principle.  Until the decision in Ramsay itself the leading authority as to how the courts should construe transactions in a fiscal context was the decision of the House of Lords in IRC v Duke of Westminster [1936] AC1.  This decision has never been overruled and remains binding upon me. 

16.	In that case the Duke of Westminster covenanted with his employees to pay them an annuity.  They remained contractually entitled to receive wages for the services they performed but it was explained to them by the Duke’s solicitors that they were not expected to claim, and they did not in fact claim, those wages during the currency of the annuity.  The Duke of Westminster was entitled to deduct the payments of the annuity for the purpose of calculating his taxable income thereby reducing his liability to surtax.  The Crown challenged these arrangements contending that the payments made under the deed of covenant were in substance payments for services and were not annual payments which could properly be deducted from the Duke’s assessment to surtax.  The House of Lords rejected this argument.  Lord Tomlin (at pp 19-21) said this:

“it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called “the substance of the matter,” and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages.  This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases.  The sooner this misunderstanding is dispelled, and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting “ the uncertain and crooked cord of discretion ” for “ the golden and straight metwand of the law.”  Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.  If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.  This so-called doctrine of “ the substance ” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable. 
The principal passages relied upon are from opinions of Lord Herschell and Lord Halsbury in your Lordships’ House.  Lord Herschell LC in Helby v Malthews observed:  “ It is said that the substance of the transaction evidenced by the agreement must be looked at, and not its mere words.  I quite agree; “ but he went on to explain that the substance must be ascertained by a consideration of the rights and obligations of the parties to be derived from a consideration of the whole of the agreement.  In short Lord Herschell was saying that the substance of a transaction embodied in a written instrument is to be found by construing the document as a whole. 
Support has also been sought by the appellants from the language of Lord Halsbury LC in Secretary of State in Council of India v Scoble.  There Lord Halsbury said: “ Still, looking at the whole nature and substance of the transaction (and it is agreed on all sides that we must look at the nature of the transaction and not be bound by the mere use of the words), this is not the case of a purchase of an annuity.”  Here again Lord Halsbury is only giving utterance to the indisputable rule that the surrounding circumstances must be regarded in construing a document.
Neither of these passages in my opinion affords the appellants any support or has any application to the present case.  The matter was put accurately by my noble and learned friend Lord Warrington of  Clyffe when as Warrington LJ in In re hinckes, Dashwood v Hinckes he used these words:
“It is said we must go behind the form and look at the substance… but, in order to ascertain the substance, I must look at the legal effect of the bargain which the parties have entered into.”  So here the substance is that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles, and, having ascertained upon ordinary legal principles, and, having regard to what I have already said, the conclusion must be that each annuitant is entitled to an annuity which as between himself and the payer is liable to deduction of income tax by the payer and which the payer is entitled to treat as a deduction from his total income for surtax purposes. 

17.	The “ordinary legal principles” referred to by Lord Tomlin can be found in operation in many non-fiscal contexts.  In McIntyre v Crossley Brothers Ltd [1895] AC 457 (where the issue was whether an agreement for the hire of a gas engine constituted a bill of sale) Lord Herschell (at pp 462-3) said:

Coming then to the examination of the agreement, I quite concede that the agreement must be regarded as a whole - its substance must be looked at.  The parties cannot, by the insertion of any mere words, defeat the effect of the transaction as appearing from the whole of the agreement into which they have entered.   If the words in one part of it point in one direction and the words in another part in another direction, you must look at the agreement as a whole and see what its substantial effect is.  But there is no such thing, as seems to have been argued here, as looking at the substance, apart from looking at the language which the parties have sued.  It is only by a study of the whole of the language that the substance can be ascertained. 

Similarly in Lloyds & Scottish Finance Ltd v Cyril Lord Carpet Sales Ltd reported in [1992] BCLC 609 but decided in 1979 Lord Wilberforce, in considering whether certain assignment of book debts were in substance absolute assignments by way of sale or assignments by way of charge would be void against a liquidator for non-registration under the Companies Act said this (at pp 614-5).

The total dependence of the assignment of the debts upon the trading agreement, the importance attached to the completion of the trading agreement before any money was advanced, show beyond doubt that the trading agreement was an essential element of the parties’ contractual intention, and that the assignment were made under it.  To suppose, in the fact of this, that the assignments were not by way of sale but by way of security, would be to impose upon the parties a form of transaction totally different from that which they had selected, namely one of sale and which there is no evidence whatever that either of them desired.  Indeed there was evidence uncontradicted from the respondents witnesses and accepted by both courts below that the respondents ‘had no intention of creating any charge over book debts or merely making a series of loans’.  It would be a strange doctrine of ‘looking for the substance’ or ‘looking through the documents’ which would produce a contractual intention so clearly negated by the documents and by oral evidence.

18.	Almost exactly two years later the House of Lords in Ramsay were asked to consider the legal effects for tax purposes of two schemes designed to avoid pre-existing chargeable gains accruing to the taxpayers in Ramsay on the sale of a farm and in the conjoined appeal of Rawling on the sale of some shares.  In each case the scheme involved an elaborate series of transactions designed to produce matching losses and gains which were in effect self-cancelling.  At the conclusion of the scheme the taxpayer made neither a gain nor a loss and incurred no expenses save for the professional fees involved.  Neither scheme had any commercial justification.  In each case the transactions forming the sequential steps or stages in the scheme were inserted solely for the purpose of producing allowable capital losses which could be used to off-set the capital gains arising from the pre-existing disposal of the farm and the shares. 

19.	In both appeals the Crown was able to rely on various arguments specific to the intermediate transactions in the scheme which if successful would defeat the fiscal assumptions upon which each scheme was built.  Thus in Ramsay an issue was raised as to whether a particular debt was as a debt on a security and therefore within the definition of “loan stock or similar security” in Schedule 7, para 5(3)(b) of the Finance Act 1965.  Similarly in Rawling there was an issue as to whether the sale of a reversion, even if viewed in isolation, did in fact create an allowable loss. 

But the principal argument of the Crown advanced in both appeals was that self-cancelling schemes, even if not shams in the sense described by Diplock LJ in Snook v West Riding Investments Ltd [1967] 2QB 786, should be looked at for the purpose of determining their fiscal consequences not on a step by step or transaction by transaction basis but rather as a single composite transaction whose ultimate legal effect should determine the tax treatment to be afforded to it.  In the case of schemes of the kind under consideration in Ramsay the tax consequences would be neutral because the taxpayer had made neither a loss nor a gain.  The chargeable gains accruing from the original transaction therefore remained taxable.

20.	It was expressly conceded by the Crown in argument (as it is on this appeal) that the taxpayer was to be treated in accordance with the legal consequences of his acts and not in accordance with some supposed substance of the transaction.  Presented in this way the Crown’s case, it was said, did not derogate from the decision of the House in IRC v Duke of Westminster and the House of Lords was not invited to re-consider that decision.

21.	The House of Lords accepted this argument.  In the leading speech Lord Wilberforce described the scheme in the terms which appeal in paragraph 45 of the Special Commissioners’ decision.  One of the “significant features” of the scheme under consideration was that:

“…….it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end – they are not intended to be arrested half-way.  This intention may be expressed either as a firm contractual obligation (it is so in Rawling) or as in Ramsay as an expectation without contractual force.”

22.	These criteria were further developed by the House of Lords in their later decision in Craven v White and have to be satisfied in all cases if the series or combination of transactions under review is to be treated as a single composite transaction for Ramsay purposes.  But the passage in Lord Wilberforce’s speech which identifies the correct approach to the legal analysis of such composite transactions is to be found in the well known passage which begins at p 323B:

In these circumstances,  your Lordship are invited to take, with regard to schemes of the character I have described, what may appear to be a new approach.  We are asked, in fact, to treat them as fiscally, a nullity not producing either a gain or a loss.  Mr Potter QC described this as revolutionary, so I think it opportune to restate some familiar principles and some of the leading decisions so as to show the position we are now in.
1.	A subject is only to be taxed upon clear words, not upon “intendment” or upon the “equity” of an Act.  Any taxing Act of Parliament is to be construed in accordance with this principle.  What are “clear words” is to be ascertained upon normal principles: these do not confine the courts to literal interpretation.  There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded:  see Inland Revenue Commissioners v Wesleyan and General Assurance Society (1946) 30 TC11, 16 per Lord Greene MR and Mangin v Inland Revenue Commissioner [19711 AC 739, 746,  per Lord Donovan.  The relevant Act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains less allowable losses, arising from disposals. 
2.	A subject is entitled to arrange his affairs so as to reduce his liability to tax.  The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides.  It must be considered according to its legal effect. 
3.	It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham.  In this context to say that a document or transaction is a “sham” means that while professing to be one thing, it is in fact something different.  To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that.  I shall return to this point. 
Each of these three principles would be fully respected by the decision we are invited to make.  Something more must be said as to the next principle.
4.	Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance.  This is the well known principle of Inland Revenue Commissioners v Duke of Westminster [1936] AC1.  This is a cardinal principle but it must not be overstated or overextended.  While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs.  If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer from to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.  For this there is authority in the law relating to income tax and capital gains tax:  see Chinn v Hochstrasser  [19811 AC 533 and Inland Revenue Commissioners v Plummer [19801 AC 896.
For the commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not “shams”, from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is.  They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole.  This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps.  It may not be so where (as in Ramsay or in Black Nominees Ltd v Nicol (1975) 50 TC 229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not.  In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction, or a number of independent transactions. 

23.	Two things emerge clearly from Lord Wilberforce’s speech in Ramsay.  The first is that nothing was intended to cast doubt either on the correctness of the decision in IRC v Duke of Westminster or upon the general or ordinary principles of construction adopted in that case to determine the legal effects of the Duke’s contractual arrangements with his employees.  This is emphasised not only by the description of the rule in Westminster as a cardinal principle but also by the express approval of the judgment of Lord Greene MR in IRC v Wesleyan & General Assurance Society 30 TC 11 at p.16 where he said this:

In dealing with Income Tax questions it frequently happens that there are two methods at least of achieving a particular financial result.  If one of those methods is adopted, tax will be payable.  If the other method is adopted, tax will not be payable.  It is sufficient to refer to the quite common case where property is sold for a lump sum payable by instalments.  If a piece of property is sold for £1,000 and the purchase price is to be paid in ten instalments of £100 each, no tax is payable.  If, on the other hand, the property is sold in consideration of an annuity of £100 a year for ten years, tax is payable.  The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not. 

There have been cases in the past, where what has been called the substance of the transaction has been thought to enable the Court to construe a document in such a way as to attract tax.  That particular doctrine of substance as distinct from form was, I hope, finally exploded by the decision of the House of Lords in the case of The Duke of Westminster v Commissioners of Inland Revenue, 19 TC 490.

24.	The second is that the submissions made to and accepted by Lord Wilberforce where that the application of these ordinary principles of construction could be used in a composite transaction consisting of a series or combination of individual steps to assess the legal effect of that transaction as a whole without denying to the individual steps the legal effect which the parties plainly intended them to have.  The loan transactions in the Ramsay scheme were not treated either singly or collectively as anything but loans producing the gains and losses which they produced.  But for the purpose of determining whether there had been a disposal producing a chargeable gain or an allowable loss within the provisions of the Finance Act 1965 the Court was entitled to treat as the relevant consequence of the composite transaction what the parties themselves intended should be its ultimate legal result: ie, no loss but no gain: and not to dissect the transaction and attribute to its constituent parts legal consequences which the taxpayer never intended should be experienced in isolation one from the other save for the purpose of avoiding tax.  This is spelt out very clearly in the judgment of Templeman LJ in the Rawling appeal (54 TC 101) whose reasoning commended itself to Lord Wilberforce.  At p.165 (TC) Templeman LJ said this: 

The effect of a contract cannot be judged by isolating one clause and ignoring the remainder.  A circular contract which requires one asset to be revolved in a circle must be judged by the difference, if any, between the position of each party at the start and at the finish of the contract.  Two or more independent contracts may produce a circle and the effect of each contract must be judged according to its terms without regard to any other contract.  But one single circular contract, or a series of interdependent contracts, which revolves one property in a circle cannot be divided into separate transactions in order to determine the effect of the contract or series. 

In the present case the one property which was dealt with consisted of the debt of  £600,000.  The contract provided that the taxpayer would only acquire an interest in the debt of £600,000 subject to a duty and right for that interest to be passed on without gain or loss to himself.  So far as the taxpayer is concerned, he began with nothing, by contract he gained nothing and lost nothing and he ended with nothing.  The effect of the contract was that he paid £9,985 for an argument which proves to be worth nothing.

25.	In the context of the circular, self-cancelling schemes of the Ramsay type it was (for the reasons I have endeavoured to explain) simply unnecessary to go behind the transaction and look for some supposed underlying substance.  The transaction was treated as composite with the fiscal consequences I have outlined because that accorded with the parties’ own intentions.  But more difficult problems arose when it was sought to apply the Ramsay principle to the so-called linear transactions of the type considered by the House in Furniss v Dawson.

26.	Furniss v Dawson concerned a scheme designed to defer liability to pay capital gains tax on the intended sale of two family companies.  Rather than sell the shares direct to the intended purchaser the taxpayers set up an investment company in the Isle of Man to which they transferred their shareholdings in the family companies in exchange for shares in the investment company.  Four days later the investment company sold the shares in the family companies to the intended purchaser.  The taxpayers contended that the exchange of shares with the Isle of Man company gave rise to no charge to capital gains tax by virtue of the provisions of paragraphs 4(2) and 6(1) of schedule 7 to the Finance Act 1965 and that no liability to tax could arise until the taxpayers disposed of their shares in the investment company.  The Crown successfully appealed to the House of Lords contending on the basis of Ramsay that the correct approach to the scheme was to treat there as having been a disposal of the shares in the family companies by the taxpayers to the intended purchaser for the consideration paid by that purchaser to the investment company.

27.	In the Court of Appeal this argument had been rejected as a step too far.  Oliver LJ (at p.486 B-F) put the difficulty about applying Ramsay in this way:

Lord Wilberforce directs the commissioners to look for “the relevant transaction”.  But the “relevant transaction” may be one which essentially involves the constituent steps.  To put shares into a company so that they and any subsequent proceeds of their sale are held by the company necessarily involves in itself a disposal in fact which, after all, means no more than the divesting of the asset from the original holder.  Once he has divested himself he has “disposed” although the statute tells us that he is to be treated as not having done so, and the question is whether, on that disposal, a gain accrues.  If the transaction, whatever it is, involves factually two dispositions, I cannot see in this part of Lord Wilberforce’s speech anything which compels the commissioners to find that it is one disposition.  It remains two dispositions though no doubt connected dispositions and the question is what is the legal effect of those dispositions taken together.  For myself, I entirely fail to see why a combination of transactions has necessarily to be labelled as “sale of shares by A to C” rather than “vesting of shares by A in the B Co. and the sale of the shares by the B Co. to C. ”  It happens that the combination of transactions does not involve the payment of capital gains tax unless and until A sells his shares in the B Co., but if that is the combination of transactions which the parties intended to carry out, then I am unable to follow why there should be attributed to them, for the fiscal purposes and only for fiscal purposes, some quite different transaction which they did not intend merely because the end result is, so far as C is concerned, but not A, the same

28.	As Oliver LJ recognised and Mr McCall accepted in argument before me the result of the decision in Furniss v Dawson was to restructure the transaction for the purpose of determining its fiscal consequences.  Unlike in Ramsay itself where the intermediate loan transactions would be ignored in favour of the overall effect of the transaction without in any way denying to those transactions their own intended legal effect, in Furniss v Dawson the House of Lords could only treat the sale of the companies to the ultimate purchaser as a sale by the taxpayers if they re-wrote the contractual arrangements to which the taxpayers and that purchaser had in fact put their names. 

29.	In my judgment this is a significant refinement on the Ramsay principle as expressed in Lord Wilberforce’s speech and does not easily accord with the decision in the Westminster case or the ordinary principles of construction and legal analysis which that decision applied.  The beginnings of a recognition that even Ramsay did not leave the Westminster decision untouched can be found in Lord Diplock’s speech in IRC v Burmah Oil Co Ltd at p.32 where he said this:

“It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay’s case did not mark a significant change in the approach adopted by this House in its judicial role to a preordained series of transaction (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable.  The difference is in approach.  It does not necessitate the overruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin’s oft-quoted dictum in Inland Revenue Commissioners v Duke of Westminster [1931 AC1, 19, ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be, tells us little or nothing as to what methods of ordering one’s affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way.”

30.	The leading speech in Furniss v Dawson was given by Lord Brightman.  After tracing the history of the Ramsay principle he set out what he described as the limitation of the principle in this passage at p.527:

The formulation by Lord Diplock in Inland Revenue Commissioners v Burmah Oil Co Ltd [1982] STC 30, 33 expresses the limitations of the Ramsay principle.  First, there must be a preordained series of transactions; or, if one likes, one single composite transaction.  This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end.  The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow.  It did not in Ramsay.  Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax-not “no business effect.”  If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes.  The court must then look at the end result.  Precisely how the end result will be taxed will depend on the terms of the taxing stature sought to be applied. 

In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow.  That inserted step had no business purpose apart from the deferment of tax, although it had a business effect.  If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket.

The formulation, therefore, involves two findings of fact, first, whether there was a preordained series of transactions, i.e. a single composite transaction, secondly, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage.  Those are facts to be found by the commissioners.  They may be primary facts or, more probably, inferences to be drawn from the primary facts.  If they are inferences, they are nevertheless facts to be found by the commissioners.  Such inferences of fact cannot be disturbed  by the court save on Edwards v Bairstow [1956] AC 14 principles.

31.	Against this background I turn to consider the three issues which arise in this appeal.

32.	Are the two options contracts to be treated as a single composite transaction?
The first essential finding of fact if the Crown is to succeed on this appeal is that the two options were a single composite transaction.  In Furniss v Dawson (at p.527) Lord Brightman treats this as synonymous with a “preordained series of transactions” and if CIL is right in its argument that there must be inserted steps before Ramsay can operate then that will be an accurate description of any composite transaction to which the doctrine can apply.  For the moment however I shall confine myself to what needs to be proved in order to make a finding that two or more transactions should be treated as composite for these purposes. 

33.	It was common ground before me that the correct test is that set out by Lord Oliver in his speech in Craven v White.  This case involved schemes similar in nature to that considered in Furniss v Dawson and the only issue for decision was whether the transactions involved did nor did not fall to be treated as composite having regard to the likelihood of each scheme being carried through to its conclusion.  In Furniss v Dawson Lord Brightman (at p.526G) had emphasised that no distinction was to be drawn for these purposes between a series of steps followed through by virtue of an arrangement falling short of a binding contract and a like series of steps which the parties were contractually bound to follow.  But in order to apply Ramsay to the first type of case there are, according to the decision in Craven v White, four essential requirements to satisfy: (per Lord Oliver at p.514):

As the law currently stands, the essential emerging from Furniss v Dawson  [1984]AC 474 appear to me to be four in number: (1) that the series of transactions was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result; (2) that the transaction had no other purpose than tax mitigation; (3) that there was at that time no practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and (4) that the pre-ordained events did in fact take place.  In these circumstances the court can be justified in linking the beginning with the end so as to make a single composite whole to which the fiscal results of the single composite whole are to be applied.

I do not for my part think that Furniss v Dawson goes further than that the intellectual basis for the decision was Ramsay and the criteria for the application of the Ramsay doctrine were those enunciated by Lord Brightman.

34.	The Special Commissioners found that the two option contracts did not constitute a composite transaction for Ramsay purposes:  see paras 43-48 of their decision.  For the Crown Mr McCall criticised this conclusion as inconsistent with the  Commissioners’ primary findings of fact based on too narrow and limited reading of Lord Wilberforce’s speech.  The passage quoted by them from Lord Wilberforce’s speech does contain his statement of the significant features of tax avoidance schemes including that the stated intention of the parties (whether contractual or not) is that the scheme shall proceed through its various steps to the end but as is clear from Craven v White the pre-ordained nature of the transactions is only one of the four requirements necessary for a finding of a composite transaction.

35.	In paragraph 46 of their decision the Special Commissioners record that the admitted purpose of the transactions was to create a capital gain and that the intention was that the options should be exercised together at the end of their term.  It therefore seems clear that the Commissioners regarded the first of the four conditions in Craven v White as satisfied.

36.	As for the other three, we know that in fact the transactions were allowed to proceed uninterrupted to their conclusion in 1996.  This leaves conditions (2) and (3), the purpose of the transactions and the requirement that there was at the time the transactions were entered into no practical likelihood that the pre-planned events would not take place in the order ordained.

37.	Of these two conditions the latter took upon most of the argument on this appeal.  Mr McCall accepted that whichever option was deep in the money could have been assigned to a third party but in his submission this was no more than a theoretical possibility.  Whatever the state of the FTSE index the combined value of the options would never be worth more than £500 per unit and to be sure of this return at settlement a purchaser would need to acquire both options.  The market for such sales was limited and unproven he said.   For the taxpayer Mr Aaronson urged me to accept that it had been clear to the Commissioners that assignment had been a real possibility; that it was always envisaged that options of this kind if deep in the money could be traded and that the Commissioners although speaking in paragraph 46 of the possibility of one option being assigned must be taken to have had Lord Oliver’s third requirement in Craven v White well in mind and to have answered the question in the negative. 	

38.	The difficulty I face on this appeal is that I know little or nothing of what passed in evidence before the Commissioners and it is not part of my function to re-examine that evidence.  The Commissioners have made a finding that this was not a composite transaction which is challenged by the Crown on the basis of a misdirection.  Mr McCall’s primary submission is that the Commissioners did not ask the right question.  They had to decide whether at the time of the transaction in December 1994 there was no practical likelihood that the pre-planned events would  not take place in the order ordained.  Their finding is that “there was always the possibility that one option could be assigned before exercise with the consent of International (CIP) and so each option did have an independent existence”.  This, says Mr McCall, is not an answer to the question.  What is more I should, he says, read the word “possibility” in the sense of “theoretical possibility” and so interpret their finding as one that there was in effect no real possibility at all of an assignment of one of the options before exercise.

39.	I am unable to accept this.  My task would have been made considerably easier in this regard had the Special Commissioners referred to the test in Craven v White and then answered it in terms.  But if, as they have found, there was “always the possibility” of assigning one option before exercise then it is not a misuse of language to say that in 1994 it could not be said that there was no practical likelihood that the pre-planned events would not take place.  I do not read the words “always the possibility” as meaning “only a theoretical possibility”.  In my judgment they denote a state of affairs in which the degree of certainty postulated by condition (3) was not satisfied.

40.	This leaves condition (2).  This again was not dealt with in terms by the Special Commissioners nor was it the subject of detailed argument before me.  I therefore approach this matter on the basis that the Special Commissioners do not appear to have regarded this condition as unsatisfied or to have made it part of their reasons for deciding that the two options were not a composite transaction.  I need therefore say no more than that I doubt whether it is satisfied in this case.  True it is that the purpose of the equity box structure was to allow investment in a form which produced a capital gain rather than an income profit.  But that is no more than the choice which faces any investor.  There seems to be to be a real difference between the taxpayer who sets out to utilise a tax avoidance scheme in order to reduce or eliminate an already existing tax liability and one who makes a legitimate choice between investment options having regard to his own fiscal and financial position.

41.	More fundamentally however I find it impossible to regard condition (2) as anything other than a reflection of Lord Brightman’s second requirement in Furniss v Dawson that there must be steps inserted which have no commercial purpose apart from the avoidance of a liability to tax.  Therefore if Mr Aaronson is right in his submission that this requirement must be and is not satisfied in the present case it must follow that condition (2) fails to be satisfied for the same reasons. 

42.	I am not therefore satisfied that the Special Commissioners misdirected themselves on the question whether this was a single composite transaction and the Crown accepts that if the options are to be treated separately they do satisfy the definition of a “qualifying option” within the meaning of s.128 of the 1988 Act.  However in case I am wrong about that I turn now to the second issue which is whether the Ramsay principle can apply to cases outside the limitations expressed by Lord Brightman in Furniss v Dawson. 

43.	Is Furniss v Dawson an exhaustive test?
Mr McCall accepts that the equity box scheme does not involve the insertion of steps with no commercial purpose other than the avoidance of a liability to tax.  Therefore if the test in Furniss v Dawson requires to be satisfied the appeal must fail.  Despite Mr McCall’s eloquent attempts to persuade me otherwise I remain of the view that the test laid down by Lord Brightman is exhaustive and that the requirement he set out are a necessary pre-condition for the application of the Ramsay principle.  For the same reason I am not satisfied that there remains some underlying or residual principle which can apply to transactions of the kind in question which have a clear commercial purpose, contain no artificial steps and were entered into for full market value on recognised terms. 

44.	I have reached this conclusion both as a matter of principle and of authority.  Lord Brightman’s speech in Furniss v Dawson (at p.527C) sets out in unequivocal terms “the limitations of the Ramsay principle”.  These are that “there must be a pre-ordained series of transactions; or if one likes one single composite transaction …. secondly there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax – not “no business effect”.  If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes”.  If I were to accede to Mr McCall’s submissions it seems to me that I would have to ignore the mandatory direction contained in that statement of law.  The passage I have quoted forms the ratio of the decision in Furniss v Dawson and I have no alternative but to apply it according to its terms.

45.	But I reach the same conclusion as a matter of principle.  Mr McCall sought to avoid the effect of Furniss v Dawson by resorting to what he described as the underlying principle of Ramsay which the Crown contends remains in tact despite the development of the law in Burmah, Furniss v Dawson and Craven v White.  For this proposition Mr McCall relies upon a distinction between the “familiar principles” referred to by Lord Wilberforce in his speech in Ramsay (at p323B) and the “emerging principle” described at page 323G.  His argument requires one to treat Lord Wilberforce as adopting a two tier approach to the problem faced in Ramsay.  The familiar (or as Mr McCall would say the under-lying) principle is to be found in the passage at page 323 which I set out earlier in this judgment.  Out of this principle or these principles has gown the emerging principle which has enabled the Court to ignore intermediate steps in self cancelling transactions (as in Ramsay) and to extend that reasoning so as to defeat the intended effect of linear transactions involving inserted steps with no purpose apart from that of tax avoidance.  It is this emerging principle, he says, which is now governed by the decision in Furniss v Dawson but the original Ramsay principles have survived unscathed and can be applied to the fiscal analysis of transactions in which no artificial steps have been inserted at all.

46.	I am unable to accept this submission.  As I have already explained in the earlier part of this judgment Ramsay was an attempt to deal with tax avoidance schemes in a way which did not infringe the principles laid down by the House of Lords in IRC v Duke of Westminster.  The House achieved this not by denying to the component parts of the scheme their individual legal effect but rather by concentrating on the tax consequences of the composite transaction as a whole.  In this way it became possible to ignore the intermediate steps in the case of a scheme where the gains and losses produced by those steps simply cancelled  each other out.  But this process of reasoning only operates when the inserted steps are self cancelling and more importantly when the scheme involves inserted steps.  In my judgment Mr McCall’s argument confuses method and effect.  The familiar principles applied by Lord Wilberforce were not some special set of principles invented for the purpose of determining the legal effect for tax purposes of any given series or combination of transactions.  As I have mentioned earlier these were and indeed are some of the generally accepted rules governing the interpretation of statutes and the construction of legal transactions.  They include, in particular, the rule that the Court cannot go behind a genuine document or transaction to some supposed under-lying substance.  It was by the application of these established principles and not by anything else that the House of Lords was able to articulate what Lord Wilberforce described as the emerging principle in Ramsay.  But it is to this emerging principle that one must look for guidance as to how a tax avoidance scheme ought to be analysed for fiscal purposes and as to what are the limits of that exercise. 

47.	When the opportunity arose to consider the possible application of this principle to linear transactions greater difficulties arose.  For the Crown’s argument to succeed it was necessary to do more than simply ignore the intermediate transactions.  The Court was required to re-construct the transactions and to treat the original seller and the ultimate purchaser as having contracted with each other even though they had never done this and had always intended to do the very opposite.  This gave rise to the critique in the judgment of Oliver LJ (as he then was) in Furniss v Dawson to which I have already referred and in Craven v White Lord Oliver returned to the same theme.  At page 501 E-H he said this:

Now it has, I think, to be accepted that Furniss v Dawson,  whilst it purported to do no more than apply the Ramsay principle to a different set of facts, involved in fact an extension of the principle and it did so not simply because it applied the principle to a “linear” transaction as opposed to a circular transaction.   The Ramsay principle is simply that you look at the result which the parties actually intended to and did produce and apply to it the ordinary fiscal consequences which flow from that result.  Furniss involved going a considerable step further than this and, by reconstituting the actual constituent transactions into something that they were not in fact, attributing to the parties an intended result which they did not in fact intend.  To that unintended result there are then attached the fiscal consequences which would have flowed if the transaction had actually taken form into which it is deemed to be reconstituted.  It has to be borne in mind that the particular transaction with which Furniss was concerned, and with which each of the three appeals before your Lordships is concerned, was one in which an actual exchange of shares had taken place, a transaction which had permanent legal and fiscal results and to which certain fiscal provisions applied from the moment at which the transaction was effected.  The critical question is that of identifying the circumstances in which such a transactions can be simply ignored and in which so radical a reconstruction of the actual events as that undertaken in Furniss v Dawson  is permissible and is to be undertaken by the court and whether, apart from the concept of tripartite contract upon which reliance was placed in reaching the decision in Furniss, such a reconstitution is rationally and logically possible within the accepted principles of construction provided by Ramsay or, indeed, any other principle.

The point is taken up again at page 513F where he said this:

	How, in the absence of contractual obligation, is the revenue’s sought for result to be obtained?  The answer is to be arrived at in two stages.  First of all through Ramsay, because that establishes that where there is (i) a scheme involving a series of transactions plus (ii) an expectation that it will be carried through from beginning to end and (iii) no likelihood that it will not, the court is not bound, in assessing the fiscal consequences to consider each step individually and accord to it its individual legal result but is entitled to look at the composite transaction as a single transaction having a single legal result.  This dispenses with the need for a contractual obligation but to achieve that result all three of the enumerated elements must be present.  They were present in Furniss v Dawson and, there being in the exercise no necessity for contractual obligation linking the beginning with the end but merely a confident expectation, the court was able to look at the overall transaction and to assess its legal result as a composite whole.  But  it was able to do this because it was in fact not only conceived but carried out as one indivisible transaction.  However, that in itself was not enough, because if you merely did that you still ended up with the statutory fiscal results of an actual disposition by the Dawsons via Greenjacket to Wood Bastow and the price firmly locked in Greenjacket.  You have to go one stage further to nullify the intermediate transfer to Greenjacket which has its own permanent fiscal consequences unless it can be totally disregarded, for Ramsay merely “enables the courts to arrive at a conclusion which corresponds with the parties’ intentions”.  In Furniss v Dawson the parties’ intention was to produce a sale by Greenjacket instead of a sale by the Dawsons.  So a further ingredient has to be supplied, and that is found in Burman.  This establishes the further proposition that if you find in what, ex-hypothesis, is an integrated and interdependent series of transactions a step inserted which has no other purpose that that of avoiding or minimising a liability to tax which, without that step, would be attracted by the transactions, you are entitled for fiscal purposes to ignore that step in assessing what is the true legal result of the series taken as a whole.  So, in reliance upon these two authorities, the House set about considering the true legal effect of the transactions undertaken and they were able to arrive at the conclusion, that although there was in fact no contractual connection between the steps making the tripartite contract, the circumstances were such that the steps could be treated together in exactly the same way as if there were.

48.	These passages are instructive not only because they examine the reasoning which allows the Ramsay doctrine to re-constitute the transactions but also because they identify what Lord Oliver regarded as the limitations of the Ramsay principle prior to its development in Burmah and in Furniss v Dawson.  It is clear that the application of Lord Wilberforce’s familiar principles would not have allowed Lord Oliver to ignore the legal effect of the transactions into which the parties had entered.  Only if one finds an integrated and inter-dependent series of transactions with no purpose other than the avoidance of tax can the Court ignore those steps in assessing the legal and fiscal effect of the  composite transaction as a whole.  By parity of reasoning in the absence of such inserted steps the Ramsay principle does not permit the Court to treat the transactions under consideration other than as they in fact are.  

49.	I therefore reject Mr McCall’s two tier approach to Ramsay.  The development of the law in Burmah and Furniss v Dawson gives the Court a limited power in appropriate cases to reconstruct a series or sequence of transactions which are indissolubly linked and which contain the features described by Lord Brightman in his speech in Furniss v Dawson.  Outside those limitations it is not open to me on the present state of the authorities to apply the Ramsay principle so as to convert genuine transactions such as the two options under consideration into something quite different.  To do so would be, as I see it, to attribute to the options a substance and legal effect which they do not have and which the Crown accepts the Court would not give them upon the application of the ordinary principles of construction adopted in cases such as Lloyd & Scottish Finance v Cyril Lord Carpet Sales Ltd.  If I were to accede to Mr McCall’s submissions, ignore the terms of each option contract which provide for its independent assignment and exercise, and concentrate instead on the fact that if exercised together the options are guaranteed to produce a fixed return in favour of the taxpayer, then it seems to me that I would be doing the very thing which Lord Wilberforce emphasised in Ramsay that the Courts cannot do: ie to go behind the transactions and search for some supposed under-lying substance which as a matter of ordinary legal analysis they do not possess.

50.	The terms of the composite transaction

In the light of my judgment on the first two issues it is not strictly necessary for me to reach any decision on Mr Aaronson’s alternative argument that the two options, even if part of a composite transaction, would still constitute a qualifying option if analysed in accordance with Mr McCall’s under-lying Ramsay principle.  But this third issue is in fact resolved by my determination of the previous two issues.

51.	If I am right and Lord Wilberforce’s familiar principles do not allow the Court to treat the taxpayer’s contractual arrangements other than as they are it must follow I think that even if composite the two options, just like the loans in Ramsay, would retain their individual identity as part of a larger transaction.  Mr McCall submitted to me that by applying Ramsay I need not be concerned with the terms of each option.  I need do no more than to say that money was put out for a specified period with a fixed return.  Taken together the two options operated to provide a return of £500 per unit regardless of the state of the FTSE index at the time.  The combined transaction, even if an option, could not be an option relating to shares within the meaning of s.144 (8)(a)(i) of the 1992 Act and therefore could not be qualifying option within the meaning of s.128 of the 1988 Act.  To hypothesise a single transaction comprising the two options as the Special Commissioners did (see para. 53 of their decision) was, he said, to apply the dissecting analysis which was precisely what Lord Wilberforce in Ramsay said should not be done. 

52.	I prefer the reasoning of the Special Commissioners on this point.  To adopt the Crown’s approach would be to disregard the legal form and nature of the transactions in favour of some supposed under-lying substance.  There is no warrant in Ramsay itself for the proposition that the Court can denature or transfigure the transactions involved and I was offered no acceptable criteria by which to decide how I should convert two options into a single transaction without ignoring the contractual structure and terms which the parties intended to create.  Unless I am entitled to override the separate provisions of each option, ignore the ISDA definitions and pay no regard to the fact that each option can and must be separately exercised by notice under Article 8.4 of the ISDA definitions the consolidation of the put and the call options into a single transaction makes no difference to its overall legal effect.  What the Crown invites me to do is not to respect the legal nature of either of individual options or the hypothetical composite transactions comprising both of them but rather to convert that composite transaction into something quite different.  For the reasons which I have already explained Ramsay does not in my judgment allow me to do this. 

53.	As a footnote I also add this.  For convenience I have dealt with the arguments in this case as three issues.  During the course of his submissions Mr McCall argued that it was unnecessary to find an inserted step in order to find that there was a composite transaction.  Although I have dealt with the first issue on that basis I am far from persuaded that Mr McCall is correct about that.  It seems to me as it did, I think, to the Special Commissioners, that issues 1 and 2 are inextricably linked.  In Craven v White (at page 514G) in the passage already quoted Lord Oliver expresses the first of the four requirements of a composite transaction in terms of a “series of transactions” involving intermediate transactions or as Lord Brightman called them, inserted steps.  It was an essential part of Lord Oliver’s reasoning that a composite transaction to which the Ramsay principle could apply must satisfy the test in Furniss v Dawson.  Logically it must follow that unless the Furniss v Dawson conditions are satisfied there can be no composite transaction to which the Ramsay principle can apply.

54.	Conclusion
For all these reasons the appeal will be dismissed.