INCOME TAX – Anti-Avoidance – Relevant discounted security – Loss on gift to wife – Subscription for security and gift part of scheme to produce loss – Avoidance not the Appellant’s sole purpose in subscribing – Ramsay (1982), Westmoreland (2003) and Arrowtown (2003) considered – FA 1996, Sch 13, para 2 – Appeal allowed

THE SPECIAL COMMISSIONERS

	DAVID LACHLAN CAMPBELL	Appellant

	- and -

	THE COMMISSIONERS OF INLAND REVENUE    	Respondents

				Special Commissioners:	THEODORE WALLACE
								JULIAN GHOSH

Sitting in public in London on 19-22 January 2004 

Richard Bramwell QC, instructed by Coutts and Co, for the Appellant

David Ewart, instructed by the Solicitor of Inland Revenue, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal against an amendment made by the Inland Revenue to the tax return of the Appellant, Mr Campbell, for the year of assessment ended 5 April 2000.  The Appellant, in that return, sought relief for a loss of £2,483,100 claimed on the transfer, by the Appellant to his wife, of a relevant discounted security, within the Finance Act 1996, Schedule 13, paragraph 3(1).  The amendment to the return was the disallowance of the entire amount claimed.

2.	We were provided with an agreed statement of facts.  The Appellant gave oral evidence. Mr Grimes, called by the Revenue as an expert witness, also gave oral evidence.  Both were cross examined. 

The facts

3.	The following facts were agreed or appeared from the documents.

4.	In December 1997 the Appellant became Chief Executive of the Ginger Media Group Ltd.  As such he acquired a number of share options.  He and his wife had also held substantial stock exchange investments for some time. In January 1998 the Appellant and his wife entered into a portfolio management agreement with NatWest, with funds worth £1.6m. Their investment advisor was Mr Greg Waunford Brown. It became a possibility in late 1999 that the Ginger Media Group would subject to regulatory approval be taken over by Scottish Media or another bidder.  In such event the Appellant would exercise the options which had a market value far greater than the exercise price thus incurring a substantial liability to income tax under Schedule E. In October 1999 the Appellant discussed with his advisor, Mr Greg Waunford Brown, how best to shelter this from income tax. Mr Waunford Brown arranged a meeting between the Appellant and members of Coutts Tax Advisory Department on 15 October 1999.  At that meeting Coutts recommended that the Appellant shelter most of the taxable income arising on the exercise of the share options by use of the scheme which is set out below. The scheme was intended to give rise to an income loss which would offset the gain on the share options.    

The scheme
Step 1:  The creation of Sabre Rock

5.	On the advice of Coutts, on 14 December 1999 the Appellant formed a company named Chestnut Rainbows Limited, which was re-named as Sabre Rock Limited in February 2000 (“the Company”), with issued capital of £2.  The Appellant was the sole shareholder and director of the Company.  

Step 2:  The borrowing from NatWest

6.	On 23 December 1999 the Appellant borrowed £3,900,000 from NatWest to fund the subscription for a loan note and incidental expenses. The terms of the loan were (a) interest at 1.5 per cent per annum over base payable quarterly; (b) repayable as to £1,800,000 on 31 March 2000, as to £900,000 on 31 January 2001 and as to the balance on 31 January 2002; although all amounts outstanding were repayable on demand; (c) security was given by a charge over the share portfolios of the Appellant and his wife, a second mortgage over their matrimonial home, a charge over a life policy and a lien over the loan notes to be issued by the Company (“the Loan Notes”).  

Step 3:  The subscription for the Loan Notes

7.	On 24 December 1999 the Appellant subscribed £3,750,000 for 375,000 Loan Notes in the Company in units of £10.  

8.	Under clause 1.1 the redemption price, which was to be calculated by the auditors, was: 

“an amount per Loan Note equal to ten pounds plus an amount found by taking 50 per cent of the excess of the Capital profits of the Company over the Capital Losses of the Company less an Allowance for Tax thereon on the disposal of Investments in the period from the date of issue of the Loan Note until its redemption multiplied by ten and divided by the number shown in clause 2.1 below or £1.25 per £1 par value whichever is greater.”  

The number shown in clause 2.1 was £3,750,000.  Under clause 3 the Loan Notes carried interest of 2 per cent per annum payable in advance.

Clause 4.1 provided,

“Those Loan Notes not previously redeemed or purchased by the Company under any of the provisions of this Instrument or converted under clause 5 of this Instrument or otherwise dealt with by agreement outside the terms of this Instrument shall be redeemed … within … twenty Business Days from the Redemption Date …”

The redemption date was the tenth anniversary from the date of the issue of the Loan Notes.  Clause 5 provided for accelerated repayment in certain events.

Step 4: The gift of the Loan Notes to the Spouse

9.	Scottish Media acquired Ginger Media Group Ltd on 14 March 2000. 

10.	On 15 March 2000 the Appellant gifted the Loan Notes to his wife, Mrs Tracey Campbell, by a Deed of Gift.

11.	The Appellant’s taxable Schedule E income from his share options was £3,354,097. In January 2001 the balance of the loan from NatWest was re-financed by loans from Barclays and Merrill Lynch.  

The activities of the Company

12.	The Company’s first bank account was opened on 17 December 1999 with NatWest. On 24 December 1999 it received the £3,750,000 subscription money.  NatWest was appointed as the Company’s investment advisor.  

13.	As at 31 March 2001 the Company had invested in £1,856,009 in listed securities, the market value of which was £1,690,077. As at 31 March 2002 the Company had invested £2,065,240 in listed securities, the market value of which was £1,776,952.  

14.	The Company also made a number of unlisted investments, including in shares in UCTX Ltd, a financial services communications business, To the Hollist and Beyond Ltd, a country pub, Ticketaide.com, Clickmusic Ltd, and Zenith Group, a television production company of which the Appellant is non-executive chairman.  The Company also bought jointly with the Appellant a boat intended for chartering.      

15.	By a letter dated 27 September 2001 Mrs Campbell formally requested from the Company an encashment of £250,000 against the £3,750,000 Loan Notes held in her name. The request was expressed to be made in the light of exceptional market conditions which had unexpectedly reduced the funds available to her for building works to which she was already committed and for living expenses.  She noted in her letter that “Clause 4.1 permits such redemption, if all sides agree, outside the terms of the loan note.”  The Company acceded to her request on 27 September 2001.  

16.	Mrs Campbell made a further request for encashment of £118,150.89 against the Loan Notes by a letter dated 30 January 2003, which was also acceded to on that day at a meeting of the Company at 5pm.  

17.	In his tax return for the year 1999/2000 the Appellant claimed a loss of £2,483,100 on the transfer of the Loan Notes to his wife on 15 March 2000.  This was calculated on the basis that the aggregate market value of the Loan Notes on the date of the transfer was £1,266,900.  A market value of £1,500,000 at 15 March 2000 was agreed later between the parties in correspondence.  On that basis the loss would be £2,250,000, being the difference between the amount that the Appellant subscribed for the Loan Notes and the market value he was deemed to have received on their transfer to his wife.   

18.	The Revenue amended the Appellant’s return by a letter dated 24 September 2002.  The Appellant appealed the amendment by a letter dated 8 October 2002.

The evidence

19.	The Appellant confirmed a witness statement and was cross-examined at some length.

20.	He said that after working for Pepsi-Cola as a marketing manager he joined the Virgin Group in 1986 and started Virgin Radio in 1992 as chief executive. In 1997 Virgin Radio was sold to Ginger Media Group in a management buyout. The Appellant was chief executive.

21.	By 1999 Ginger Media Group had grown and a number of possibilities were being considered including sale. The Appellant held shares and options in Ginger Media Group and foresaw a substantial income tax charge on exercise of the options.

22.	In October 1999 the Appellant discussed the implications of a take-over with Mr Waunford Brown his personal investment adviser at NatWest who arranged for him to see the Coutts Tax Advisory team on 15 October. The RDS (Relevant Discounted Security) proposal was explained to the Appellant.  In his statement the Appellant said that the proposal fitted in with his own investment plans and that the capitalisation of an investment company would give him the chance to invest on a larger scale. He told the Tribunal that the stock markets were very bullish in late 1999 although there are always risks. Since he was the sole shareholder in the Company he could always get the money out to repay the loan to the bank.  The sale of Ginger Media Group was uncertain at that stage and the gift of Loan Notes would not occur until a sale.  If there had been no sale he would have reduced the amount of money in the Company.  He would have had to make a judgment if the sale did not go forward.

23.	The Appellant told Mr Ewart that the idea of borrowing £3.9 million to subscribe for loan notes rather than wait for a take-over came from his tax advisers but fitted in with what he wanted to do. He wanted a combination of investing in the market and in private ventures and unquoted investments. He said that the best way to have a series of investments and to do it in a tax efficient manner was to have a company. If the sale went forward it would be more tax efficient.  The Appellant said that he took the advice he was given and was not qualified to comment on whether the scheme would be strengthened if the company was set up before the sale.  The advice was tax advice, not advice about the best time to invest.

24.	The Appellant said that up to then his investments were managed on a discretionary basis in which he was not personally involved.  He wanted to be involved and to invest in unquoted investments.  He said that organizing private equity-type investments as a company seemed a more appealing way than doing it personally. Asked about the benefits of a company, he said that expenses could be offset, there would be limited liability, there was a benefit in the rate of corporation tax and differences in terms of dividends. At the time he did not feel that he would need to take money out of the Company; he viewed it as a long-term investment.  He said that the benefits of a company outweighed the drawbacks.  The situation with the Loan Notes was not the sole benefit.  Asked by Mr Ewart whether he would have used an investment company without the advantage of the loss scheme he said that he could not answer a hypothetical question: at the time he felt that the combination of advantages was sufficient.

25.	He said that there were a whole series of other benefits and drawbacks to setting up the Company in this way. He went through the various scenarios with Coutts.  At the time, the sale of Ginger Media Group was not certain.

26.	The Appellant said that the Company was formed through Farrer & Co, solicitors. He did not know whether the draft for the loan note came from Coutts or Farrers. Wearing both hats, the terms seemed reasonable both to himself and to the company.  He had some input as to the 10 year term and the interest rate, but less as to other terms such as redemption.  He envisaged investment for some 10 years, so a 10 year term seemed appropriate. Asked whether the deferred redemption was to achieve the tax result, the Appellant said that he could not comment and Mr Ewart would have to ask the tax experts.  He said that the scheme was explained to him and he had understood that a person who was not the sole shareholder would quite probably not have paid £3.75 million for the Loan Notes because of the 10 year term and that with the 10 year term the value was £1.5 million. He discussed the matter with his advisers and took their advice.

27.	The Appellant said that very quickly after the Company was formed investments were made in eight quoted stocks and by the end of March over £½ million was invested in quoted equities with £2,986,889 still  in cash; as it turned out some of the companies such as ARM Holdings, Logica and Sage were highly over-rated.  He was quite intimately involved in each of the stocks acquired although still working full-time until March with Ginger Media Group. He had also invested £50,000 in UCTX a private financial services communications company.

28	When asked by Mr Ewart about the redemption price for the Loan Notes, the Appellant said that he would need to go through it with his advisers.  Asked about the possibility that the company might have to pay all of its profit to the note holder because of the definition of the allowance for tax, he said that this example was not pointed out to him at the time; in the event the Company made substantial losses. He denied a suggestion that the precise terms of the Loan Notes did not matter because it was never intended to be a serious commercial transaction.

29.	The Appellant denied the suggestion in the statement by Mr Grimes that the redemptions at par could not be justified.  He said that the building works by Mrs Campbell (see paragraph 15 above) were on a property which they owned jointly. He took advice from his tax advisors and was told the early redemption at par was proper and right. It was not correct that he would have paid out the money to his wife under any circumstances.

30.	The Appellant told the Tribunal that he did appreciate that the loan agreement entitled NatWest to demand repayment of the £3.9 million loan to him on demand, however he had felt confident that that would not happen.

31.	He said that the advice on limited liability had been given by Mr Mike McCarthy at Coutts. His wife had received independent advice on the mortgage of their home from solicitors. Coutts had given oral advice to the Company on the redemption.

32.	We also heard evidence from Mr Grimes as to the market value of the Loan Notes. Mr Grimes had expertise in the field of Loan Notes issued by quoted rather than unquoted companies (and so strictly his evidence was only of marginal relevance to the circumstances of this case, since the Company was unquoted), but his evidence served to underline what is accepted by the parties in any event, that the market value of the Loan Notes at the time of the subscription was considerably lower than their par value.

The legislative provisions

33.	The Finance Act 1996, Schedule 13, paragraph 3(1), defines a “relevant discounted security” as 

“…any security which…is such that, taking the security as at the time of its issue, the amount payable on redemption-

	(a)  on maturity, or
(b) in the case of a security of which there may be a redemption before maturity, on at least one of the occasions on which it may be redeemed,

 is or would be an amount involving a deep gain, or might be an amount which would involve a deep gain.”

34.	Schedule 13, paragraph 3(3) and (4) defines a “deep gain” as a gain of an amount where the difference between the issue (subscription) price of a security and its redemption amount exceeds either 0.5% per annum or 15% overall (in either case of the redemption amount).

35.	It is common ground between the parties that the Loan Notes for which the Appellant subscribed in the company are relevant discounted securities within paragraph 3(1). The redemption price formula set out above was at least capable of producing a deep gain.

36.	The provisions which relate to the calculation of an allowable income loss on the transfer of a relevant discounted security are contained in Schedule 13, paragraphs 2, 4 and 8. Any loss falling within the terms of these provisions may be set against taxable income of the same year of assessment in which the loss arises (paragraph 2(1)). We note, in passing that the relevant provisions were modified, firstly by the insertion of Schedule 13, paragraph 9A (which restricted the availability of losses under paragraph 2) by the Finance Act 2002, section 104 and then subsequently by the repeal of paragraph 2 (which denied relief for losses on relevant discounted securities altogether) by the Finance Act 2003, sections 182 and 216, Schedule 39, paragraph 2 and Schedule 43, Part 3.  This appeal concerns paragraph 2 of the 1996 Act and the other relevant provisions in their pre-Finance Act 2002 form. 

37.	Paragraph 2(1) of Schedule 13 provided that 

“(1)	Subject to the following provisions of this Schedule,
where—

(a)  a person sustains a loss in any year of assessment from the discount on a relevant discounted security, and 
(b)  makes a claim for the purposes of this paragraph before the end of twelve months from the 31st January next following that year of assessment,

 that person shall be entitled to relief from income tax on an amount of the claimant’s income for that year equal to amount of the loss.” 

38.	Paragraph 2(2), defining “loss”, provided that 

“(2)	For the purposes of this Schedule a person sustains a loss from the discount on a relevant discounted security where—

(a)  he transfers such a security or becomes entitled, as the person holding the  security, to any payment on its redemption; and 
(b)  the amount paid by that person in respect of his acquisition of the security exceeds the amount payable on the transfer or redemption.”

39.	Paragraph 2(3), quantifying “loss”, provided that

	“(3)	For the purposes of this Schedule the loss shall be taken—

(a)  to be equal to the amount of the excess increased by the amount of any relevant costs; and
(b)  to be sustained for the purposes of this Schedule in the year of the assessment in which the transfer or redemption takes place.”

40.	Paragraph 4(1) provides, 

“(1) Subject to sub-paragraph (2) below, in this Schedule references to a transfer, in relation to a security, are references to any transfer of the security by way of sale, exchange, gift or otherwise.”  

Paragraph 4(2) is not relevant to this appeal.  

41.	Paragraph 8(1) and (2) provide, 

(1)	This paragraph applies where a relevant discounted security is transferred from one person to another and they are connected with each other.
	
(2)	For the purposes of this Schedule—

(a)  the person making the transfer shall be treated as obtaining in respect of it an amount equal to the market value of the security at the time of the transfer; and
(b)  the person to whom the transfer is made is treated as paying in respect of his acquisition of the security an amount equal to that market value.”

42.	The Appellant and his wife are connected persons within paragraph 8: paragraph 8(3) defines connected persons by reference to the Income and Corporation Taxes Act 1988, section 839.  Section 839(2) provides that a husband and wife are connected persons.

43.	We also record that during argument Mr Ewart accepted that:-

1.	The entire subscription payment of £3.75 million made by the Appellant to the Company was for the Loan Notes, notwithstanding that the subscription price far exceeded the market value of the Loan Notes at the time of issue and that no part of the subscription price was a gift to the Company;

2.	The gift of the Loan Notes by the Appellant to his wife was a “transfer” of the Loan Notes within paragraph 2(2)(b); and

3.	There was no implied term in the Loan Notes which permitted the holder to redeem the Loan Notes at any time. Such a term would have increased the market value of the Loan Notes and decreased or eliminated the loss available to the Appellant under paragraph 2, since, on the Appellant’s argument, that loss was the difference between the issue (subscription) price paid for the Loan Notes and their market value at the time of their transfer to the Appellant’s wife.   
       
The Taxpayer’s submissions

44.	Mr Bramwell, for the Appellant, said that the subscription for the Loan Notes and their subsequent transfer to the Appellant’s wife, resulted in a “loss”, within Schedule 13, paragraph 2, to the Appellant of £2.25 million on the basis of the market value now agreed (see paragraph 17 above), which could be set against the Appellant’s taxable income arising from the exercise of his share options in the same year of assessment.  On redemption of the Loan Notes at par his wife incurred a tax charge on the profit over the market value at the time of the gift which she duly returned on her self-assessment.

45.	The subscription payment of £3.75 million was accepted by the Inland Revenue to be for the Loan Notes and, according to Mr Bramwell, must therefore be an amount paid “in respect of [the Appellant’s] acquisition of the Loan Notes” within Schedule 13, paragraph 2(2)(b). The gift was accepted by the Inland Revenue to be a “transfer” within paragraph 2(2) and paragraph 4. Paragraph 8 deemed the Appellant to have received an amount equal to the market value of the Loan Notes at the time of that transfer (£1.5 million).  Thus a loss of £2.25 million arose under paragraph 2(1).  

46.	Mr Bramwell said that relief for the loss could not be denied by the application of the approach to statutory construction, in relation to artificial tax avoidance schemes, developed by the courts in WT Ramsay Limited v IRC [1982] AC 300, as interpreted in subsequent cases, in particular in Macniven v Westmoreland Investments Limited [2003] 1 AC 311. We shall refer to this approach as the “Ramsay doctrine”.  He said that the approach of the House of Lords in Westmoreland reinforced his contention that the loss should be allowed in this case: paragraph 2, which closely articulated the mechanism to calculate the loss under Schedule 13, was a “legal” concept in the sense used by Lord Hoffmann in Westmoreland and did not admit of any application of the Ramsay doctrine at all.  The decision of the Hong Kong Final Court of Appeal in The Collector of Stamp Revenue v Arrowtown Assets Ltd (4 December 2003), and in particular the judgment of Lord Millett, sitting as a non-permanent judge, while purporting to be an application of the Ramsay doctrine, in criticising Lord Hoffmann’s commercial/legal dichotomy (where the Ramsay doctrine was applicable to “commercial” terms but not to “legal” terms) was irreconcilable with Westmoreland and should not be followed. Mr Bramwell submitted that we were bound to follow the approach of Lord Hoffmann in Westmoreland, which represented the ratio of that case.  Mr Bramwell said that the present appeal was very close to the issue before the Inner House of the Court of Session in IRC v Scottish Provident Institution [2003] STC 1035, where the term “loss” was construed in the context of the Finance Act 1994, section 155(2) (in relation to qualifying contracts in the financial instruments regime). The Court of Session held that the closely articulated definition of the mechanism which calculated the “loss” for section 155 purposes did not admit of any application of the Ramsay doctrine to deny the loss due to any tax avoidance purpose on the part of the taxpayer company.  On any view that case involved loss creation.  Mr Bramwell submitted that we should adopt the same approach here.

47.	He said that if the statutory concept is a legal one, there is no scope for the application of Ramsay, and likewise if the statute is too closely articulated to admit the principle.  If the concept is not a legal one, then if there is a preordained series of                       transactions with steps inserted solely for the purpose of tax avoidance, those steps may be disregarded in applying the concept.  Here, unlike in Ramsay, the transactions were not self-cancelling and not pre-ordained.  Lord Hoffman’s approach in Westmoreland was applied by the Court of Appeal in Barclays Mercantile Business Finance Ltd v Mawson [2003] STC 66.

48.	Mr Bramwell further submitted that even if Arrowtown did represent an application of the Ramsay doctrine in a manner consistent with United Kingdom tax law, the loss in dispute here could not be denied.  The application of the Ramsay doctrine resulting in the denial of stamp duty relief in Arrowtown depended on transactions, there a purported issue of shares, being effected exclusively for tax avoidance, there stamp duty, without any commercial, non-tax, justification at all.  

49.	He said that the loan note was the means of capitalising the Company for long-term investment.  The Appellant controlled the Company.  The question what an unconnected person would have done was not relevant.  It is commercial for an owner of a company to lend money to it on terms which would be unattractive to a non-shareholder: it is an everyday transaction, see per Nourse J at page 85B-E in Inland Revenue Commissioners v Levy  (1982) 56 TC 68.  On issue the commercial value of the Loan Notes to the Appellant, as owner of the Company, was the same as the subscription price.  There was no basis for implying a term that the Notes were redeemable on demand.

50.	Mr Bramwell said that on a true construction of the plain words in Schedule 13, paragraph (2)(b) the Appellant was entitled to loss relief.

The Revenue’s Submissions

51.	Mr Ewart started by stating seven submissions:

(1)	A provision granting relief from tax is generally (though not universally) to be taken to refer to transactions undertaken for a commercial purpose and not solely for the purpose of complying with the statutory provisions for relief, see per Lord Millett at paragraph 149 of Arrowtown;

(2)	Transactions which have such a sole purpose are to be disregarded in applying the provisions which give the relief;

(3)	The relief for losses given by the Finance Act 1996, Schedule 13, paragraph 2 was a provision which is to be taken as referring only to transactions undertaken for a commercial purpose and not solely for the purpose of complying with its requirements;

(4)	The subscription for the Loan Notes on their terms and the transfer of the Loan Notes to the Appellant’s spouse were transactions undertaken with no purpose other than to qualify for loss relief;

(5)	If those transactions are disregarded, then the Appellant has not sustained a loss within Schedule 13, paragraph 2; 

(6)	It is no part of the Ramsay principle that one has to decide whether the concept of loss in Schedule 13, paragraph 2 is a legal or commercial concept;

(7)	However, if there is such a dichotomy, the concept of loss in Schedule 13, paragraph 2 is a commercial concept as was the concept of loss in Ramsay.

52.	Mr Ewart said that the converse of a business or commercial purpose is that a transaction is solely for a tax purpose not that it is gratuitous.  The share exchange in Furness v Dawson [1984] AC 474 was to avoid tax although not gratuitous.  It is a question of fact whether the sole purpose is a tax purpose.  If there are other purposes, Ramsay does not apply.

53.	He said that he was not seeking to extend Ramsay but to apply it in a new situation where although the transactions were contemplated they were not inevitably pre-ordained.  This was not a case such as Craven v White [1989] AC 398 where there was a gap with no certainty that the sale would take place.

54.	Mr Ewart submitted that the ratio of Westmoreland was not to be found in Lord Hoffmann’s speech.  Rather, the ratio was contained in the speeches of Lord Nicholls, Lord Hutton and Lord Hope. The application of the Ramsay doctrine is not dependent on any legal/commercial dichotomy. Rather,  it is that transactions effected solely to obtain a tax result unintended by Parliament should not be given the benefit of that tax result. That is the approach which binds this Tribunal and that is the approach which is reflected in Arrowtown.  Mr Ewart, said that Arrowtown is irreconcilable to Lord Hoffmann’s approach in Westmoreland but is an unexceptionable application of the Ramsay principle.  There is no difficulty in applying Arrowtown as a matter of authority in this appeal, according to Mr Ewart.  Arrowtown accords with the true ratio of Westmoreland which is to be found in the speeches of Lord Nicholls, Lord Hutton and Lord Hope. Mr Ewart submitted that the ratio of Westmoreland as stated by Lord Nicholls, Lord Hutton and Lord Hope was that a tax avoidance purpose of any transaction was sufficient to deny that transaction the benefit of the provision which the taxpayer sought to attract.  

55.	The approach of the Court of Session, in Scottish Provident Institution was  wrong in relying on Lord Hoffmann’s commercial/legal dichotomy.  Ramsay itself concerned the term “loss” in the context of Capital Gains Tax legislation, where the term was defined in greater detail than for Schedule 13, paragraph 2 but nevertheless was subjected to the application of the Ramsay doctrine to which that case has given its name. Examples of these provisions in the Taxation of Chargeable Gains Act 1992 were sections 1(1), the computation provisions in Part II, such as sections 15 (computation of gains), 16 (computation of losses), 17 (deemed to be made at market value), 18 (transactions between connected persons), 19 (deemed consideration in cases where assets are disposed of in a series of transactions), 20 (original market value and aggregate market value for the purposes of section 19), 35 (assets held on 31 March 1982), 37 and 38 (allowable deductions).  He referred to the speeches of Lord Steyn and Lord Cooke in Inland Revenue Commissioners v McGuckian [1997] STC 908 and to Carnwath LJ in Barclays Mercantile Business Finance Limited v Mawson [2003] STC 66 at 88-94.  

56.	Mr Ewart said that the Company was established and the Loan Notes issued solely for tax avoidance purposes (to generate the loss under paragraph 2(1)), so that the Appellant could not pray in aid any commercial, non tax, purpose on the part of the Company to escape the application of the Ramsay doctrine.   

57.	Mr Ewart said that the crucial words in paragraph 2(1)(a) are “sustains a loss”.  In applying these words the issue of the Loan Notes and its gift to Mrs Campbell should be disregarded.  It was no part of the Revenue case that the Loan Note should be treated as issued to Mrs Campbell direct or that there had been no transfer to her within paragraph 8.  The application of Ramsay depended on the sole purpose of the transactions being to obtain tax relief.  It was not suggested that the gift to Mrs Campbell was bogus.

58.	He said that the advantages identified by the Appellant of investing through a company were minor compared with the tax benefit of the scheme.  They were a by-product of the scheme not a purpose.  The Appellant had borrowed the money and started investing when there was no certainty of a sale of Ginger Media.  He agreed that he had not asked his advisers the best time to invest in the market.  Mr Ewart said that it was hard to think of any reason for the timing other than to counter a Ramsay argument.

59.	Mr Ewart said that it was clear that the conditions of the Loan Notes were set as part of the scheme.  The term had to be long enough to produce a significant depreciation.  No unconnected person in the real commercial world would have subscribed on those terms.  There was no sense in subscribing for the Loan Notes apart from getting tax relief on a loss.

60.	He asked the Tribunal to find that the borrowing from the bank, the subscription for the Loan Notes and the gift were all carried out for no purpose other than obtaining loss relief.  The borrowing was part of the initial transaction and indicated that it was all part of a tax scheme.  In any event the subscription for the Loan Notes and the subsequent gift were for no other purpose.  It was sufficient for the Ramsay principle if the subscription for the Loan Notes alone was solely for a tax purpose.  He said that the words such as “otherwise than by reason of a transaction or transactions entered into with the sole purpose of obtaining tax relief under this paragraph “should be implied after “sustains a loss” in Schedule 13, paragraph 2(1)(a).

Taxpayer’s Reply

61.	In reply, Mr Bramwell said that it was not denied that there was a tax motive but in addition there was a commercial objective to invest.  Ramsay does not apply to dual purpose transactions.  The subscription to the Loan Notes was motivated by tax relief but capitalisation of the Company was also a purpose.  Part of the funds were invested immediately.  In Arrowtown Lord Millett said of the shares at paragraph 152 “they had no other purpose.”  Mr Bramwell said that, for example, without a tax incentive there would be no reason for a retirement annuity premium contract with its restrictions but that an investment in such a contract would not be ignored under the Ramsay doctrine, albeit that it would not have been made absent those tax incentives, as the investment would also have a commercial, non tax purpose He said that Mr Ewart’s argument here had the effect of introducing a provision such as section 137(1) of the Capital Gains Tax Act 1992 into the tax system generally by implication but without a clearance procedure.

62.	Mr Bramwell said that the Appellant had not been challenged on his evidence that he had the purpose of forming an investment company for making long-term investments.  The Company could roll up dividends without regular rate income tax and would pay a lower rate of tax on capital gains as well as getting indexation relief.

63.	Mr Bramwell repeated  that the concept of “loss” in Schedule 13, paragraph 2 was a legal concept within Westmoreland and was closely articulated, see paragraph 149 of Arrowtown.  Scottish Provident was indistinguishable from the present case.  The loss provisions for capital gains tax considered in Ramsay had no core provision defining a loss.

64.	Finally, he said that in the present case there was no pre-ordained series of transactions with inserted steps.

Decision

65.	We start by accepting that the Appellant wished to make the investments which were ultimately made by the Company and chose to make those investments through the medium of the Company, of which he was the sole director and shareholder. Thus the Appellant had a commercial, non-tax, purpose, that of making investments.  We accept the Appellant’s evidence that he had an investment strategy.  We do not consider that the overpayment by the Appellant for the Loan Notes displaces this fact.  As Nourse J pointed out in Levy, supra, an interest-free loan by a sole shareholder is an everyday transaction.  As Mr Bramwell pointed out while the Notes were held by the Appellant their value to the Appellant was by reason of his control over the Company much greater than their deemed market value calculated under Schedule 13, paragraph 8.
 
66.	However, we also find that the main purpose of the Appellant in establishing the Company,  and subscribing for the Loan Notes, in the form in which they were, in fact, issued was to obtain tax relief under Schedule 13 of the Finance Act 1996.  The Company was established after tax advice from Coutts.  The Loan Notes were issued after tax advice from Coutts and after their form had been discussed with Coutts, in particular the redemption price and the redemption date, which were critical terms to their status as relevant discounted securities, since the definition of “relevant discounted security” depends on the rate of return by reference to the redemption date and redemption amount: see Schedule 13, paragraph 3(3).  This does not affect our conclusion that the Appellant also had the commercial, non tax, purpose of making the investments which were made by the Company.  The fact that the Appellant would not have invested through the Company and subscribed for the Loan Notes in the form in which they were issued but for the perceived tax advantage arising from the loss on the transfer of the Loan Notes to the Appellant’s wife is consistent with our finding that the Appellant himself had a purpose of making investments, quite independent of tax, and that the Appellant funded the Company by subscribing for the Loan Notes to fulfill that purpose.

67.	We find that the gift of the Loan Notes to the Appellant’s wife was wholly tax motivated. The Appellant received tax advice from Coutts as to how to generate the loss under Schedule 13, paragraph 2(1).  The transfer by the Appellant to a connected person was critical to the loss arising. There would be no loss without that transfer, in the context of the facts in this appeal. We infer that the transfer of the Loan Notes to the Appellant’s wife was purely to generate the loss for which the Appellant seeks relief and for no other reason.  The Appellant gave no evidence of a wish to make a gift of the Loan Notes to his wife independent of tax considerations.

68.	However, since the Inland Revenue accepts that the entire subscription monies of £3.75 million were paid for the Loan Notes and were in no part a gift to the Company and that the gift of the Loan Notes by the Appellant to his wife was a “transfer”, the only issue for us to decide is whether the difference between the subscription price for the Loan Notes (£3.75 million) and their market value at the time of that transfer by gift (£1.5 million) is a “loss” within the meaning of paragraph 2(2) and paragraph 2(3), or whether the Appellant’s tax motivation in subscribing for the Loan Notes in the form in which they were issued to him denies relief on the application of the Ramsay doctrine.  

69.	We consider the correct approach to the potential application of the Ramsay doctrine in this appeal to be as follows: the Ramsay doctrine is a principle of statutory construction in relation to tax avoidance schemes which seek a tax result which is unintended by Parliament (Westmoreland [2003] 1 AC 311 at 325)

70.	The Ramsay doctrine has been applied in at least four different contexts.

71.	Firstly, the doctrine has been applied to ascertain whether a series of self cancelling, pre-ordained transactions, effected solely to generate an allowable loss for capital gains tax purposes, were to be respected for the purposes of capital gains tax legislation or not. The House of Lords held that they were not, even though the transactions were to be respected for the purposes of other statutes: Ramsay [1982] AC 300 at 325, 337.  

72.	Secondly, the Ramsay doctrine has been applied to ascertain the true parties and the true dealing in a transaction. So, where the true dealing was between the taxpayer (Mr Dawson) and a particular purchaser, Wood Bastow Holdings Limited, in that the sale of shares by Mr Dawson to Wood Bastow was a practical certainty, an inserted sale of the shares by Mr Dawson to a wholly owned creature company (Greenjacket Limited) and a sale of those same shares by Greenjacket to Wood Bastow was ignored and the disposal treated as a disposal of the shares by Mr Dawson to Wood Bastow: Furniss v Dawson [1984] AC 474 at 513, 526-7.  The test adopted by the House of Lords was that the inserted steps had to have an exclusive tax avoidance purpose and the ultimate transaction must be preordained before the inserted steps could be ignored.  As Lord Brightman said in Furniss v Dawson [1984] AC 474 at 527:

“First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end… Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not ‘no business effect.’ If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.” 

73.	It was not sufficient that the inserted steps had a sole tax avoidance purpose for them to be ignored.  So in Craven v White [1988] STC 476 where, in the same scheme as that which failed in Furniss v Dawson, the inserted sale of  shares, by a taxpayer (Mr White) to the intermediate company (Millor Limited) took place at a time when there was no preordained onwards sale to an ultimate purchaser, that sale to the intermediate company was respected for capital gains tax purposes, see especially per Lord Oliver: at 503c to 504b and also at 507d where he said, “…Ramsay is concerned not with reforming transactions but with ascertaining their reality.”  In Craven v White, there was no “true dealing” to uncover by ignoring the intermediate sale.

74.	Thirdly, the Ramsay doctrine has been applied to ascertain the true nature of a receipt in the hands of a taxpayer.  So where a taxpayer, entitled to a dividend which has been declared, sells the right to that dividend to a third party for a sum which is funded by the very dividend payment itself, the receipt by the assignee is income, not capital, for the purposes of section 478 of the Income and Corporation Taxes Act 1970:  IRC v McGuckian [1997] 1 WLR 991, as explained by Lord Hoffman in Westmoreland, supra, paragraphs 51 to 57, especially paragraphs 54, 55 and by Lord Millett in Arrowtown, paragraph 147..  The question was not whether or not the receipt was a “dividend” but whether the receipt was “income”, so that the fact that the taxpayer, as assignor, received only a proportion of the dividend received by the assignee was irrelevant.  There also, the test adopted by the House of Lords, to decide whether the receipt of the assignment consideration was income or capital, was whether the sale of the right to the dividend and the receipt of the assignment consideration out of the dividend payment itself was solely tax motivated and part of a pre-ordained series of transactions.

75.	Fourthly, the Ramsay doctrine has been applied to ascertain the true nature of instruments issued solely for tax avoidance purposes.  In Arrowtown, the question before the Hong Kong Final Court of Appeal was whether shares which carried deferred rights, where there was no rights to a winding up and only a right to a dividend if the issuing company made profits greater than to the Gross National Product of the United States, constituted “issued share capital” for the purposes of the Hong Kong stamp duty legislation which exempted transactions between companies which had a 90% shareholding relationship from stamp duty.  The shares were issued solely to create an artificial relationship between companies in order to obtain stamp duty relief.  The court held that such “shares” were not “issued share capital” for stamp duty purposes, despite the fact that the shares were respected as being shares for Hong Kong company law purposes and the fact that the shares carried a valuable right to appoint a director (Arrowtown, paragraphs 152-157). 

76.	In this fourth application of the Ramsay doctrine, the notion of a preordained series of transactions is irrelevant. It is the nature of the rights held by the taxpayer which is under scrutiny, viewed in the light of the finding that the rights were only held to obtain a particular tax result. It is because the Ramsay doctrine may be applied in different contexts that its limits in one context cannot be taken to be limits of general application in all contexts.  In McGuckian [1997] STC 908 Lord Cooke said this at page 921b, 

“I suspect that advisers of those bent on tax avoidance, which in the end tends to involve an attempt to cast on other taxpayers more than their fair share of sustaining the national tax base, do not always pay heed to the theme in the speeches in the Furniss case, especially those of Lord Scarman, Lord Roskill and Lord Bridge of Harwich, to the effect that the journey’s end may not yet have been found” 

So, of course, a step with an enduring consequence must be respected in ascertaining, for, example, who are the parties to a particular dealing, or the nature of a particular transaction: Pigott v Staines Investments Limited [1995] STC 114 at 141a-b.  However the fact that a company which issues highly deferred shares of the type issued in Arrowtown is an enduring structure is not of itself relevant in ascertaining whether those shares are part of its “issued share capital” within the statute.

77.	Of course, we are bound by the decision of the House of Lords in Westmoreland, rather than that of the Hong Kong Court in Arrowtown, were these decisions to conflict. It is clear to us that Lord Hoffmann’s decision in Westmoreland is the ratio of that case; all four of the other judges expressly agreed with Lord Hoffman.  Furthermore, the legal/commercial dichotomy has been applied in Barclays Mercantile, supra (see [2003] STC 66 at 86g to 87d, 92f), which decision binds us, and by the Inner House of the Court of Session in Scottish Provident, supra (see [2003] STC 1035 at 1067c-g), which is of highly persuasive authority.  

78.	However, we consider that the commercial/legal dichotomy articulated by Lord Hoffman in Westmoreland and the approach of the Hong Kong Court in Arrowtown are reconcilable and are consistent with the application of the Ramsay doctrine as applied by the courts in the United Kingdom to date.

79.	Lord Hoffmann, in Westmoreland [2003] 1 AC 31 articulated the commercial/legal dichotomy thus at paragraph 58:  

“The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say ‘You had better ask a lawyer’. For example, stamp duty is payable upon a ‘conveyance or transfer on sale’: see Schedule 13, paragraph 1(1) to the Finance Act 1999. Although slightly expanded by a definition in paragraph 1(2), the statutory language defines the document subject to duty essentially by reference to external [our emphasis added] legal concepts such as ‘conveyance’ and ‘sale’. If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept.”

We take this passage to confirm that the Ramsay doctrine is a canon of construction and its application will vary according to the statutory term or phrase under scrutiny and the context of the case before the Court which is invited to apply it. Lord Hoffmann’s dictum and dichotomy does not suggest that certain terms or phrases have an intrinsic quality which makes them “commercial” (and susceptible to the application of the Ramsay doctrine) or “legal” (and invulnerable to such application). Rather Lord Hoffmann observes that certain terms and phrases bear “external” legal meanings. An extreme example would be where a particular term expressly bears the meaning given to it in another statute.  In Westmoreland itself, the meaning of the term “payment” had the narrow (“legal”) meaning of “discharge of a debt”, not due to some express statutory reference but because of the context of the relevant provision in section 338 of the Income and Corporation Taxes Act 1988, where such a meaning was required to preserve symmetry between debtor and creditor in relation to interest payments on a loan. We do not take Lord Nicholls in Westmoreland to quarrel with that approach at all but rather to commend it.  Lord Nicholls said at paragraph 14,  

“‘Charges on income’ are defined in section 338(2) as ‘payments of any description mentioned in subsection (3) below’. So far as relevant, subsection (3) provides that ‘the payments referred to in subsection (2)(a) above are--(a) any yearly interest ...’ Prima facie, payment of interest in section 338 has its normal legal meaning, and connotes simply satisfaction of the obligation to pay. In the present case, WIL's obligation to pay the accrued interest to the trustees was discharged by satisfaction. Thus, if the Inland Revenue are to succeed, payment in section 338 must bear some other meaning. Ultimately, applying in full the purposive Ramsay approach to interpretation, I can find no justification for giving payment in section 338 some other meaning. Moreover, I am unable to see what that other meaning could be.”

We take Lord Nicholls to be giving the term “payment” in section 338 a precise, narrow (“legal”) meaning due to the statutory context of s 338.  This is another way of expressing the commercial/legal dichotomy, and is not in conflict with it.  It is unsurprising that Lord Nicholls at paragraph 18 expressly agrees with Lord Hoffmann’s approach and conclusions.  

80.	Lord Millett, in Arrowtown, appears to have accepted that this construction of Lord Hoffmann’s commercial/legal dichotomy in Westmoreland was consistent with his approach and conclusion in Arrowtown. Lord Millett said at paragraph 149 of Arrowtown:  

“If Lord Hoffmann was merely saying that the statutory language must be construed in the light of its purpose, and that a provision granting relief from tax is generally (though not universally) to be taken to refer to transactions undertaken for a commercial purpose and not solely for the purpose of complying with the statutory requirements for tax relief, it is an accurate description of the Ramsay principle. Nor can objection be taken to the idea that the words of a particular statute may be too closely articulated to admit of an application of the principle: Judge Learned Hand had said as much in Helvering v. Gregory. I am not at all sure that Lord Hoffmann intended more than this.”  

81.	Certainly we can see no conflict between the notion that certain terms may, either expressly, or as a matter of statutory context, have a meaning which is unaffected by the purpose of a taxpayer, whether tax avoidance or otherwise, and the notion that certain other statutory phrases, even those with a settled meaning in certain areas of law (and certain statutes), may, in the context of the application of tax statutes, be given a different meaning in their application to transactions effected purely for tax avoidance purposes. This is no more than a recognition that different statutes are enacted for different purposes and on the basis of different assumptions of the type of transaction and circumstances which the respective draftsmen wish to encompass in their language, and that the assumptions of one statute, which apply to one area of law, do not necessarily hold good in applying another statute in a different area of law: 

“…although a word may have a 'recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept." (Lord Hoffmann in Westmoreland, supra, at paragraph 50). 

82.	Thus in Arrowtown, although the deferred shares may be treated as “shares” for company law purposes, so that the requirement for stamp duty relief and a 90% shareholding relationship between two companies was literally met (see Lord Millett at paragraph 156), those shares were not part of the company’s “issued share capital” for stamp duty purposes where stamp duty relief was dependant on the true economic relationship between those two companies. 

83.	Put another way, using the term “capital” in a broad sense to include both shareholders’ funds and distributable profits, the holder of the deferred shares in Arrowtown did not have a “share” in the “capital” of the issuing company in the context of a stamp duty provision which sought to give relief only where there was a true economic relationship between two or more companies. We note that Lord Millett expressly ignored the right of the deferred shareholders to appoint a director, presumably because this was irrelevant to the question of whether the holder of the deferred shares had any rights to a “share” in the “capital” of the company. Lord Millett does impose a judicial backstop to the application of the Ramsay principle in the context in which it was applied in Arrowtown.  Lord Millett said of the deferred shares at paragraph 152 of Arrowtown:  

“Leaving aside for the moment their nominal value and the right to appoint a director of Prepared and Arrowtown which was attached to them, they had no commercial content at all. They carried no rights to dividends or capital on a winding up. If shares are considered as a bundle of rights, they had barely even a shadowy existence.”   

Lord Millett also observed that the shares had no commercial purpose in their issue:  

“But Ramsay allows steps to be disregarded if they have no business purpose, not no business effect. It is fanciful to suppose that the shares were issued in order to give Shiu Wing an additional albeit miniscule investment in Prepared or to allow it to appoint a representative director to look after its interests. The former was merely a by-product of the scheme rather that an object of it…”(Arrowtown, para 153). 

We take from this that if the shares either had realistic rights to dividends or capital on a winding up, which we take to be a question of degree, bearing in mind the context of the particular statute under scrutiny, or if the shares had been issued for a commercial purpose, they would have been respected for stamp duty purposes in Arrowtown, even if they had also been issued for the purpose of attracting relief from stamp duty.   

84.	Lord Millett expressly recognized that certain statutory terms may have a sufficiently precise meaning so as to be unaffected by any reference to the purpose of the parties to a particular transaction:  

“Nor can objection be taken to the idea that the words of a particular statute may be too closely articulated to admit of an application of the principle: Judge Learned Hand had said as much in Helvering v. Gregory. I am not at all sure that Lord Hoffmann [in Westmoreland] intended more than this” (Arrowtown, para 149).  

Thus Lord Millett does not find an inherent conflict between his approach in Arrowtown and the commercial/legal dichotomy in Westmoreland.   

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

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

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

86.	In this case, we are concerned with the terms of Schedule 13, paragraph 2 in circumstances in which the Inland Revenue accepts that the subscription price was entirely paid in respect of the acquisition of the Loan Notes and that there was a transfer by the Appellant to a connected person. Paragraph 2(3) is an entirely mechanistic provision which calculates the “loss” by deducting the subscription price “paid in respect of [the] acquisition of [the Loan Notes]”, within paragraph 2(2)(a), from the market value deemed by paragraph 8 to be obtained on the “transfer”, within paragraph 2(2)(b) and deducting any relevant costs.   

87.	Once an amount paid in respect of a relevant discounted security is ascertained and the amount received (or deemed to be received) on transfer or redemption is determined, there is a “loss” where the former exceeds the latter.  There is no room for the purpose of the holder of the relevant discounted security to inform the construction of the term “loss”.  In other words, once the terms “amount paid…in respect of [an] acquisition of [a relevant discounted security]” and “amount payable on…transfer or redemption [of the relevant discounted security]” have been construed in the context of paragraph 2(2), the “loss” is also automatically ascertained. This is confirmed by the terms of paragraph 2(3) which provides that “For the purposes of [Schedule 13] the loss shall be taken … to be equal to the amount of the excess increased by the amount of any relevant costs …”  Paragraph 2(3) confirms that the term “loss” is, to use the terminology of the Lord President at paragraph 43 in Scottish Provident a “construct which has a specific statutory meaning”, so that, like section 155 of the Finance Act 1994, in Scottish Provident, paragraph 2(2), of Schedule 13 is “an artificial framework…[which] does not indicate that a commercial meaning falls to be given to “loss”.  

88.	The artificial (“legal”) meaning of the term “loss” in Schedule 13, paragraph 2(1), 2(2) is further reinforced by the statutory mechanism which quantifies a “loss” for these purposes.  Firstly, the “loss” is increased by the “relevant costs” incurred by a taxpayer (being the costs incurred “in connection with the acquisition of the [relevant discounted security]” and costs incurred “in connection with [any] transfer or redemption of the [relevant discounted security]”: see Schedule 13, paragraph 1(4) and paragraph 2(3)(a).  Secondly, as we have already observed, the transferor of a relevant discounted security is deemed to receive an amount equal to its market value, when the transfer is to a connected person, even though he may receive no such sum.  These factors, while not at all conclusive in themselves, confirm that the term “loss”, in the context of paragraph 2(1) and 2(2), is far removed from any “commercial” sense of the term,
   
89.	Here, the amount paid by the Appellant in respect of the Loan Notes exceeded the amount which he was treated as obtaining on the transfer to his wife.  It follows that by the express words of paragraph 2(2) he sustained a loss for the purposes of Schedule 13.

90.	Put another way, paragraph 2 is a provision which is sufficiently “closely articulated” (on Lord Millett’s terminology in Arrowtown) or “legal” (using Lord Hoffmann’s terminology in Westmoreland) to be unaffected by the purpose of the Appellant in subscribing for the Loan Notes.

91.	We reject Mr Ewart’s submission, which he made by reference to Ramsay itself, that because the capital gains tax legislation definition of “loss” is detailed and technical, this shows that the construction of “sustains a loss” in paragraph 2 is affected by the purpose of those effecting particular transactions. The reason why no “loss” arose in Ramsay was because the series of pre-ordained self-cancelling transactions were ignored.  Ramsay was not decided upon a construction of the term “loss” or a construction of the detailed computational provisions which quantify a “loss” for capital gains tax purposes in circumstances in which that series of transactions were respected for capital gains tax purposes.  Here, as we have already observed, Mr Ewart accepts that there has been a subscription for the Loan Notes for the entire subscription price, and a transfer of those Loan Notes by the Appellant to a connected person, namely his wife.  It is no part of Mr Ewart’s case that the Loan Notes were issued directly to the Appellant’s wife, or that there was no transfer of the Loan Notes by the Appellant to his wife.  The analogy drawn by Mr Ewart of this case to Ramsay does not, therefore, hold good.  

92.	Even if the, contrary to our view, Appellant’s purpose in establishing the Company and subscribing for the Loan Notes was relevant, the appeal would still succeed.  Given our finding that the Appellant in addition to his tax purpose had a commercial purpose in making that subscription, namely to permit the Company to make the investments which the Appellant wished to acquire, the subscription for the Loan Notes by the Appellant cannot be said to have been solely for tax purposes in and the loss on the transfer under Schedule 13, paragraph 2 cannot therefore be ignored on the Ramsay principle as interpreted in Arrowtown.  The nature of the shares in Arrowtown were subjected to the Ramsay doctrine and ignored on the basis that they were issued solely for tax avoidance purposes.  That is not the case here.  

93.	We are, of course mindful of the distinction between a step or transaction which has a commercial, non fiscal, purpose and a step, or transaction, which is solely tax motivated, from which might emanate a mere commercial “by product”.  We repeat that we find, for the reasons we give above, that in addition to the tax purpose the Appellant had a commercial, non fiscal, purpose of making investments, so that the subscription for the Loan Notes also had that purpose.  The fact that the Company would not, we find, have been formed and the subscription for the Loan Notes would not have been made but for the potential tax relief under Schedule 13, paragraph 2, does not, on the facts we have found, displace that conclusion.  

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

In any event we find that, although the main purpose of the Appellant was to produce a tax loss, it was not the sole purpose.

95.	We allow the appeal.  If requested we consider this an appropriate case for a Court of Appeal certificate under section 56A(2) of the Taxes Management Act 1970.

THEODORE WALLACE

JULIAN GHOSH
SPECIAL COMMISSIONERS

SC 3060/03