[2010] UKFTT  196 (TC)

TC00498
Appeal Number: SC/3163/2008
			        
FIRST TIER TRIBUNAL TAX

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

CAPITAL GAINS TAX – ALLOWABLE LOSS – Tax scheme involving options –  the Options entered into were interlinked –  no separate commercial existence –  part of an indivisible process –  planned as a single continuous operation –  disputed loss construed against the whole transaction involving the four Options – no allowable loss -– Appeal dismissed on substantive dispute 
CAPITAL GAINS TAX – OPTIONS OVER GILTS – whether exempt under section 115 TCGA - Yes
	 HOWARD PETER SCHOFIELD	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	
				      RICHARD THOMAS
					
Sitting in public at London on 25, 26, and 27 January 2010

David Goldberg QC instructed by PriceWaterhouseCoopers Legal for the Appellant

Julian Ghosh QC and Raymond Hill counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

AMENDED DECISION PURSUANT TO RULE 37 OF 2009 TRIBUNAL RULES

Each party identified an accidental slip in the original published decision at paragraphs 37 and 40 which the Tribunal has corrected pursuant to rule 37.

© CROWN COPYRIGHT 2010

DECISION
The Appeal
1.	The Appellant was appealing against an HMRC decision dated 28 May 2008 amending the Appellant’s self assessment return for the year ending 5 April 2003. The amendment resulted in an increase of ₤1,357,568 in the capital gains tax due.
2.	On 15 November 2000 the Appellant sold his shares in PL Schofield Limited to Cattles Plc for consideration of £11,840,000 in the form of bank guaranteed loan notes redeemable in December 2002. On 31 December 2002 the Appellant redeemed the loan notes realising a chargeable gain of £10,726,438. The Appellant, however, declared in his 2002/03 return an allowable loss of ₤11,305,017 to offset the chargeable gain arising from the redemption of loan notes.
3.	The loss arose from a disposal of a FTSE 100 Index European Style cash settled put Option which was granted to the Appellant under an agreement made on 7 February 2003 for a premium of ₤12,153,834. On 4 April 2003 the Appellant surrendered his right to exercise the Option for which he received ₤732,600 creating the loss of ₤11,305,017.
4.	This particular Option agreement was one of four Option agreements entered into by the Appellant on the same date, 7 February 2003. The other three Options comprised a FTSE 100 Index European style cash settled call Option, and two physically settled European style Options (one a put, the other a call). The physically settled Options involved rights to buy and sell two different issues of gilt-edged securities redeemable in 2007.
5.	The Option agreements formed part of a tax scheme purchased from PricewaterhouseCoopers LLP (hereinafter PWC) designed to shelter from capital gains tax the gains which the Appellant had made on the loan notes. 
6.	The primary dispute in this Appeal is whether the surrender of the Option on 4 April 2003 created an allowable loss for the purposes of the Taxation of Chargeable Gains Act (TCGA) 1992. The secondary dispute concerns whether the two Options to buy and sell gilt-edged securities were true Options to sell or acquire gilt-edged securities. The decision required from the Tribunal was one of principle.
The Evidence  
7.	The Tribunal heard evidence from Howard Peter Schofield (the Appellant), Alexander William Durham Wilkinson and Edward James Buchanan Hamilton-Ely for the Appellant. Marcus J G Stanton gave evidence for HMRC. The parties supplied an agreed statement of facts and a bundle of documents and authorities.
8.	Mr Wilkinson was a managing director of a company specialising in advisory services in technically complex mergers and acquisitions. His evidence concerned the gilts transactions. Mr Hamilton-Ely was an Executive Director and Head of Structured Products at Kleinwort Benson Private Bank (KBPB) at the time the Appellant entered the four Options agreements on 7 February 2003. Mr Hamilton Ely gave evidence on the part played by KBPB in the scheme purchased by the Appellant. Mr Stanton was a banking consultant to banks and various government agencies in the United Kingdom and overseas. Mr Stanton had been involved in banking and taxation for most of his career since graduation from Oxford University in 1975. Mr Stanton’s evidence concerned the banking aspects of the Options agreements, and the commercial risks and rewards attached to them. 
The Background
9.	The Appellant was both resident and ordinarily resident for tax purposes in the United Kingdom for the year of assessment 2002/03. Since 29 March 2003 the Appellant has been resident in Spain.  He has not been resident or ordinarily resident in the United Kingdom for any year of assessment from and including 2003/04.
10.	The Appellant knew that he would be facing a substantial capital gains tax liability on the redemption of the loan notes in December 2002. On 9 January 2003 he met with PWC which advised him of a tax scheme involving the sale and purchase of options from KBPB. The Appellant expressed an interest in the scheme and was introduced to a Mr Adrian Jones at KBPB. 
11.	 The Appellant went ahead with the scheme which involved the Appellant entering into an International Swap Dealers Association Master Agreement and Schedule (ISDA agreement) and a Security Agreement with KBPB on 17 January 2003. 
12.	Under the ISDA on 7 February 2003 the Appellant entered into four option contracts with KBPB subject to the ISDA agreement with specific contractual terms as follows:
(1)	The Appellant paid a premium of £12,037,617 to KBPB for the grant of a European style cash settled put option over a nominal amount of £333 million of the FTSE 100 Index with an expiry date of 7 April 2003.  The strike price was 3389.91 (Option One).
(2)	The Appellant paid a premium of £12,141,846 to KBPB for the grant of a European style cash settled call option over a nominal amount of £333 million of the FTSE 100 Index with an expiry date of 7 April 2003.  The strike price was 3725.17 (Option Two).
         Options One and Two are called the cash-settled FTSE Options.
(3)	The Appellant received a premium of £12,153,834 for the grant to KBPB of a European style put option over £333 million of 7.25% Treasury Stock 2007 with an expiry date of 7th April 2003.  The strike price was based on a formula such that the option would be in the money were the FTSE 100 index to fall below 3390.4 (Option Three).
(4)	The Appellant received a premium of £11,915,073 for  the grant to KBPB of a European style call option over £333 million of 8.5% Treasury Loan 2007 with an expiry date of 7 April 2003.  The strike price was based on a formula such that the option would be in the money were the FTSE 100 index to rise above 3725.71 (Option Four).
       Option Three and Four are called the Gilts Options
13.	All four Options were European Style options which meant that they could only be exercised on the expiry date and that early close out before the expiry date required the agreement of both parties.  The party granting the option is referred to as the grantor or seller and the party to whom the option is granted is the grantee or purchaser.  A call option gives the grantee the right, but not the obligation, to acquire the asset over which the option is granted for a price determined by the contract (the “strike price”) and correspondingly the grantor has the obligation to sell the asset for that price if the option is exercised.  A put option gives the grantee the right, but not the obligation, to sell the asset over which the option is granted for the strike price and correspondingly the grantor has the obligation to buy the asset for that price if the option is exercised.  As the rights given to the grantee may be valuable, the grantee pays an amount (the premium) upfront to the grantor.  If the value of the asset is greater than the strike price the option is said to be “in the money”, and if it is less, the option is “out of the money”.  An in-the-money option will be exercised, but an out-of the-money option will not. Some options may be cash settled, so that instead of an asset passing from one party to the other, an amount of money will pass instead: this is the only way some options can be exercised, those  where the subject matter over which the option is granted is a virtual asset such as an index.  Options over financial assets may be traded on a stock or futures exchange, or may be the subject of individual negotiation between the parties, one of which is usually a bank or similar – these latter are known as “over the counter” options.
14.	The ₤24 million paid by KBPB to the Appellant for the purchase of the two gilts Options (Three and Four) provided the Appellant with the funds for the purchase of the two cash settled FTSE Options (One and Two). The Appellant’s purchase price included an additional ₤110,000 which represented KBPB’s fee for making the various arrangements in connection with the scheme.
15.	The Appellant also transferred ₤50,000 on 7 February 2003 to KBPB to cover his potential liability to the predetermined loss under the scheme if the FTSE moved in a particular direction.
The Scheme
16.	The scheme in relation to the Appellant was set out in a letter dated 13 February 2003 from Mr Leyland of PWC to the Appellant, headed Capital Loss Planning. The contents of this were not disputed by the Appellant:
“I am writing to set out for you details of the planning which you have recently undertaken and some of the issues you need to be aware of.
The intention, as you know, is to create a capital loss of ₤11.8 million which can be set against the capital gain you have made on the redemption of your loan notes.
This is achieved by entering into two Options over the FTSE 100 index to be settled in cash. These are essentially bets over the movement of the index over the period of the Option. The Options have an expiry date of 7 April 2003. Each will cost you about ₤11.8 million and each will give rise to either a taxable gain or an allowable capital loss. One Option is exercisable if on expiry the index is at or below 94.2 per cent of the current level (the put Option) and the other Option is exercisable if on expiry the index is at or above 103.5 per cent of the current level (the call Option). The other party to both Options is the Kleinwort Benson Bank.
At the same time you sell equal and opposite put and call Options to Kleinwort Benson Bank, using the proceeds of ₤23.8 million to finance the Options you have purchased i.e they are betting with you. The difference here is that these Options can only be settled by physical delivery of gilt-edged securities. This has the effect of making the Options exempt from tax so that any gain is not taxable and any loss is not allowable.
1. The first possibility is that the index does not move sufficiently for any Option to be exercisable, in which case both cash Options are closed out on 4 April and you will have lost ₤11.8 x 2 = ₤23.6 million. This amount will be a capital loss available to set against your current gain leaving ₤11.8 million to be set against future gains. The exempt options are both closed out at the same time giving rise to a non-taxable gain of ₤23.6 million.
2. The second possibility is that the FTSE index falls below 94.2 per cent. The put options become valuable and exercisable, but the call options are not exercisable. You will close out the call option showing the loss on 4 April i.e in this tax year, thus generating a loss of ₤11.8 million for tax purposes. You will close out at the same time the equal and opposite call over the gilts will give rise to a non taxable gain of the same amount. On 7 April, which is in the new tax year the other two put options expire. These give rise to a taxable gain and non-allowable loss. However, as you will be non-resident and outside the scope of United Kingdom tax in that year, there will be no charge to capital gains tax.
3. The third possibility is that the index moves above 103.5 per cent and the call options become valuable and exercisable. In this case the same process is followed in that the put options which are not exercisable are closed out on 4 April giving an allowable loss and a non taxable gain for the current year. The valuable call options are deferred until the new tax year when they expire giving a taxable gain and a non allowable loss. However, as you will be non resident no tax will be payable
In this situation it is likely that you will realise a commercial profit of about ₤50,000.
I should mention that the possibility of commercial profit or loss in situation 2 and 3 above arises because for the planning to be effective it is important to demonstrate that there is some commercial risk being taken.
In 1 above, there is clearly no requirement for you to be non-resident in the following tax year as there is no gain in that year. However, in both of the other cases it is critical that you do become non-resident – if not you will have swapped a gain in this tax year which would have had the benefit of taper relief, thereby reducing the effective rate to around 14 per cent for a gain which will be taxable at 40 per cent next year. We have discussed this risk, and you are comfortable with the requirement to become non-resident before the end of this tax year.
I should add as well that although we believe this planning has an excellent chance of being successful, nothing can be guaranteed. That said, assuming you do become no resident, you would most likely suffer only the costs of the transaction as your downside.
Our fees for this were agreed at 1 per cent of the loss i.e ₤118,000 (the normal fee is 2 per cent for PWC and 2 per cent for Kleinwort Benson but you will recall that I agreed with them that as the gain would have been chargeable at only 14 per cent we would both discount our fees by one half). These are billable 50 per cent on implementation and 50 per cent when the loss is realised”.
17.	The Appellant’s scheme was derived from a generic scheme known as the “Digital Collar” with a stated aim of reducing the charge to capital gains tax on the disposal of chargeable assets by a customer of the scheme in a year of assessment. The generic scheme involved the purchase of a call and a put option over the FTSE Index and the grant of a call and a put option over certain gilt-edged securities by the customer with KBPB as counterparty. The transactions were over the counter options.  Further details of the generic schemes are set out in paragraphs 18 to 24.
18.	The purchased options, one call and one put, were cash-settled FTSE options and were assets within the scope of TCGA 1992 (see section 21(1)(a)).  If one or both of the options was closed out, a gain or loss under TCGA 1992 would be calculated as the difference between the consideration received on close out (section 23(3)(c)) and the premium paid.
19.	 The sold options, one call and one put, were options over gilt-edged securities. Under normal circumstances a premium received for an option would fall within the capital gains tax regime. The tax charge would be calculated on the premium less the settlement received on expiry. Section 115 TCGA 1992, however, exempted from capital gains tax gains or losses on options to acquire or dispose of gilt-edged securities.
20.	The strike prices of the options were such that taken together each pair (the two cash-settled FTSE options are one of the pairs, with the two Gilts options being the other) formed a “digital collar” of which the strike prices formed the upper and lower boundary and within which the reference value for the strike prices was expected to stay.  The strike price (and hence whether any of the options was in or out of the money) of all four options including the two over gilt-edged securities were determined by reference to the level of the FTSE 100 Index. The respective index points for the put and call options were respectively below and above the closing price for the FTSE 100 Index on the day when the options were taken out.  
21.	 If on the expiry date of the options the closing price for the FTSE 100 Index was within the digital collar the options would expire valueless, in which case the customer would realise allowable losses equal to the premiums paid for the cash-settled FTSE options purchased and would realise exempt gains on the premiums for the Gilt options granted. The generic scheme was structured so that there was an 85 to 90 per cent likelihood that the Index would be within the digital collar on expiry.
22.	If, on expiry date the FTSE 100 Index had moved below the digital collar the put options would be in the money, whilst the call options would be out of the money. The converse would apply if the FTSE 100 Index was above the digital collar on the expiry date. In the situation of the FTSE 100 Index being outside the digital collar the set of options in the money would be exercised, whilst the other set would be allowed to expire valueless. A small difference between the FTSE Index reference points for the strike price of the cash-settled FTSE options and of the Gilt options ensured that in the case where the FTSE 100 Index was outside the digital collar, there would be a small overall profit or loss to the customer.
23.	Under this generic scheme where one of the cash-settled FTSE options was in the money because the FTSE 100 Index was outside the digital collar, the customer would not achieve the allowable loss originally envisaged when the options were entered into unless mitigating actions were taken by the parties.  For the reasons set out below this problem could not arise for the Appellant.
24.	A critical feature of the generic scheme was to eliminate any risks to the parties beyond the pre-determined profit or loss arising when two of the options were in the money. The customer did not have to find the premiums for the cash-settled FTSE options from his own resources, as KBPB supplied the funds for these premiums by its purchase of the options over gilt-edged securities from the customer. Thus the scheme was characterised by a circular flow of funds between the Bank and the customer. The fact that the customer did not have to commit his own monies enabled the size of the premium to be geared to the capital gain that the customer wished to eliminate. Further the risk that one of the parties might secure an unexpected profit from an exercise of one of options was avoided by the other party holding a corresponding option expiring on the same date. Thus if the put option was in the money the customer’s exercise of that option would be matched by the exercise of the corresponding put option held by the Bank resulting in no net gain to either party except the pre-defined gain agreed at the outset when the customer entered into  the scheme. The Bank also insured against the risk of incurring a loss arising from the pre-defined gain or loss by requiring the tax payer to deposit the pre-defined amount as a security into an interest bearing account that was charged to the Bank. 

25.	The generic scheme described above was adapted to suit the Appellant’s circumstances and in particular his intention to become non-resident in 2003/04. In the Appellant’s case, the size of the premiums for the cash-settled FTSE Options bore a direct relationship to the size of the chargeable gain realised by the redemption of the loan notes in December 2002.  Thus the Appellant’s premiums for the cash settled FTSE Options were fixed at just over ₤24 million which equated to about twice the chargeable gain on the loan notes. This meant that if the FTSE 100 Index remained within the digital collar, the Appellant would secure allowable losses of about ₤24 million and would have about £12 million to use should he ever return to the United Kingdom. But even if the FTSE 100 Index at the material time had moved outside the digital collar, the Appellant would achieve an allowable loss of about ₤12 million enough to wipe out the gain on the loan notes already achieved.  And by contrast to the generic scheme, the Appellant’s non-residence in 2003/04 meant there would be no need to take any “mitigating action” as mentioned in paragraph 23 above, as any chargeable gain on the in-the-money FTSE Option would be outside the scope of capital gains tax.
26.	It was crucial that the Appellant realised the requisite allowable loss in the year of assessment 2002/03 to deduct from the chargeable gain made in that year, as allowable losses could not be carried back from 2003/04 to 2002/03 (see section 2(3) and 16(3) of TCGA 1992). As the Options were only exercisable on 7 April 2003 in the year of assessment 2003/04, it required the agreement of both parties to close out selected Options before the end of 2002/03 (i.e. before 6 April). In the situation where the FTSE 100 Index did not move outside the digital collar, the four Options would all be closed out before the 6 April 2003 realising an allowable loss of about ₤24 million subject to any payments on close out on both cash-settled FTSE Options, the corresponding gains on the Gilt Options being exempt. If the FTSE 100 Index was outside the digital collar (3389.91 - 3725.17), the out-of-the-money options would be closed out before 6 April, whilst the in-the-money options would be exercised on the agreed date of 7 April 2003. This would produce an allowable loss of about ₤12 million in 2002/03 (subject to any payments on close out) on one of the cash-settled FTSE Options, the gain on the corresponding Gilt Option being exempt, with the Appellant incurring no capital gains tax consequences from the expiry of the Options in the subsequent tax year because of his non-resident status.  
27.	PWC’s letter dated 13 February 2003 confirmed that the Appellant’s scheme only had three possible pre-tax outcomes:
(1)	Scenario One: no movement of the FTSE 100 Index outside the digital collar in which case the four Options are closed out on 4 April 2003 realising an allowable loss of ₤23.6 million.   
(2)	Scenario Two: the FTSE index falls below 3389.91. The put options (Options One & Three) become valuable and exercisable, but the call options are not exercisable. The call options are closed out on 4 April  2003 generating an allowable loss of ₤11.8 million.. On 7 April 2003, the two put options expire which generate no charge to capital gains tax because of the Appellant’s non-resident status.
(3)	 Scenario 3: The index moves above 3725.17 and the call options (Options Two & Four) become valuable and exercisable but the put options are not exercisable. In this case the put options are closed out on 4 April giving an allowable loss of ₤11.8 million. On 7 April 2003, the two call options expire which generate no charge to capital gains tax because of the Appellant’s non-resident status.
 Implementation of the Scheme
28.	On 4 April 2003 the Appellant sent a fax to Adrian Jones, an employee of KBPB, in which he said:
“Dear Adrian, This fax is to confirm our telephone conversation regarding the put options.  Please close these as discussed both with myself and Brian Leyland of PWC.”
29.	Following the fax, Option One was closed out by mutual agreement when the FTSE 100 Index stood at 3814.30. As part of the agreement KBPB paid the Appellant ₤732,600 to settle the Option. This payment was then deducted from the premium of ₤12,037,617 for the cash settled Option in February 2003 producing a loss of ₤11,305,017 on the transaction for the Appellant.
30.	 At the same time on 4 April 2003 Option Three was closed out which involved the Appellant paying KBPB ₤737,595. Accordingly when that sum was deducted from the premium of ₤12,153,834 paid by KBPB to the Appellant, the net gain to him on this Option was ₤11,416,239. This gain, however, was exempt from capital gain tax as it concerned an Option over gilt-edged securities.
31.	The net effect of the cash flow movements on the 4 April 2003 was that the Appellant paid ₤4,995 (the difference between £732,600 received in respect of Option One and £737,595 paid in respect of Option Three).
32.	On 7 April 2003 the Appellant sent another fax to Adrian Jones, of KBPB, in which he said:
“Dear Adrian, Further to our telephone conversation today.  Assuming the options are in the money on expiry, I wish to exercise the cash settled call option of the FTSE 100 index.  As you will exercise the gilt option please purchase on my behalf the appropriate gilts in settlement of that option.”
33.	Option Two expired on 7 April 2003 when the FTSE 100 Index stood at 3935.8. The exercise resulted in KBPB paying the Appellant a cash sum of ₤19,487,605.58, producing a net gain of ₤7,354,759.58 for the Appellant which was not taxable because of his non-resident status.
34.	At the same time as Appellant exercised Option Two , KBPB exercised Option 4 triggering their right to buy gilt-edged securities (₤333 million nominal of 8.5 per cent Treasury Loan 2007) from the Appellant at a price of ₤370,172,357.10 (excluding accrued interest). For this purpose the Appellant instructed KBPB to acquire the gilts at a cost of ₤389,610,000 (excluding accrued interest) which KBPB acquired from Dresdner Kleinwort Wasserstein Investment Bank. This bank was in the same group as KBPB.  Under this transaction the Appellant made a loss of ₤7,522,570 which would not have been an allowable loss even if he had been resident in the United Kingdom as the loss arose from the disposal of gilt edged securities.
35.	The net effect of the cash flow movements on 7 April 2003 was that the Appellant received ₤49,962 (£19,487,605 less £19,437,643 – see table at paragraph 38).
36.	The Appellant submitted his tax return for the year ended 5 April 2003 to HMRC. In it he showed a quantified allowable loss of ₤11,305,017 deducting it from a gain of ₤10,726,438. HMRC amended the Appellant’s self assessment return disallowing the loss of ₤11,305,017 for the following reason:
“My conclusion is that the avoidance scheme that you entered into, involving the purchase and sale of Put and Call Options is ineffective. I am amending your return to reflect this”.
Summary of the Transactions
37.	The table below sets out the outcomes following the implementation of the scheme, and the Appellant’s preferred CGT analysis of the transactions. 
	Gain (₤)	Loss (₤)	Appellant’s 
CGT Analysis 	
Option One 		11,305,017	Allowable Loss	
Option Two	7,345,759		Outside CGT (Non-resident)	
Option Three	11,416,239		Exempt (Gilts)	
Option Four		7,522,570	Outside CGT (Non-resident)	
	18,761,998	18,827,587		
Loss (CGT Loss)		65,589	(₤11,305,017)	

38.	The table below sets out the cash flows on the relevant dates:
Dates	Appellant’s Payments (₤)	KBPB Payments  (₤)	Net Cash Flow       ( ) –ve Appellant’s  cash flow   (₤)	
7 February 2003	24,179,463	24,068,907	(110,556)	
4 April 2003	737,595	732,6000	(4,995)	
7 April 2003	19,437,643	19,487,605	49,962	
			(65,589)	
 
39.	 The above tables showed that the Appellant actually lost ₤65,589 which with the net payment of ₤44,967 (₤49,962 - ₤4,995) on 7 April 2003 represented KBPB’s fee of ₤110,556 for the scheme. KBPB had retained the ₤50,000 which the Appellant had deposited on the 7 February 2003 pursuant to the security agreement. The ₤50,000 made up the shortfall in KBPB’s fee. It was not clear from the evidence whether the Appellant retained the net payment of ₤44,967 arising from the transactions in April 2003. Thus the only resources committed by the Appellant to the scheme were the respective fees of ₤110,556 and ₤118,000 for KBPB and PWC. The maximum  profit that could be secured from the scheme was ₤49,962.
Factual Dispute on Loss
40.	The factual dispute on the scheme between the parties was best summed up by the respective statements of Mr Hamilton-Ely and Mr Stanton.
“From KBPB’s perspective there were four separate and divisible options each conferring different rights or obligations. Subject, therefore, to ensuing there was sufficient collateral in place, …. both KBPB and the client were free to deal with each of the four Options as they saw fit. That is to say the client could have sold off one of the Options he purchased from KBPB, with the only caveat  being that if he did, KBPB would have wanted to ensure the client could cover his obligations under the remaining options the client had sold to the bank” (Mr Hamilton-Ely, para 13).
“ …. that at the pre-tax level the scheme operates within a hermetically sealed environment, in that although being made up of a series of individual transactions, these are all linked to each other and provided the transaction is executed as planned, then the seal would not broken, and the parties would not be exposed to any significant market risk, or reward” (Mr Stanton, para 2.5).
The principal factual issue was whether the dealings in the four Options were inextricably linked with each other to form a continuous process which could be viewed commercially as a single or composite transaction. 
The Witnesses
41.	The Appellant’s understanding of the transactions in the Options was that they were intended to create a taxable loss and a taxable gain in different years for the purpose of delivering a capital loss of about ₤11.8 million to be set against the gain from the loan notes. The Appellant also knew that the transactions had the potential to produce a relatively small actual gain or loss, the sizes of which were significantly below the ₤218,000 paid in fees by him.  Finally the Appellant was aware that the structure of the transactions took account of his proposed non-resident status from 29 March 2003. This was the extent of the Appellant’s understanding of the transactions. He did not have any comprehension of gilt-edged securities, and completely unaware of his potential exposure to buying ₤400 million worth of gilts in the market. The Appellant indicated in cross-examination that he would not have been interested in the scheme, if he had known of the ₤400 million exposure. The Appellant confirmed that he had no involvement with the setting of the prices for the Options. The Appellant accepted that he relied entirely on the advice of PWC and KBPB in respect of the detail of the transactions. He followed his advisers’ instructions with the implementation of the deals. His faxes of 4 and 7 April 2003 instructing KBPB to close out Options and the sale and purchase of gilts were sent following telephone conversations with Mr Jones of KBPB. Essentially the limits of the Appellant’s involvement with the arrangements was that he paid his advisers ₤218,000 with the expectation that his advisers would deliver him a tax saving of ₤1.3 million.
42.	Mr Hamilton-Ely in examination in chief asserted that the Appellant’s arrangements involved four separate and commercially independent contracts   with no automatic exercise of any Options. The holder of the Option had to notify the other party if he wanted to exercise it. Equally the holder was entitled to sell his Option to a third party. Mr Hamilton-Ely maintained that the Options carried significant risks. The investor could make an outright profit or loss from the transactions because they were linked to movements in the FTSE 100 Index. Mr Hamilton-Ely stated that the FTSE 100 Index was characterised by high volatility. During the last eighteen months the average daily change in the index was 1.4 per cent with a maximum change of 9.84 per cent. According to Mr Hamilton-Ely there was approximately a 45 per cent probability that one of either the call or put options would be in-the-money at the expiry. 
43.	Mr Hamilton-Ely pointed out that each Option was valued at prevailing market rates using a recognised standard option pricing methodology known as Black-Scholes. He acknowledged that the amounts of the underlying assets were large but this was merely an automatic function of the relationship between the amount paid by way of premium and the underlying nominal in the Black-Scholes methodology. Further Mr Hamilton-Ely accepted that the transactions involved relatively large sums of money for the Appellant which was why KBPB purchased the Gilts Options from him to act as collateral in case the Appellant could not cover the costs of the relevant transactions. 
44.	Mr Hamilton-Ely explained that the scheme was set up following an approach from PWC sometime in 2002. He did not handle the discussions on behalf of KBPB with the Appellant. Instead a Mr Jones represented the Bank in its dealings with the Appellant. Mr Hamilton-Ely believed that the Appellant would have had an initial meeting with KBPB to introduce the arrangements with PWC in attendance to provide advice regarding the tax implications. Mr Hamilton-Ely believed that no firm decision would have been reached at the meeting between the Appellant and the Bank to close any Options out early. The possibility of early close out would have been raised but only to ascertain the requirements of KBPB if that situation arose.
45.	Mr Hamilton-Ely’s evidence in chief was undermined by his answers given in cross-examination. He accepted that the PWC letter dated 13 February 2003 to the Appellant accurately reflected the Appellant’s arrangements. The letter showed an agreement to close out either all or some Options on 4 April 2003, and that KBPB would fund the premiums paid by the Appellant for the cash settled Options. Mr Hamilton Ely accepted that KBPB would have closed out the Options on 4 April 2003 subject to settlement of the amounts payable under the Options. He also agreed that the arrangements were a tax planning scheme designed to reduce capital gains tax liability, and that KBPB was alive to the fact that the four Options had to have a tax result. Finally he knew that the Appellant was not expected to introduce his own resources into the scheme.
46.	Mr Hamilton-Ely was unaware that clause 7 of the ISDA Master Agreement which determined the terms of  the Four Options between the Appellant and KBPB prohibited a party from transferring its interest in the Options without the prior written consent of the other party subject to specific exceptions. In any event Mr Hamilton-Ely accepted that under the arrangements it was not envisaged that either party would assign their Options to a third party. Further he stated that it made no sense for the Appellant to assign his interest in Option One without closing out Option Three because if he did the Appellant would be exposed to the risk of finding gilt-edged securities to the value of ₤330 million.  Mr Hamilton-Ely stated that KBPB would not relinquish control over the dealings in gilt-edged securities.
47.	Mr Hamilton-Ely acknowledged that under clause 1(c) of the Master Agreement the four Options formed a single agreement between the parties. Mr Hamilton-Ely considered this term to be a standard term.
48.	Mr Stanton stated that the Appellant’s arrangements were a modified version of the generic digital collar scheme designed to reduce the tax payable on capital gains. The arrangements involved a series of connected transactions with KBPB. The transactions were taken out on the same date and shared identical expiry dates. The pricing of the Options was interdependent with the two Gilts Options providing the Appellant with the ₤24 million to acquire the cash-settled FTSE Options. Mr Stanton concluded that the intention of the arrangements was to create a capital gains tax loss of a defined amount. In the Appellant’s case the size of the potential tax losses was guaranteed by the doubling up of the underlying contract size, and if necessary utilising the strategy of early close out of the out-of-the-money Options. According to Mr Stanton, the most likely outcome was that the FTSE 100 Index would remain within the collar generating a capital loss of around ₤24 million from the arrangements. If the FTSE index moved outside the collar, the parties would utilize the strategy of early close out producing a capital loss of about ₤12 million which would be sufficient to eliminate the Appellant’s gain from the redemption of loan notes.
49.	 Mr Stanton identified one specific pricing characteristic of the Appellant’s arrangements which was the slight difference in the strike prices between the cash- settled FTSE Options, and the corresponding Gilts ones. Mr Stanton believed this was done for tax reasons because PWC considered that the arrangements should allow for a profit to be made on the Options. Mr Stanton, however, pointed out that the size of the profit, ₤49,961, was relatively small and would remain the same whatever the level of the FTSE 100 Index once it had passed the call strike price. Further this potential profit would be significantly below the level of fees paid by the Appellant to PWC and KBPB, in which case Mr Stanton discerned no commercial purpose for Mr Schofield entering into the Options. 
50.	Equally Mr Stanton formed the view that KBPB was not obtaining a commercial profit from trading in individual Options. KBPB did not receive a commission from the Appellant for buying or selling the gilt-edged securities. The normal business practice was for brokers to charge their clients commission at a rate of around 0.15 per cent, which in the Appellant’s case would have worked out at ₤594,000. Instead the Appellant paid KBPB a fee calculated on the potential tax savings which reinforced Mr Stanton’s view that the transactions served no commercial purpose.   
51.	Mr Stanton considered that the major security feature built into the scheme, namely, that they were European Style Options, meant that the Appellant was locked into the arrangements. He could not exercise any Option early without the agreement of KBPB. Further KBPB controlled every step of the arrangements. The prospect of a party departing from the arrangements was, in Mr Stanton’s view, out of the question. It was unrealistic for the Appellant say to exercise one of the cash- settled FTSE Options but for KBPB to leave the corresponding Gilts option to expire. In such a situation KBPB would be short of the ₤387 million paid for the gilts, which would have to be recovered from the Appellant, who did not have the wherewithal to cover an exposure of such magnitude.
52.	In cross-examination Mr Stanton was challenged on his evidence that KBPB would change the nature of the Options if the FTSE 100 Index moved outside the collar. Mr Stanton pointed out that with the Appellant’s scheme the necessary tax mitigation to combat this scenario was already built in, namely the early close out of the out-of-the-money Options and the change in the Appellant’s residence status. The other principal challenge related to the nature of the gilts transactions which is considered by the Tribunal under the alternative dispute. 
  Facts Found on Loss Dispute
53.	The Tribunal finds the following facts:
(1)	The arrangements involving the four Options between the Appellant and KBPB were set up for the sole purpose of eliminating the Appellant’s liability to capital gains tax arising from the redemption of loan notes.
(2)	The evidence in support of the arrangements being a pure tax avoidance scheme was overwhelming. KBPB’s product documentation described it as a strategy for the reduction of a charge to capital gains tax based around option transactions over gilts and the level of FTSE. The PWC letter of 13 February 2003 referred to the arrangements as capital loss planning. The Appellant’s sole intention for entering the arrangements was to achieve a capital loss wiping out his gains on the redemption of loan notes. The Tribunal was satisfied that the PWC’s letter reflected the parties’ understanding of the arrangements before the Options were taken out.
(3)	The incorporation of a potential actual small profit or loss within the structure of the scheme by allocating marginally different strike prices between the set of cash-settled FTSE Options and the set of Gilts Options was contrived to give the scheme an illusory aura of commerciality.  This was confirmed by the passage in PWC’s letter dated 13 February 2003 which stated that for the planning to be effective it is important to demonstrate that there is some commercial risk being taken and the limited extent of the contrived risk (see (4) below).
(4)	The scheme served no commercial purpose. The contrived profit and loss only occurred when the FTSE 100 Index moved outside the collar, and fixed at a modest upper limit either a ₤49,961 profit or a ₤45,335 loss which did not vary on subsequent movements in the Index. The pursuit of this relatively small profit made no commercial sense having regard to the size of the Appellant’s fees for the scheme which amounted to ₤218,000. 
(5)	Equally the fees charged by PWC and KBPB were directly related to the anticipated tax savings from the scheme. The fees had no connection with commercial profit generated from trading in Options.
(6)	The Appellant did not risk his own resources in the implementation of the scheme (beyond the built in fee). KBPB supplied the complete funding for the scheme ranging from the premiums for the cash settled Options, the payment to the Appellant on closing out and the purchase of gilts to the value of ₤370 million. The funding arrangements consisted of a series of equal and opposite book entries in the Appellant’s account with KBPB which all but cancelled each other out. The only actual monies that passed between the Appellant and KBPB were the fees for KBPB’s services and the security demanded by KBPB to cover the contrived marginal loss.
(7)	The nature of the funding arrangements which did not carry any risks for either KBPB or the Appellant gave KBPB the freedom to configure the arrangements so that they delivered the desired capital loss for the Appellant. Under the scheme it was the value of the premiums for the cash-settled FTSE Options that determined the size of the capital loss. Thus the figure fixed of ₤24 million for the two premiums ensured that the scheme either delivered a capital loss of either around ₤24 million or ₤12 million.
(8)	The fact that the Options were acquired at market value was irrelevant. The notional value of the assets to be acquired or disposed of under the cash-settled FTSE Options and the nominal value of the gilts under the Gilt Options had nothing to do with market considerations or the Appellant’s risk appetite and his ability to pay for them. The notional value was a theoretical exercise determined by the size of the premium necessary to deliver the capital losses.
(9)	The architecture of the scheme incorporated two particular features which guaranteed the desired capital loss. The first feature took advantage of the exempt status of gains and losses on disposals of gilt edged securities and of options to acquire or dispose of gilts. This enabled the creation of the set of Gilts Options the strike price of which was  linked to the FTSE 100 Index matching the cash-settled FTSE Options, which ensured that the corresponding call or put options operated in tandem. Thus any potential profit or loss on the cash-settled FTSE Options arising from movements of the FTSE 100 Index outside the collar was matched by an equal and opposite profit or loss on the gilt-edged securities. Further the matching set of Gilt Options supplied the Appellant with the funding to carry out the necessary steps involved in the arrangements, as the Appellant was the grantor of the Gilts Options, but the grantee/purchaser of the cash-settled FTSE Options.
(10)	The second feature utilised the tax saving possibilities arising from the Appellant’s intention to change his tax residence from the United Kingdom to Spain, which eliminated the risk inherent in the generic scheme arising from movements in the FTSE 100 Index outside the collar. Thus the expiry date for the four Options was fixed for 7 April 2003 in a new year of assessment when the Appellant would not be resident or ordinarily resident in the United Kingdom. This permitted an early close out of the out-of-the-money cash-settled FTSE Option (Option One) in the preceding year of assessment when the Appellant was resident and ordinarily resident in the United Kingdom. The corresponding in-the-money cash-settled FTSE Option would be exercised in the year of assessment when the Appellant was non-resident, which enabled him to avoid the capital gains tax consequences from the exercise of that Option.

(11)	The Appellant’s claim that the vagaries of the FTSE 100 Index would render the potential costs required to fund the necessary steps within the scheme and the gains and losses resulting therefrom unpredictable was without foundation. As found in (9) above the question of costs was controlled by the insertion of the matching set of Gilts Options, which ensured the necessary funding for the required steps. The quantum of the desired loss was determined by the size of the premiums paid for the cash- settled FTSE Options not by movements in the FTSE 100 Index. The profits and losses delivered by the FTSE 100 Index were regulated strictly and had no impact on the outcomes of the scheme. The insertion of a collar provided an 85 to 90 per cent probability that movements in the FTSE 100 Index would have no effect on potential gains or losses. The effects of movements outside the collar were negated by strategy of an early close out of the out-of-the-money cash-settled FTSE Option and the exercise of in-the-money cash settled FTSE Option when the Appellant was non-resident and not ordinarily resident. Mr Stanton’s analysis of the various scenarios of movements in the FTSE 100 index demonstrated that each scenario produced a minimum loss of about ₤12 million on one of the cash settled Options. The variable gains or losses produced on the other Options were of no effect because of the tax saving strategies built into the scheme.
(12)	The scheme was, therefore, guaranteed to deliver a loss of either around ₤24 million if there was no movement of the FTSE 100 Index outside the collar or around ₤12 million if the FTSE 100 Index moved in either direction beyond the collar, which the Appellant intended to claim as an allowable loss against the gain from the redemption of the loan notes. 
(13)	The plan to arrive at the stated destination of a guaranteed loss of either ₤12 million or ₤24 million was set out in PWC’s letter of 13 February 2003. The plan consisted of a series of pre-ordained steps which involved taking a specific step on 4 April 2003 which was essential to ensure that the claimed loss happened in the same year of assessment as the realisation of the gain from the redemption of the loan notes. The other step was for the Appellant to become non-resident in the subsequent year of assessment, 2003/04, if the FTSE 100 Index moved outside the collar. The pre-ordained step on 4 April 2003 was either to close out all Options  if the Index had not by then moved beyond the collar or if it had (as in fact did) to close out the two out-of-the-money Options, in which case the other two Options would be exercised on 7 April 2003. The Appellant asserted that although there was an expectation of an early close out on 4 April 2003, it was not certain because of the unpredictability of the outcomes. The Tribunal finds to the contrary, the outcomes on 4 April 2003 were known, which would be limited to three exhaustive possibilities, all beneficial to Appellant, and requiring either close out of all Options or of the two out-of-the-money Options. The only other variable concerned the non-resident status of the Appellant. The Tribunal decided on the evidence that the Appellant held a firm intention at the time of entering into the Options to live in Spain and to cease to be resident and ordinarily resident in the United Kingdom, an intention which was demonstrated by the fact that he took up residency in Spain on 29 March 2003.
(14)	There was no logical reason for KBPB to depart from the script in the 13 February 2003 letter. The Bank in establishing the Appellant’s arrangements eliminated any potential risks from the movement of the FTSE 100 Index. KBPB held total control over the arrangements which ensured that the Appellant danced to its tune. The Appellant could not take action under the arrangements unless he had KBPB’s consent. The Bank had developed a specific financial product at the behest of PWC. The Tribunal is satisfied that KBPB would not jeopardise its professional and commercial relationship with PWC by departing from the script. Finally Mr Hamilton-Ely confirmed that KBPB would have closed out the Options on 4 April 2003 provided the amounts payable on the Options were settled. Mr Hamilton-Ely knew that the structure of the scheme guaranteed that the Bank would effectively provide the Appellant with the wherewithal to settle the matching Option held by it.
(15)	.The 13 February letter constituted the extent of the Appellant’s understanding of the scheme. He did not comprehend the technical infrastructure of the scheme and relied entirely on his professional advisers. The Appellant’s sole expectation from the scheme was that it would deliver losses to wipe out the capital gains from the redemption of loan notes. He did not enter the scheme for any commercial reason. The proposition that the Appellant would somehow follow a different course of action from that proposed in the 13 February letter was preposterous. 
(16)	The ISDA Master Agreement of 17 January 2003 governed the terms of the four Option contracts, and under the ISDA they constituted a single agreement. 
(17)	Clause 7 of the ISDA Master Agreement prohibited the assignment of the Options by their owner without the consent of the other party. In any event Mr Hamilton Ely accepted that it made no sense for the Appellant to assign his interest in the Options to a third party because of his exposure to the risk of finding gilts to the value of ₤370 million. The Appellant did not understand the concept of assignment, and completely unaware of the associated risks. The prospect of the Options being marketed or assigned separately to a third party was not a legal or practical proposition. It would not have happened.
(18)	The Options were entered into on the same date and shared the same expiry date and all had a short lifespan of two months. They were all European Style Options which meant that no Option could be exercised early by one party without the consent of the other party and the Appellant was effectively locked into the arrangements. The strike price for all four Options was linked to the FTSE 100 Index. 
(19)	On 4 April 2003 the Appellant and KBPB agreed to close out the out-of-the- money cash-settled FTSE put Option (Option One) and the corresponding Gilt put Option (Option Three), whilst the call Options (options Two and Four) were exercised on 7 April 2003. This was one of the three scenarios contemplated in the PWC letter dated 13 February 2003. As a result the Appellant submitted his tax return for the year ended 5 April 2003 to HMRC in which he showed a quantified loss of ₤11,305,017 deducted from a gain of ₤10,726,438. 
54.	The Tribunal is satisfied on the facts found that the Appellant’s arrangements consisted of a series of interdependent and linked transactions with a guaranteed outcome of a capital loss at least equivalent to the chargeable gain arising from the redemption of loan notes. The structure of the Options and their interrelationship were such that it provided the funding for the scheme, determined the size of the  loss and eliminated the risks associated with movements in FTSE 100 Index with the result that there were only three possible scenarios all favourable to the Appellant. The transactions followed a pre-ordained path which involved the Appellant becoming non-resident and implementing the necessary steps required by whichever of the three known scenarios existed on 4 April 2003. All three scenarios guaranteed a  loss of at least around ₤12 million which the Appellant would claim by deducting it from his chargeable gain. There was no prospect of a party departing from the pre-ordained path. The sole aim of the transactions was to avoid tax. The transactions were bereft of a commercial purpose. The implementation of the scheme achieved the desired result.

Legal Analysis for Loss dispute
55.	The issue to be determined by the Tribunal is whether the loss occasioned on the Appellant’s exercise of Option One on 4 April 2003 was an allowable loss within the meaning of sections 2(2) and 16 of TCGA 1992.
56.	Section 1 of TCGA 1992 charges tax on chargeable gains accruing to a person on the disposal of assets. Section 2(2)(a) permits the deduction of any allowable losses from the total amount of any chargeable gains provided the losses and the gains have accrued in the same year of assessment. Section 16(2) provides that any provision of the 1992 Act which distinguish chargeable gains from those which are not shall apply equally to distinguish losses which are allowable from those which are not. Section 16(3) provides that a loss accruing to a person in a year of assessment during no part of which he is resident or ordinarily resident in the United Kingdom shall not be an allowable loss for the purposes of TCGA 1992 subject to an (in this case) irrelevant qualification.
57.	Section 21(1)(a) of TCGA 1992 includes an option among the category of assets to a disposal of which the Act applies. Section 22(3)(c) of that Act shows that the surrender of rights and the refraining from exercising rights in consideration of a capital sum amounts to a disposal of an asset, and this provision applies to the release of an option for consideration (Welbeck Securities Ltd v. Powlson [1987] STC 423). Sections 143 to 148 of TCGA 1992 contain a special code for options, but of those sections the only ones relevant to the loss dispute are sections 144 and 144A. In the case of cash-settled options, such as Options One and Two in this case, section 144A(3) rather than section 144(3) applies and provides that where a person exercises a cash-settled option he shall be treated as having disposed of an asset, and the payment received by him shall be treated as the consideration for the disposal. The acquisition of the option and the disposal shall be treated as a single transaction and the cost of acquiring the option shall be treated as expenditure allowable as a deduction under section 38 of the 1992 Act from the consideration for the disposal.  
58.	Section 144(4) provides that the abandonment of, amongst others, a “financial option” is the disposal of the option. “Financial option” includes an option which relates to shares which are dealt with on a recognised stock exchange which is granted by a member of such an exchange. It seems to be agreed that Options One and Two are “financial options”. Even if they are not, a disposal under section 22(3)(c) would override the rule in section 144(4) that the abandonment of an option which is not a traded or financial option is not a disposal (Welbeck Securities op. cit.)
59.	The disputed question is principally one of construction, namely whether the statutory provisions dealing with allowable losses construed purposively applied to the facts of this case. In this respect the principles established by Lord Wilberforce in Ramsay (WT) Ltd v Inland Revenue Commissioners [1982] AC 300 were relevant. Lord Wilberforce decided that capital gains tax operated in the real world not that of make believe. It was a tax on gains not on arithmetical differences. Arising from Lord Wilberforce’s dictum a purposive construction of loss within TCGA 1992 has been adopted which recognized that loss has a business meaning which referred to a real loss not an arithmetical difference. 
60.	The other significant development derived from Ramsay was that when interpreting legal concepts with a business meaning the court was not necessarily restricted to the context of each transaction but may lump the transactions all together as the parties intended and construe the legal concept against that background. The tax analysis that ensued was not of the single transaction but of the net effect of the composite transaction. The Courts have identified a range of circumstances when transactions should be construed as a whole rather than separately. 
61.	In Ramsay the question of whether transactions should be construed as a whole was one of fact having full regard to the intentions of the parties and the contents of the documents. In Lord Wilberforce’s view a wider construction was particularly appropriate when the individual transactions were stages in an indivisible process and planned as part of a single continuous operation. He went on to identify general features of tax planning schemes which made them susceptible to the wider construction:
“In each case we have a taxpayer who has realised an ascertained and quantified gain…. He is then advised to consult specialists willing to provide, for a fee, a preconceived and ready made plan designed to produce an equivalent allowable loss. The tax payer merely has to state the figure involved … and the necessary particulars are inserted into the scheme.
The scheme consists …. of a number of steps to be carried out, documents to be executed, payments to be made, according to a timetable , in each case rapid….. In each case two assets appear, like particles in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss and which gain is intended not be taxable. Like the particles, these assets have a very short life. Having served their purpose they cancel each other out and disappear. At the end of the series of operations, the taxpayer’s financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses to the promoter of the scheme. 
There are other significant features which are normally found in schemes of this character. First 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 or as an expectation without contractual force.
Secondly, although sums of money, sometimes considerable, are supposed to be involved in individual transactions, the tax payer does not have put his hand in his pocket ….. In some cases one may doubt whether, in any real sense, any money existed at all.
Finally, in each of the present cases it is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the voidance of tax”. ([1982] AC 326GH )”.
62.	The term a single composite transaction was coined in Furniss v Dawson [1984] AC 474 to describe the circumstances when a wider construction was appropriate. Lord Oliver in Craven v White [1988] STC 476 at 507 identified the four essential requirements of a single composite transaction:
“As the law currently stands, the essentials emerging from Furniss v Dawson appear to me to be four in number: 1) that the series of transactions was, at the time when the intermediate transactions was entered into, preordained in order to produce a given result. 2) that that 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”.
63.	Lord Oliver went on, however, to say at 512E:
“I do not, of course, suggest that the Ramsay principle is applicable only to transactions displaying the precise sequence which occurred in Furniss. There are, no doubt, many circumstances in which transactions are so closely linked as realistically be regarded as a single indivisible composite whole – a concept which may be summed up in homely terms by asking the question whether at the material time the whole is already “cut and dried”.
64.	In Inland Revenue Commissioners v Scottish Provident Institution [2004] UKHL 52, the House of Lords used the term a series of transactions which were intended to have a commercial unity rather than a single composite transaction. The significance of the Scottish Provident Institution case, however, was in their Lordships’ decision that a commercially irrelevant contingency deliberately inserted in a scheme would not as a matter of course upset a construction of the relevant statutory provision against the commercial whole:
“Moreover, it would destroy the value of the Ramsay principle of construing provisions such as section 150A(1) as referring to the effect of composite transactions if their composite effect had to be disregarded simply because the parties had included a commercial irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned. The uncertainty in the instant case arose from the fact that the parties had carefully chosen to fix the strike price for the B option at a level which gave rise to an outside chance that the option would not be exercised. There was no commercial reason for choosing that strike price. Thus the contingency on which SPI relied for there being no composite transaction was itself part of that composite transaction, chosen not for any commercial reason but solely to enable SPI to claim there was no composite transaction”.  
65.	The House of Lords in Barclays Mercantile Busness Finance Limited v Mawson [2004] UKHL 51 clarified the position regarding the application of the Ramsay case, emphasising that it did not introduce a new doctrine operating within a special field of revenue statutes. The Ramsay case rescued tax law from being some island of literal interpretation and brought it within generally applicable principles, so that the language of taxing statutes should be interpreted so far as possible in a way that best gives effect to the purpose of a particular provision. Under a purposive construction the Court was entitled to determine the overall effect of a composite transaction when construing the statutory provision, and if need be disregarding from the analysis those elements of the composite transaction which have no commercial purpose. The House of Lords, however, considered, it went too far to disregard all transactions or elements of transactions which had no commercial purpose when interpreting taxing statutes: 
66.	Lord Nicholls at paragraph 36:
“Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35:
"[T]he driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."

67.	The House of Lords also stressed the importance of avoiding sweeping generalisations about disregarding transactions undertaken for the purpose of tax avoidance. In this respect Lord Nicholls at paragraph 38 referred to the case of MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311:
“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: …”
Consideration of the Loss Dispute
68.	The Appellant accepted that he had to prove on the balance of probabilities that the loss occasioned on the disposal of Option One was a real loss, and not an arithmetical difference. Mr Goldberg QC advanced five separate arguments in support of the Appellant’s proposition that it was real loss. The principal point of difference between the parties was the identity of the transaction which should be construed to determine whether the Appellant incurred a real loss. Essentially Mr Goldberg QC contended that each of the transactions dealing with the four Options should be construed separately to assess the correct tax analysis. In contrast Mr Ghosh QC for HMRC submitted that the four transactions formed a commercial unity, and should be interpreted together to decide the net tax effect of the Appellant’s actions.
69.	Mr Goldberg’s preferred tax analysis was that the dealings in each Option should be interpreted in relation to the specific statutory provision that applied to the Option. Thus in relation to Option One, section 144(4) of TCGA 1992 provided that the Appellant’s abandonment of the rights under that Option on 4 April 2003 was a disposal of an asset (the option) which created an allowable loss being the difference between the premium paid and the settlement consideration received. This loss was not cancelled out by the gain on Option Three which arose when the Appellant granted that Option on 7 February 2003. This gain was not a chargeable gain because of the effect of section 115(1)(b) of the 1992 Act which exempted from capital gains tax gains and losses arising from the disposal of options to acquire or dispose of gilt-edged securities. Options Two and Four had no bearing on the correct tax analysis of Option One because Option Two was exercised in the following year of assessment when the Appellant was non-resident and not subject to United Kingdom capital gains tax and Option 4 produced a loss on its expiry in 2003/04 which was not an allowable loss, also because of the Appellant’s non-residence in that year.
70.	Mr Goldberg’s first argument in support of his preferred tax analysis was that factually the transactions in the Options were separate and divisible and did not constitute a single composite transaction. The Tribunal by its findings of fact summarised at paragraph 54 that the Appellant’s arrangements consisted of a series of interdependent and linked transactions with a guaranteed capital loss outcome rejects the Appellant’s analysis of the facts. 
71.	The Tribunal does not intend to repeat here its findings which deal with the facts relied upon by the Appellant, except to re-examine the issue of pre-ordination. Mr Goldberg contended that at the time the Option transactions were entered into it was not known which Option would be closed out on 4 April 2003. The Appellant conceded that there was a likelihood that something would happen on that date but the precise details would not be known until the 4 April because of the vagaries of the FTSE 100 Index. The Tribunal found otherwise, and that the Appellant knew at the outset he would be faced with one of three defined situations on 4 April 2003 which were exhaustive of the possibilities. Each of the three situations was favourable to the Appellant in that each secured his aim of wiping out the chargeable gain. The fact that there were three known situations rather than one did not disturb the finding on pre-ordination, nor did the fact that in one situation the loss might be twice the amount of the gain. The key features of the Appellant’s arrangements were that one of three favourable situations was bound to happen, and that the Appellant would then choose to act in accordance with that situation.
72.	Mr Goldberg’s second argument was a different take on the issue of pre-ordination which was built upon the High Court decision in Griffin v Citibank Investments [2000] STC 1010. The facts of this case concerned a purchase of a capped call option and a floored put option by the taxpayer company, both being purchased from another company in its group. The return on the options was linked to the FTSE 100 index such that a greater or lesser amount would be payable on the exercise of the call option and the put option respectively depending on the movement of the FTSE 100 index, although the combined amount payable to the taxpayer company on simultaneous exercise of the options would always be a predetermined sum such that the gain to the taxpayer company would be commensurate with the interest that would have been paid on a deposit of the amount invested in the options.  The taxpayer company’s aim for the option transactions was to realise a chargeable gain which would be eliminated by available capital losses instead of interest income which would be subject to corporation tax. The options were exercised on 29 April 1996, some 15 months after the options were taken out. HMRC accepted that there were two individual options purchased at market value but argued that the taxpayer company needed the two complementary options and did not want the normal concomitant of options, namely risk and choice. The taxpayer company wanted the certainty of a predetermined return and the operation of the underlying FTSE index was irrelevant. The use of the two options in combination meant that individually they had no independent existence. The Special Commissioners, allowing the taxpayer company's appeal, held that the two option contracts did not constitute a composite transaction. They found that the purchase of the options was far removed from the sort of scheme to which the principle of fiscal nullity had been intended to apply. There had been no artificial steps inserted which could subsequently be disregarded for tax purposes. They also found as a matter of fact that there was always the possibility that one option could have been assigned before exercise with the consent of the other party and that each option, therefore, did have an independent existence. They also held that, even if the option contracts were a composite transaction, that transaction was an option and not a loan. HMRC appealed contending, inter alia, that the principle of fiscal nullity could apply in respect of transactions in which no artificial steps had been inserted at all.
73.	Patten J dismissed HMRC’s appeal. Mr Goldberg placed weight on Patten J’s ruling at paragraph 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 Lloyds & Scottish Finance v Cyril Lord Carpets Sales Ltd [1992] BCLC 609. 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 company, then it seems to me that I would be doing the very thing which Lord Wilberforce emphasised in Ramsay that the courts cannot do: i e to go behind the transactions and search for some supposed underlying substance which as a matter of ordinary legal analysis they do not possess”.
74.	Patten J’s ruling at paragraph 49 was based on his view that the test laid down by Lord Brightman in Furniss v Dawson regarding pre-ordination was exhaustive and a necessary pre-condition of the Ramsay principle. The test required the insertion of steps with no commercial purpose apart from the avoidance of a liability to tax, which was not the case in Citibank. There the option transactions had a clear commercial purpose, contained no artificial steps and entered into for full market value on recognised terms.  As an aside Mr Ghosh’s analysis of the law in relation Ramsay casted doubt on whether the test in Furniss was exhaustive (see Lord Oliver in Craven v White [1988] STC 476 and Scottish Provident Institution). Also in this Appeal HMRC did not make the same concession in Citibank in which it accepted that parts of the scheme had a commercial purpose. Mr Ghosh also pointed out that the Special Commissioners ignored the point that under an ISDA Master Agreement (used in both Citibank and this case) assignment to a third party required the consent of both parties
75.	Mr Goldberg argued in this Appeal that Options Three and Four in gilt-edged securities had a commercial purpose, in that they acted as hedges or insurance for KBPB against potential losses arising from the Appellant’s transactions in the cash settled Options. It, therefore, followed that Appellant’s scheme had no artificial steps that could be excluded in which case the transactions could not be viewed as a whole. This is ultimately a question of fact. The Tribunal disagreed with the Appellant’s characterisation of Options Three and Four as having a commercial purpose. Options Three and Four were created to provide the Appellant with the wherewithal in the form of book entry premiums from granting them to generate the loss by paying the premiums on Options One and Two. If Options Three and Four had not existed there would have been no premiums for the cash settled Options, and no tax planning scheme. Options Three and Four were over gilt edged securities because of the exemption from capital gains tax for such Options. Options Three and Four had no independent existence from Options One and Two. They were created solely for the purpose of tax avoidance.
76.	Mr Goldberg questioned the relevance of the argument that Options Three and Four funded Options One and Two. He pointed out that regardless of the method of funding the premiums as a matter of law constituted consideration for the purposes of calculating the base costs for a disposal. The Options still existed despite the apparent circularity in the cash flow. The Tribunal considers Mr Goldberg’s observation glosses over the fact that the funding arrangement provided the sole rationale for the creation of Options Three and Four. Options One and Two would not have existed if there had been no monetary movement from the sale of Options Three and Four. The funding arrangements were the rope that bound the Options together.
77.	It is important to emphasise that the findings of fact in this Appeal were materially different from the findings of fact in Citibank. In Citibank the Special Commissioners decided that one option could be assigned before exercise with the consent of the other party, but in this Appeal the Tribunal found the prospect of the Options being marketed or assigned separately to a third party was not a legal or practical proposition. Further in this Appeal the Tribunal held that the acquisition of the Options at market value was irrelevant. The notional value of the assets to be purchased or sold and the value of the premiums had nothing to do with market considerations or the Appellant’s risk appetite and his ability to pay for them. The notional value of the assets was a theoretical exercise determined by the size of the premium necessary to deliver the allowable losses. The Options in this Appeal were short lived and cancelled each other out. The Appellant did not risk any of his own resources with the purchase of the Options, whereas in Citibank there was no rapid timetable relating to the options; indeed there was an interval of 16 months between their purchase and their exercise. Finally in Citibank the taxpayer company had to put its corporate hand into its corporate pocket to find the considerable sums for the purchase of the options, whereas in this Appeal the Appellant had only to find the fees and, as it turned out, a small pre-ordained loss. It is also worth noting that what the Inland Revenue were attempting to do in Citibank was not to argue that the effect under TCGA 1992 was different to that claimed (which is HMRC’s argument in this Appeal) but that because the profit to Citibank was economically equivalent to interest on the company’s investment, the Ramsay approach meant that it should be so treated for tax purposes. This is a radically different proposition from that put forward by HMRC in this Appeal, and it does not involve any statutory interpretation of any provision of TCGA 1992, which is what is at the heart of the loss dispute in this Appeal. 
78.	Mr Goldberg’s next three arguments focussed on whether the loss on Option One was a real loss. Mr Goldberg accepted that the loss, referred to in the capital gains tax legislation must be a real loss. 
79.	Mr Goldberg’s first argument was that the reality of the loss was recognised by  HMRC in the formulation of its alternative argument that Options Three and Four were not options to acquire or dispose of gilt edged securities. According to Mr Goldberg, HMRC was saying that there was only a chargeable gain in respect of Option Three if the loss on Option One was allowable. Thus HMRC’s argument acknowledged that, in principle, the loss on Option One was a real loss which required cancelling out by a chargeable gain. In Mr Goldberg’s view, the logic of  HMRC’s position, when taken together was that the loss on Option One produced no loss, while the gain on Option 3 was a chargeable gain, so that a transaction, which  produced little commercial profit or loss for the Appellant, left him with a chargeable gain of about £12 million. This position had no sense of reality. 
80.	The Tribunal considered Mr Goldberg’s argument to be pre-emptive. HMRC’s primary position was that the loss on Option One properly construed was not a real loss. HMRC’s alternative argument had no bearing on its analysis in respect of its primary position. The alternative argument only came into play if HMRC failed on its primary position. The alternative argument was just that based on a different factual matrix defined by HMRC’s failure, if it proved to be the case, to establish its preferred argument. 
81.	Mr Goldberg’s second argument on real loss was that certain features established by case law had to be present in the Appellant’s arrangements if the loss on Option One was to be discounted as an arithmetical difference. Thus:
(1)	A loss on an asset would be disregarded if the asset was purchased for more than it was worth (see Burmah Oil op cit).
(2)	In a case where an asset was purchased at market value, a loss on the asset would be disregarded, if it was created by an act of parties to the tax avoidance scheme by, for example, shifting value from one asset owned by the taxpayer to another asset by the taxpayer.
(3)	In such a case, the question of whether the value was to shift or not must be within the control of the parties.
(4)	The realisation of a potentially allowable loss must be something which the parties to the scheme could themselves bring about by their own actions.
(5)	There must be an arrangement which was intended to proceed uninterrupted from a known beginning to a predicted end.
(6)	The only possible effect of the arrangement, assuming it to work must be to create an allowable loss.
82.	According to Mr Goldberg, all the above features except the first feature were present in Ramsay, whilst a similar result was attempted in Eilbeck v Rawling [1980] STC 192. In Burmah Oil, the first, fourth, fifth and sixth features were present. In the Appellant’s case, however, none of the above features were present.
83.	Mr Ghosh contended that Mr Goldberg’s submission regarding the presence of specific features in the arrangements was not the correct legal test. Mr Ghosh  argued that the correct legal test comprised the four following propositions:
(1)	If the Ramsay doctrine was engaged, a composite transaction was taxed according to its composite net effect.
(2)	Not all statutory provisions admitted the application of the Ramsay principle.
(3)	The statutory construct of loss in TCGA 1992 admitted Ramsay.
(4)	The application of the Ramsay principle was dependent upon two conditions, namely:
a.	The presence of a tax avoidance motive for engaging in a composite transaction.
b.	 Whether it was a composite transaction which depended upon the intention of the parties and scrutiny of documents.
84.	The Tribunal considers that the correct approach was that laid down by the House of Lords in Barclays Mercantile Business Finance Limited. Essentially the Tribunal has to consider whether the relevant statutory provisions, construed purposively, were intended to apply to the facts of the transactions, viewed realistically. The question whether a loss was a real loss is a question of fact, and depends upon the circumstances of the individual case. Mr Goldberg’s analysis of the features required to be present where there were merely arithmetical differences  and not real losses was no more than a summary of the facts relied on in other cases. The features were not an exhaustive and definitive list of the facts that determine whether a loss was real or not. Also some of the features identified were more relevant to the second question of the identity of the transaction against which the term loss should be construed. Finally, even if it were to be accepted by the Tribunal that at least one of the features has to be present, the Tribunal disagrees with Mr Goldberg’s assertion that none of the identified features was present in the Appellant’s arrangements. The Tribunal on its findings would say that the fourth, fifth and sixth features were present in the Appellant’s arrangements. 
85.	The analysis of the case law also put to bed one of Mr Goldberg’s submissions that it was not possible to combine two separate assets owned by different persons into a composite transaction. Mr Ghosh pointed out that the facts in Ramsay involved distinct assets of a loan debt and shares. In any event the Tribunal considers this to be a question of fact which would determine whether a combination of transactions dealing with separate assets was possible. Mr Goldberg cited no authority which prohibited as a matter of law such a combination for the purposes of construction.
86.	Mr Goldberg’s final argument focussed on the application of the single net result tax analysis to the Appellant’s circumstances. According to Mr Goldberg it produced illogical results in respect of the Appellant, which supported his conclusion that the Option transactions should be construed separately. The authorities suggested that under a single net result analysis the courts should leave out those transactions with no commercial purpose. Mr Goldberg pointed out that the loss calculation on Option One was not dependent upon the outcome of the other transactions. Thus if Option Three was left out of the equation, the loss on Option One would remain. Equally the capital gain on Option Three did not cancel out the loss on Option One because the gain was exempt from capital gains tax. In short the outcomes of the single net result analysis reinforced his view that in reality there were two distinct things (one an asset; the other a liability of the Appellant) which  must be respected. Thus there were two distinct disposals, each of which must have a separate result for capital gains tax purposes.
87.	In Mr Ghosh’s view the correct tax analysis was to regard the whole composite transaction as fiscal nullity, which was permissible if the Tribunal decided to construe the Option transactions as a unity. The Tribunal agrees with Mr Ghosh’s interpretation. 
Decision on Loss Dispute
88.	The decision facing the Tribunal is whether the capital loss claimed by the Appellant in his 2002/03 tax return arising from the Option transactions entered into 7 February 2003, specifically on the closing out of Option One on 4 April 2003, was an allowable loss within the meaning of the TCGA 1992. The statutory term allowable loss has a business meaning and refers to real loss not an arithmetical difference. On the facts found summarised at paragraph 54, the Tribunal is satisfied that the Four Options entered into 7 February 2003 were interlinked and did not have a separate commercial existence. They were part of an indivisible process and planned as a single continuous operation. The steps to realise the stated aim of the process were “cut and dried” from the outset. The transactions were bereft of a commercial purpose, and entered into for the sole purpose of the avoidance of tax. In view of those findings the Tribunal holds that the disputed loss should be construed against the whole transaction involving the four Options rather than the single transaction dealing with Option One.
89.	When viewed as whole the basic structure of the arrangements was that Options Three and Four funded the Appellant’s purchase of Options One and Two with the result that a cash flow as represented by book entries in relation to four premiums went from and immediately back to the Bank on 7 February 2003. On 4 April 2003, on the closing out of Options One and Three, a cash flow as represented by book entries in relation to two close out payments went from and immediately back to the Bank. On 7 April 2003 a cash flow as represented by book entries in relation to the cash payments under Option Two and the sale of assets acquired under Option Four went from and immediately back to the Bank. The combined effect of Options One, Two, Three and Four ensured that the Appellant did not bear the burden of paying any premium at all for Options One and Two, and did not suffer the economic consequences of either the grant or the exercise of the Options. At the end of the planned arrangements the Appellant’s financial position was precisely the same as it was at the beginning, except for the fees he paid to PWC and KBPB, and the security of ₤50,000 lodged with KBPB to cover the contrived loss. The Appellant, therefore, suffered no real loss. 
90.	The Tribunal’s decision that the Appellant suffered no real loss is not upset by the incorporation of a potential actual profit or loss within the structure of the scheme by allocating marginally different strike prices between the set of cash settled Options and the set of gilts Options. This incorporation was contrived to give the scheme an illusory aura of commerciality. A pursuit of a contrived maximum ₤49,961 profit made no commercial sense having regard to the size of the Appellant’s fees for the scheme which amounted to ₤218,000. This contrived profit or loss fitted the description of a commercially irrelevant contingency as defined in Scottish Provident Institution and can properly be disregarded in assessing the net effect of the composite Options transaction.
91.	The Tribunal, therefore, holds that the loss of ₤11,305,017 claimed by the Appellant in his 2002/2003 return was not an allowable loss within the meaning of TCGA 1992. The Tribunal dismisses the Appeal in respect of the loss dispute.
The Alternative Dispute
92.	Strictly speaking the alternative dispute is now hypothetical in view of the Tribunal’s decision in respect of the claimed loss. HMRC posited the alternative argument if in the event it was unsuccessful with the principal dispute. The Tribunal has however decided to give a determination on the alternative dispute in case the issue should become relevant on any appeal from this Tribunal.
93.	HMRC’s alternative argument was predicated on the basis that the loss occasioned on the disposal of Option One on 4 April 2003 was allowable under the provisions of TCGA 1992. In its alternative argument HMRC was impugning the legal character of Option Three as an Option to dispose of gilt-edged securities. If HMRC was correct the gain made by the Appellant on the disposal constituted by the grant of Option Three on 4 February 2003 would lose its exempt status under section 115 TCGA 1992, and be a chargeable gain which would cancel out the presumed allowable loss under Option One.
94.	Section 115(1) TCGA 1992 provides that
(1) A gain which accrues on the disposal by any person of -
      (a) gilt-edged securities or qualifying corporate bonds
      (b) any option or contract to acquire or dispose of gilt-edged securities or    qualifying bonds
    shall not be a chargeable gain.
95.	Gilt-edged securities are defined for the purpose of section 115 as those securities specified in Part II of Schedule 9 to the TCGA 1992, and any such stocks and bonds issued under section 12 of the National Loans Act 1968, denominated in sterling and issued after 15 April 1969, as may be specified by statutory instrument. Particulars of a Treasury Order specifying a stock must be published in the London and Edinburgh Gazettes as soon as may be after the Order is made. The exemption does not apply to Northern Ireland Government securities. 
The Facts
96.	Options Three and Four were United Kingdom Government Stock. Option Three was a put Option over ₤333 million Treasury Stock 7.25 per cent 2007, whilst Option Four was a call Option over ₤333 million Treasury Loan 8.5 per cent 2007. Both Options specified physical delivery of the underlying government stock. The strike prices of the government stock Options were set by a formula, which in both cases included an adjustment to reflect movements in the FTSE 100 Index over the life of the Option. The terms and conditions of the Options were set out in the contract notes issued by KBPB to the Appellant dated 7 February 2003. Mr Stanton when cross-examined accepted that he had seen no documentary evidence which prevented the Gilts Options from fulfilling their terms and conditions.
97.	Option Three was closed out on 4 April 2003.Option Four was in the money on its expiry date of 7 April 2003 and so was exercised. The exercise of Option Four involved the following four transactions:
(1)	KBPB acquired on behalf of the Appellant, ₤333 million of 8.5 per cent. Treasury Loan for ₤396 million from KGLG, a gilt market maker in the same group as KBPB (the Dresdner Banking Group). The bond dealing ticket recorded the acquisition as a market cross being a trade matched with the fourth transaction below.
(2)	KBPB sold on behalf of the Appellant, ₤333 million of Treasury Stock for ₤376 million to KBIM, which was the trading name of KBPB.
(3)	KPBB acquired on behalf of a Generic Options Account (an account of KBPB) ₤333 million of Treasury Stock for ₤376 million from KBIM.
(4)	KBPB sold on behalf of a Generic Options Account ₤333 million of Treasury Stock for ₤396 million to KGLG.
98.	The four transactions all took place at 16:30 hours on 7 April 2003. At that time Treasury Stock was transferred from KGLG to the Appellant, from the Appellant to KBIM, from KBIM to KBPB and then returned to KCLG from KBPB. 
99.	The four transactions were documented in contract notes issued by KBPB to the Appellant with a settlement date of 10 April 2003, Bloomberg Tickets, and entries in the Appellant’s account with KBPB. 
100.	Mr Wilkinson stated in evidence which was not challenged by HMRC that physical settlement of the gilts transactions in Option Four was satisfied by the record of purchase and sale in the Appellant’s account statement with KBPB, and in KBPB’s account with DKW, the investment bank of the Dresdner Banking Group. Mr Wilkinson also asserted that it was not necessary to report the gilt transactions involving the Appellant to Central Gilts Office. The transactions took place in a highly regulated environment between two banks in the same banking group. In accordance with market practice the transactions were netted off against each other with the netting off being recorded in DKW’s book. As there had been no net change in gilt holdings at the end of the banking day, DKW was under no obligation to report the transactions to the Central Gilts Office.
101.	According to Mr Hamilton-Ely it made sense for KBPB to transact with DKW in respect of the gilts. By trading with an investment bank in the same grouping as KBPB it reduced transaction costs and eliminated any counter-party credit risk.
102.	Mr Stanton pointed out that the size of these gilt transactions were over 100 times the average bargain size of gilts transactions in the period April 2000 to June 2000, which was ₤3 million. Further there was no reasonable prospect of the Appellant on his own account trading in the gilt options as he would have required funds in the region of ₤400 million. The Appellant indicated that he would not have been interested in the scheme, if he had known of the extent of his financial exposure.
The Appellant’s Submissions
103.	Mr Goldberg submitted that the legal character of Options Three and Four as Options over gilt-edged securities was fixed at the time when they were entered into on 7 February 2003. Their legal character was defined by the terms and conditions of the contract notes issued by KBPB which had not been challenged by HMRC. There was no principle of law which allowed the Options to be treated as other than what their terms showed. The facts that the Appellant and the KBPB were not exposed to the gilts market and that the gilts transactions under Option 4 were circular were irrelevant for the correct legal analysis of the Options. Section 115 of TCGA 1992 asked a legal question not an economic one.
HMRC’s Submissions
104.	Mr Ghosh contended that on the facts it could not be said that Option Three was an Option to sell gilts on the part of KBPB to the Appellant within section 115 of TCGA 1992. According to Mr Ghosh, KBPB never expected an exercise of Option Three, particularly as there was an 85 to 90 per cent probability that the FTSE 100 Index would remain within the digital collar. When the FTSE unexpectedly rose to put Option Four in the money, the method of exercise adopted demonstrated that there was no true intention to trade in gilts. The gilt transactions were retained firmly under the Bank’s control with a circular flow of gilts between KBPB and an affiliate investment bank. The Appellant was never commercially exposed to movements in the market in gilts. The risks were too high involving exposure to trades in gilts to the value of ₤396 million. The taking out of the Options over gilt-edged securities was solely tax driven and had no economic effect on the Appellant. The unreality of the arrangements was demonstrated by the supposed dealings when Option 4 was exercised which all took place simultaneously at 4.30 pm on 7 April 2003. In short, Options Three and Four were not true options to sell or acquire gilts. It, therefore, followed that the premium received by the Appellant from KBPB for Option Three was not exempt from capital gains tax under section 115(1)(b) but instead taxable under sections 144(1) of TCGA 1992.
105.	Mr Ghosh considered the decision of the Privy Council in Carreras Group Limited v The Stamp Commissioner (Jamaica) [2004] UKPC 16 provided support for his proposition that the Options were not true options over gilts. Mr Ghosh appeared to rely on their Lordships’ view that if they took account of the terms of the debenture and its redemption which took place two weeks later they would take a different view of whether the relevant transaction could be characterized as a reorganization of shares. The corollary for this Appeal was that if the Tribunal took a wider view which incorporated how the parties intended to conduct the transactions in the gilts, it might come to a different conclusion on the character of the Options than the one where the analysis was restricted to the terms and conditions of the original grant of the Options.
Decision
106.	There is a degree of unreality in determining this question, in that it is presented as an alternative to the principal dispute on the footing that the Tribunal has found that the loss occasioned on Option One was an allowable loss within the meaning of TCGA 1992. The dispute, therefore, is an academic one based on a narrower factual matrix from the one relied upon by the Tribunal in reaching its decision on the primary dispute.
107.	.The term that the Tribunal is being asked to construe within section 115(1) TCGA 1992 is an option to acquire or dispose of gilt-edged securities. The Tribunal  accepts that the factual matrix for the construction exercise was that which existed on the date when the Options were taken  out on 7 February 2003.  
108.	The Tribunal proceeds on the given that the Options were dealing with gilt-edged securities as defined in Schedule 9 of TCGA 1992. The dispute, however, was not about the legal identity of the security but whether the parties intended as at 7 February 2003 to take out Options to acquire or dispose of gilt-edged securities with the operative words in italics. 
109.	The Tribunal makes the following findings of fact:
(1)	On 7 February 2003 KBPB paid a premium of £12,153,834 to the Appellant for a European style put option over £333 million of 7.25% Treasury Stock 2007 with an expiry date of 7th April 2003. The strike price was based on a formula such that the option would be in the money were the FTSE 100 index to fall below 3390.4 (Option Three).
(2)	On 7 February 2003 KBPB paid a premium of £11,915,073 to the Appellant for a European style call option over £333 million of 8.5% Treasury Loan 2007 with an expiry date of 7 April 2003. The strike price was based on a formula such that the option would be in the money were the FTSE 100 index to rise above 3725.71 (Option Four).
(3)	The terms and conditions of the Options were evidenced by contract notes, which specified that the Options were to be settled by physical delivery.
(4)	The premiums received by the Appellant for these two Options were used to fund the purchase of two cash-settled FTSE Options.
(5)	The sole purpose for taking out the two Gilts Options was to avoid tax.
(6)	At the time he entered into the Option transactions the Appellant had no knowledge of the gilt market. He was completely unaware of his exposure to a potential trade in gilts to the value of ₤400 million.
(7)	At the time the parties entered in the Options they did not intend to exercise the Options in the Treasury Stock. There was an 85 – 90 per cent probability that the Options in Treasury Stock would not be exercised. If the FTSE Index moved outside the digital collar, the Gilts Option which mirrored the out-of-the-money cash-settled FTSE Option would be closed out.
(8)	At the time the parties entered into the Option transactions they decided that on the 4 April 2003 they would leave both Gilt Options to expire on the 7 April unexercised if the FTSE Index was within the digital collar or, if the FTSE was outside the collar, they would close out the out-of-the-money Gilt Option which mirrored the out-of-the-money cash-settled FTSE option and exercise the in-the-money Gilts Option on 7 April.
(9)	On 4 April 2003 Option Three was closed out by mutual agreement  which involved the Appellant paying KBPB ₤737,595. Accordingly when that sum was deducted from the premium of ₤12,153,834 paid by KBPB to the Appellant, the net gain to him on this Option was ₤11,416,239.
(10)	 At the same time on 4 April 2003 Option One was closed out by mutual agreement. As part of the agreement KBPB paid the Appellant ₤732,600 to settle the Option. This payment was then deducted from the premium of ₤12,037,617 for the cash settled Option in February 2003 producing an allowable loss of ₤11,305,017 for the Appellant.
110.	On balance the Tribunal finds on the facts that the parties at the time of entering the Options on 7 February 2003 intended on 4 April 2003 (depending on the level of the FTSE 100 Index) either to let both Gilt Options expire or close out the Option which mirrored the out-of-the-money cash settled Option. Since one of these two situations would happen on 4 April 2003 the Tribunal could conclude that the parties held no intention on 7 February 2003 to take out one of the Options for the purpose of acquiring or disposing of gilt-edged securities. Thus on this analysis the gain on Option Three would not be exempt from capital gains tax.
111.	 But on the basis of the artificial assumption that Tribunal has not found that the arrangements constituted a composite transaction, the question is whether the above analysis can stand. There is a parallel here with the question that faced the Special Commissioners in Scottish Provident. The statutory term that required construction there was “a contract under which....a company... has any entitlement.... to become a party to a loan relationship”.  In dealing with the question the House of Lords said that “If one confines one's attention to the Citibank option, it certainly gave Citibank an entitlement, by exercise of the option, to the delivery of gilts.” But it went on of course to say that what had to be considered was the larger scheme. So in the assumed absence of a finding of a “larger scheme” the Tribunal is stuck with the ordinary meaning of the contract notes evidencing the granting of Options Three and Four which showed that on exercise of the Options there would be an acquisition and disposal of gilt-edged securities as the contracts called for physical settlement on exercise.  HMRC did not challenge the authenticity of the contract notes. This problem engages the principles of construction dealing with contractual documents on which the Tribunal heard no arguments from the parties.
112.	The principles of construction in respect of contractual documents are summarised below:
(1)	 Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2)	 The background was famously described as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception mentioned in head (3) below, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man5. This proposition should be regarded with some circumspection. It has been observed that no authority was cited for it, and that it may not have been the subject of argument; and suggested that surrounding circumstances should be confined to what the parties had in mind, and what was going on around them at the time when they were making the contract6.
(3)	 The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in a claim for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way utterances would be interpreted in ordinary life. The boundaries of this exception are in some respects unclear.
(4)	  The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.
(5)	 The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common-sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.
113.	The principal source of information upon which the Tribunal derived its findings on the parties’ intention was PWC’s letter of 13 February 2003 to the Appellant. This letter summarised the discussions and the intentions of the parties which took place before the Options were entered into. The Tribunal considers that it is caught by principle 3 set out in the above paragraph which excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. In those circumstances the Tribunal decides that it is bound by the ordinary meaning of the contract notes which show that the parties on 7 February entered into Options to acquire or dispose of gilt-edged securities. Thus the gain on Option Three was exempt pursuant to section 115 of TCGA 1992.
Decision
114.	The Tribunal decides that the loss of ₤11,305,017 claimed by the Appellant in his 2002/03 tax return was not an allowable loss within the meaning of TCGA 1992. 
115.	The Tribunal considered the alternative argument that Option Three was not an option to acquire or dispose of gilt-edged securities with the meaning of section 115 TCGA 1992. The Tribunal emphasised that this was an academic exercise. The Tribunal decided that it was bound by the ordinary meaning of the contract notes which showed that the parties on 7 February entered into Options to acquire or dispose of gilt-edged securities. Thus the gain on Option Three was exempt pursuant to section 115 of TCGA 1992. In reaching this decision the Tribunal relied on principles of construction dealing with contracts on which it received no submissions from the parties.
116.	The Tribunal dismisses the Appeal as a result of its decision on the primary dispute.
117.	The Tribunal expresses its gratitude to the advocates for their assistance and clear arguments.

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 30 April 2010

LON/

Notes
1.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.