Spc00718

CAPITAL GAINS TAX – tax avoidance scheme – whether subscription for shares followed by the return of the subscription money by way of dividend (by an unlimited company), followed by disposal of the shares for a nominal amount five months after the subscription was a self-cancelling composite transaction – yes – whether HMRC can tax the settlor on  the trustees’ gain under  s 77 TCGA 1992 when the did not open an enquiry into the trustees’ return which claimed an offsetting loss – yes – whether (assuming that the dividend had not been ignored as part of the composite transaction) the settlor was taxable on the dividend under s 660A Taxes Act 1988 – no – or whether the trustees were taxable on it under s 686 – no   

THE SPECIAL COMMISSIONERS

(1) THE TRUSTEES OF THE EYRETEL UNAPPROVED PENSION SCHEME
	(2) MR R L KEENAN 
	(3) MRS J KEENAN	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 24 and 25 October 2008

Kevin Prosser QC and James Rivett, counsel, for the Appellant

David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	These are appeals by Mr and Mrs Keenan as settlors of the Eyretel Unapproved Pension Scheme (“the Eyretel Pension Scheme”) against assessments for 2000-01 and 2001-02 (1) to capital gains tax in respect of chargeable gains accruing to the trustees of the Eyretel Pension Scheme, (2) in respect of dividend income of the Eyretel Pension Scheme, and (3) (alternatively to (2)) on the trustees of the Eyretel Pension Scheme in respect of dividend income of the Scheme.  The Appellants were represented by Mr Kevin Prosser QC and Mr James Rivett, and the Respondents (“the Revenue”) by Mr David Ewart QC.
2.	The issue relating to assessment (1) above concerns an extremely elegant and simple tax avoidance scheme for creating a capital loss.  This consists of trustees of an unapproved pension scheme borrowing money, subscribing for shares at a premium in a company, receiving a similar sum back as a dividend (the company then being an unlimited company that can pay a dividend out of share premium account), repaying the borrowing, and selling the shares for a small sum representing the assets left in the company less a turn for the purchaser (together “the Transactions,” which is not intended to imply that they are necessarily a single composite transaction).  Since the dividend is received as income, although the tax credit covers the tax, it is claimed that the dividend is ignored in computing the capital loss on the shares of the difference between the subscription price and the sale price.  The issue also concerns a procedural question of whether since the Revenue did not make an enquiry into the trustees’ return they can disallow the loss shown in that return in taxing the settlors.  The assessments at (2) and (3) above relate to the taxation of the dividend either under s 660A of the Taxes Act 1988 as income of the settlors, or alternatively under s 686 on the trustees to the trust rate of tax.
Issue (1): the capital loss
Facts
3.	There was an agreed statement of facts as follows:
(1)	By a deed dated 23rd November 1994, the directors of Eyretel Limited established a retirement benefit scheme for the benefit of Eyretel’s employees, which was called the Eyretel Pension Scheme.  The trustees of the Eyretel Pension Scheme, Anthony Davies and Cormac Murnion, owned some 31,602,000 shares in Eyretel Limited.  
(2)	On 14th April 2000, the Trustees of the Eyretel Pension Scheme disposed of 6,320,000 of their shares in Eyretel.  The net proceeds after disposal costs were £9,006,570.
(3)	On 16th June 2000 Anthony Davis retired as a trustee of the Eyretel Pension Scheme.  He was replaced by Dr. Simon Emblin.  
(4)	On 26th September 2000 the Children’s Fund was created by a deed of amendment to the Eyretel Pension Scheme trust deed, whereby the Children’s Fund was to be administered as a separate sub-fund of the Eyretel Pension Scheme.  By the same deed, the Trustees of the Eyretel Pension Scheme transferred £350,000 to the Children’s Fund.  
(5)	On the 2nd October 2000 the Trustees of the Eyretel Pension Scheme instructed UBS to transfer £350,000 from the Eyretel Pension Scheme bank account to a new account held by the trustees of the Children’s Fund at Kleinwort Benson.  
(6)	GW 652 Limited was incorporated on 4th July 2000, with GW Incorporations Limited as director and GW Secretaries Limited as company secretary.  Its registered office was Windsor House, 3 Temple Row, Birmingham, B2 5JR.  The first board meeting of GW 652 Limited took place on 22nd September 2000.  Various matters of business were undertaken.  Notice was given of the intention to call an Extraordinary General Meeting, one subscriber share was transferred by GW Incorporations Limited to Glyn Jones, and thereafter one ordinary share was transferred for value to the Trustees of the Eyretel Pension Scheme, and Cormac Murnion and Dr. Simon Emblin were appointed as directors, and the existing director (GW Incorporations Limited) resigned from office.  Thereafter, the Extraordinary Meeting was held, in the course of which (1) the authorised share capital of GW 652 was increased from £100 to £1000 by the creation of 900 new ordinary shares of £1 each (2) the name of the company was changed from GW 652 to JMNI Limited and (3) new articles of association of JMNI Limited (previously GW 652) were adopted.  The issued share capital remained at £2.    
(7)	On 6th October 2000 an Extraordinary General Meeting of JMNI Limited was held, in the course of which the authorised share capital of the company was reorganised into 1 “A ordinary share” of £1 (the share belonging to Glyn Jones), and 999 “B ordinary shares” of £1 (which included the share belonging to the trustees of the Eyretel Pension Scheme, and the 998 authorised but unissued ordinary shares in the capital of the company).  The rights attaching to the different share classes were to be subject to new Articles of Association, which were adopted in the course of that meeting.  The new Articles of Association included the following provisions in relation to the rights attaching to the company’s share capital: 
(a)	The share capital of the Company is £1000 divided into 1 A ordinary share of £1 each (“the A share”) and 999 B ordinary shares of £1 each (“the B shares”).  
(b)	The respective rights and privileges attached to the shares in the capital of the Company are as follows: - 
(a) As regards income: - 
(i) The provisions hereof shall apply to distributions of any kind whether consisting of cash (in whole or in part) or not. 
(ii) If the Company achieves in respect of its investment business for the period commencing on 6 October 2000 and ending on 5 January 2001 (“the Relevant Period”) a gross rate of return (including income, capital gains and capital losses, whether realised or unrealised, and if unrealised then calculated by reference to market value) before any commissions, costs, charges and expenses on an annualised basis of at least 6.136 per cent (“the Investment Return”) the Company shall pay a cash dividend (“the B Dividend” of £8,809 per share to the holders of the B shares on the register as at the close of business on the said 31 December 2000, and shall pay the same as soon as possible after the said 31 December 2000 and no later than 31 January 2001.  In the event of any doubt or dispute regarding the amount of the Investment Return, the determination of the auditors of the Company shall be final and conclusive.  
(iii) If the Company fails to achieve the Investment Return, the Company shall pay a cash dividend (“the A Dividend”) of £5000 to the holder of the A share on the register as at the close of business on the said 31 December 2000, and shall pay the same as soon as possible after the said 31 December 2000 and no later than 31 January 2001.  
(iv) Subject to payment of the A Dividend or the B Dividend (as the case may be), the profits which the Company may determine to distribute in respect of any financial year shall be applied in paying a dividend to the holders of the Ordinary Shares in proportion to the number of shares held by them respectively. 
(v) Unless the Company has insufficient profits available for distribution and the Company is thereby prohibited from paying dividends by law the A Dividend or the B Dividend (as the case may be) shall, notwithstanding any of the provisions of Table A or of these Articles, and notwithstanding in particular that there has not been a recommendation of the Directors or a resolution of the Company in general meeting, be paid as provided above and if not so paid shall be a debt due by the Company and be payable in priority to any other dividend
(vi) The Company and the Directors shall take all necessary lawful steps (including but without generality to the foregoing drawing and approving interim or other accounts, causing the Company to become an unlimited company, reducing the share capital or share premium amount and crediting reserves) to ensure that the Company is not prohibited by law from paying the A Dividend or the B Dividend (as the case may be).”
(8)	A meeting of the trustees of the Children’s Fund was also held on 6th October 2000.  In the course of that meeting the trustees signed a letter from Kleinwort Benson granting the trustees of the Children’s Fund a loan facility of £8.78 million, with which the trustees applied to the directors of JMNI Limited to subscribe for 998 B ordinary shares in JMNI Limited for £8.78 million, which application was duly approved.   
(9)	Thereafter, the trustees of the Children’s Fund executed a deed of charge in favour of Kleinwort Benson over their shares in JMNI Limited and authorised Kleinwort Benson to transfer £8.78 million from the Children’s Fund account to JMNI Limited.  
(10)	Later on the same day, the directors of JMNI Limited instructed Kleinwort Benson to place £7.78m into a fixed-interest deposit account, and to place £1m into a foreign exchange rate trade.    
(11)	On 5th January 2001 a management account profit and loss account and a balance sheet in respect of JMNI Limited as at 5th January 2001 was produced, which included a calculation showing that the gross rate of return for JMNI Limited in the period to 5th January 2001 was 6.1398%.  The accuracy of these management accounts was subsequently confirmed by JMNI’s auditors in a letter dated 16th January 2001.  
(12)	On 8 January 2001 a meeting of the directors of JMNI Limited was held, in which the Directors recommended to the members of JMNI Limited that (1) JMNI Limited become an unlimited company; (2) the Articles of Association of JMNI Limited be amended and (3) that JMNI Limited change its name to JMNI.  An Extraordinary General Meeting of JMNI was held later that day, at which members assents were obtained and the directors’ recommendations were adopted.  The company’s Articles of Association were amended to include the following provision: - 
 “3.6	The Company may by special resolution: - 
(a)	increase the share capital by such sum to be divided into shares of such amount as the resolution may prescribe;
(b)	consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares; 
(c)	subdivide its shares, or any of them, into shares of a small amount than its existing shares; 
(d)	cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person; and 
(e) reduce its share capital and any share premium account in any way.”
The application to re-register JMNI Limited as an unlimited company was lodged with Companies House and took effect on 11th January 2001.  
(13)	A further meeting of the directors of JMNI was held on 12 January 2001.  In the course of that meeting the directors approved payment of an aggregate dividend of £8,850,000, to be comprised of £8,800,191 in respect of a “B dividend” (as defined in the Articles of Association) to holders of B Ordinary Shares, and £49,809 to all shareholders of Ordinary Shares in proportion to the number of shares held by them.  So far as is relevant, the minutes of that meeting recorded as follows: 
 “2.	IT WAS NOTED that as the Company is unlimited, it is able to reduce its share capital in any way pursuant to Article 3.6(e) of the Company’s Articles of Association (“the Articles”).  
3.	In accordance with the Articles IT WAS RESOLVED that an aggregate dividend of £8,850,000 be paid, comprising £8,800,191 in respect of the B Dividend (as defined in the Articles) payable to the holder of the B Ordinary Shares registered at close of business on 31 December 2000 and £49,809.00 distributable reserves payable to the holders of the Ordinary Shares in proportion to the number of shares held by them respectively.”
Pursuant to the resolution of the board of directors, JMNI paid an aggregate dividend of £8,850,000 (including the B Dividend of £8,800,191) to the trustees of the Children’s Fund on the same date.  
(14)	On 1st March 2001 a meeting of the directors of JMNI was held in connection with the acquisition of the whole of the issued share capital of JMNI by Exitpress Limited.  In the course of that meeting, the directors of JMNI agreed to approve the appointment of Paul Brouwer as director of JMNI, and Mark Reid as its secretary and the resignation of Simon Emblin and Cormac Murnion as directors of JMNI.  The directors then approved the transfer of the 999 ‘B’ Ordinary Shares owned by the Trustees of the Eyretel Pension Scheme to Exitpress Limited for £19,980, and the transfer of the 1 ‘A’ Ordinary Share owned by Forty-two consulting limited to Paul Brouwer.  The sale proceeds of £19,980 were deposited with Kleinwort Benson on 8th March 2001.  
(15)	The tax return submitted by the Trustees of the Eyretel Pension Scheme for the year ended 5th April 2001 recorded the following information in the ‘Additional Information’ section: 
 “The dividend of £8,850,000 was paid on 12 January 2001.  As to £8,800,191 this was the B Dividend payable pursuant to Article 3.2(a) of JMNI Limited’s Articles of Association.  This provided that if the company achieved a rate of return of at least 6.136 per cent (annualised) in respect of its investment business for the period 6/10/00 to 5/1/01, the company would have to pay a cash dividend of £8,809 per share (“the B Dividend”) to the holders of the B shares on the register as at the close of business on 31/12/00 as soon as possible after 31/12/00 and no later than 31/1/01.  The B dividend was payable notwithstanding any of the provisions of the Articles and notwithstanding in particular that there had not been a recommendation of the Directors or a resolution of the company in general meeting.  It was further provided that the company and the directors should take all necessary lawful steps (including drawing and approving interim or other accounts, causing the company to become an unlimited company, reducing the share capital or share premium account and crediting reserves) to ensure that the company was not prohibited by law from paying the B dividend.  
The stated return was duly achieved and the trustees, being the holders of the 999 B shares on the register on 31/12/00, were therefore entitled to the B dividend of £8,809 per share that is £8,800,191.  Accordingly, on 8/1/01 by special resolution the company resolved to re-register as an unlimited company with amended Articles of Association including (by new Article 3.6) a provision to the effect that the company may be special resolution reduce its share capital and any share premium account in any way.  The application to re-register was duly lodged and took effect on 11/01/01.  On 12/01/01 the board of directors the company (consisting of the same individuals as the trustees who were the holders of the 999 B shares which were the only voting shares) expressly referred to the ability to reduce the share premium account and then resolved to pay an aggregate dividend of £8,850,000 including the B Dividend of £8,800,191, and the company paid the £8,850,000 to the trustees on 12 January 2001.
There was no formal special resolution to reduce the share premium account, but the trustees have been advised that this was unnecessary having regard to the obligation in Article 3.2(a) to take all necessary lawful steps and to the express reference (see above) to the ability to reduce the share premium account.  
The trustees have also been advised that the management accounts of the company as at 5 January 2001 sufficed to enable the B Dividend to be paid, notwithstanding that they had not been restated to show the accounting entry transferring share premium account to distributable reserves.  
Nevertheless for the avoidance of any doubt, the company, the trustees and the current shareholders are presently in the process of completing all the formalities so that if (contrary to the advice received by the trustees) the B Dividend has not hitherto been validly paid, the same will be paid to the trustees in accordance with Article 3.2(a) (payment will be made by set off against the equivalent sum which, on this basis, would be repayable to the company).”
(16)	During November 2001 a stock market placing of Eyretel Plc shares occurred and as part of this the Trustees of the Eyretel Pension Scheme disposed of 4,500,000 shares at 90 pence each. After dealing costs and indexation relief there was a net capital gain arising to the Trustees of £3,856,173 in respect of this disposal 
(17)	Meaujo (571) Limited was incorporated on 2 November 2001, with Meaujo Incorporations Limited as Director and Philsec Limited as Company Secretary. Its registered office was St. Phillips House, St. Phillips Place, Birmingham, B3 2PB. 
(18)	At a meeting on 6th December 2001 Simon Emblin and Cormac Murnion consented in writing to become Directors of Meaujo (571) Limited. At the same meeting Meaujo Incorporations Limited resigned as the Director of the company and Philsec Limited resigned as Company Secretary. Dr. Simon Emblin became the new Company Secretary. Also at the same meeting there was a transfer of one ordinary share from Philsec Limited to Dr. Simon Emblin as trustee of the Eyretel Pension Scheme for £1.  
(19)	On 17th December 2001 Companies House issued a Certificate of Incorporation on the change of name whereby Meaujo (571) Limited changed its name by special resolution to Glenloughlin Limited. 
(20)	On 17th December 2001 an extraordinary general meeting of Glenloughlin Limited was held, in the course of which one ordinary share in Glenloughlin Limited was allotted to Mr John Feron and 9,000 ordinary shares of £1.00 each of the company were cancelled leaving the company with 1,000 ordinary £1.00 shares.  The one ordinary share issued to Mr John Feron was then redesignated as an A ordinary share having the rights and restrictions as set out in a new Articles of Association that were also adopted at the same meeting.  The one ordinary share issued to Dr. Simon Emblin as Trustee was re designated as a B ordinary share, again having the rights set out in the new Articles of Association.  The remaining 998 ordinary shares that had been authorised but unissued were redesignated as B ordinary shares.  It was also resolved that the new Articles of Association were to be adopted. 
(21)	The new Articles of Association included the following provisions in relation to the rights attaching to the company’s share capital: 
3.1	At the date of adoption of these articles the share capital of the company is £1,000 divided into one A ordinary share of £1 (“ the A share”) and 999 B Ordinary shares of £1 each (“ the B shares”).
3.2	The respective rights and privileges attached to the shares in the capital of the company are as follows:
3.2.1	As regards income:
3.2.1.1	The provisions hereof shall apply to distributions of any kind whether consisting of cash ( in whole or in part) or not.
3.2.1.2	If the company achieves in respect of its investment business for the period commencing on 21 December 2001 and ending on 31 January 2002 (“ The relevant period”) a rate of return (including income, capital gains and capital loses, whether realised or unrealised, and if unrealised then calculated by reference to market value) on an annualised basis of at least 3.5% (“ The Investment Return”) the company shall pay a cash dividend (“ the B Dividend”) of £3,913 per B share to the holders of the B shares on the register as at the close of business on the said 31 January 2002, such dividend to be paid as soon as possible after 31 January 2002 and not later than 28 February 2002. In the event of any doubt or dispute regarding the amount of the Investment Return, the determination of the auditors of the company shall be final and conclusive.
3.2.1.3	If the company fails to achieve the Investment Return in respect of the Relevant Period, the Company shall pay a cash dividend (“the A Dividend”) of £2,000 to the holder of the A share on the register as at the close of business on the said 31 January 2002, such dividend to be paid as soon as possible after 31 January 2002 and no later then 28 February 2002.
3.2.1.4	Subject to payment of the A Dividend or the B Dividend (as the case may be), the profits which the Company may determine to distribute in respect of any financial year shall be applied in paying a dividend to the holders of the A share and the B shares ( pari passu as if the same constituted one class of shares) and in proportion to the number of A shares and B shares held by them respectively.
3.2.1.5	Unless the Company has insufficient profits available for distribution and the Company is thereby prohibited from paying dividends by law the A Dividend or the B Dividend (as the case may be) shall, not withstanding any of the provisions of Table A or of these articles, and not withstanding in particular that there has not been a recommendation of the directors or a resolution of the Company in general meeting, be paid as provided above and if not so paid shall be a debt due by the Company and be payable in priority to any other dividend.
3.2.1.6	The Company and the directors shall take all necessary lawful steps (including but without generality to the foregoing drawing and the approving interim or other accounts, causing the Company to become an unlimited company, reducing the share capital or share premium account and crediting reserves) to ensure that the Company is not prohibited by law from paying the A Dividend or the B Dividend (as the case may be).
(22)	A meeting of the Trustees of the Children’s Fund was held on 21st December 2001.  In the course of that meeting the Trustees signed a letter from Kleinwort Benson granting the Trustees of the Children’s Fund a loan facility of £3,900,000, with which the Trustees applied to the Directors of Glenloughlin Limited to subscribe for 998 B ordinary shares in Glenloughlin Limited for £3,900,000 which application was duly approved. 
(23)	Also at the Trustees’ meeting of 21st December 2001 the one B ordinary share that had originally been allotted to Dr. Simon Emblin as Trustee of the Eyretel Pension Scheme was transferred to the Trustees of the Children’s Fund. 
(24)	Thereafter, the Trustees of the Children’s Fund executed a deed of charge in favour of Kleinwort Benson over the shares in Glenloughlin Limited and authorised Kleinwort Benson to transfer £3,900,000 from the Children’s Fund account to Glenloughlin Limited. 
(25)	Later on the same day, the Directors of Glenloughlin Limited instructed Kleinwort Benson to place £2,900,000 into a fixed interest deposit account, and to place £1,000,000 into a foreign exchange rate trade. 
(26)	On 12th February 2002 there was a board meeting at Glenloughlin Limited at which the Company approved the transfer of the one A ordinary share held by Mr John Feron to Meaujo (575) Limited. 
(27)	On 13th February 2002 a meeting of the Directors of Glenloughlin Limited was held at which it was decided to recommend to the members of Glenloughlin Limited that (1) Glenloughlin Limited become an unlimited company, (2) the Articles of Association of Glenloughlin Limited be amended and (3) Glenloughlin Limited changes its name to Glenloughlin. The companies Articles of Association were amended to include the following provision: 
3.5 	The company may by special resolution:
3.5.1 	increase the share capital by such sum to be divided into shares of such amount as the resolution may prescribe; 
3.5.2	consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
3.5.3	subdivide its shares, or any of them, into shares of a smaller amount then its existing shares ;
3.5.4	cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person;
3.5.5	reduce its share capital and any share premium account in any way.
The application to re-register Glenloughlin Limited as an unlimited company was lodged with Companies House and took effect on 15th February 2002. 
(28)	A further meeting of the Directors of Glenloughlin was held on 18th February 2002.  At that meeting and the extraordinary general meeting that occurred on the same day the company reduced its share premium account from £3,899,002 to nil and that amount by which the share premium account was reduced was transferred to the profit and loss account. Management accounts of Glenloughlin were written up as at 18th February 2002 to reflect the transfer of share premium account to profit and loss account.  Following the production of accounts the Directors of Glenloughlin resolved that a B Dividend of £3,913 per share be paid to the holders of the B shares on the register as at close of business on 31st January 2002. The total B dividend paid was £3,909,087 and this was paid to the Trustees of the Children’s Fund on 18th February 2002. 
(29)	On 2nd April 2002 a meeting of the Directors of Glenloughlin was held in connection with the acquisition of the whole of the issued share capital of Glenloughlin by Warren Products Limited. In the course of that meeting, the Glenloughlin Directors agreed to approve the appointment of Dr Jeremy Walker as both Director and Company Secretary of Glenloughlin, and Mark Reid’s resignation as Company Secretary. It was also resolved that Mrs Dora Warren, the other Director of Warren Products Limited, be appointed as Director of Glenloughlin. The Directors then approved the transfer of the 999 B ordinary shares owned by the Trustees of the Eyretel Pension Scheme to Warren Products Limited for £1, and the transfer of the one A ordinary share owned by Meaujo (575) Limited. 
(30)	In January 2003 the trustees of the Eyretel Pension Scheme submitted their tax return for the year ending 5th April 2002 to the Inland Revenue. 
(31)	On 25th January 2007 HM Revenue & Customs issued (under s. 29 of TMA 1970) the assessments against Mr. Keenan, Mrs. Keenan and the trustees of the Eyretel Pension Scheme for the year ended 5th April 2001, which assessments form part of the subject of these appeals.  
(32)	By notices dated 5th February 2007, Mr. and Mrs. Keenan appealed against the assessments raised against them, and by a notice dated 9th February 2007 the Trustees of the Eyretel Pension Scheme appealed against the assessment issued against them.  
(33)	On 4th January 2008 HM Revenue & Customs issued (under section 28A (1) (2) Taxes Management Act 1970) notices against Mr Keenan, Mrs Keenan and the Trustees of the Eyretel Pension Scheme for the year ended 5th April 2002, which notices form part of the subject of these appeals. 
(34)	By notices dated 14th January 2008 Mr and Mrs Keenan and the Trustees of the Eyretel Pension Scheme appealed against the notices raised against them. 
4.	During the course of the hearing the following facts were also agreed:
(1)	The Transactions are a tax avoidance scheme consisting of a number of pre-planned steps.
(2)	The lending bank kept control of the money at all times.  The £8.78m deposited at interest with Kleinwort Benson could not be withdrawn.
(3)	The insertion of the investment return condition (see paragraphs 3(7) and 3(21) above) was an anti-Ramsay device.
(4)	Delaying taking any steps to find a purchaser for the shares until after payment of the dividend was also an anti-Ramsay device.
(5)	The sole purpose of creating the Children’s Fund within the Eyretel Pension Scheme was to use it in the Transactions.
(6)	Of the £350,000 put into the Children’s Fund, £200,000 was used to pay financing costs.
5.	I heard evidence from Dr Simon Emblin and find the following additional facts:
(1)	The Transactions had the sole purpose of creating a capital loss.  They had no commercial purpose.  If successful they had the effect of preserving the trustees of the Eyretel Pension Scheme from a claim by the settlors of the tax on the gain under s 78 TCGA 1992.  But that was the effect not the purpose of the Transactions.
(2)	Apart from preserving the Eyretel Pension Scheme from such a claim by the settlors the Transactions were designed to leave the trustees in the position in which they started (apart from payment of costs and fees).
(3)	There was a 90 per cent chance of the investment return condition (see paragraphs 3(7) and 3(21) above) being satisfied, which, as stated above, was agreed to be an anti-Ramsay device.  If one ignores this chance, there was a practical certainty that all the Transactions would proceed to their completion.  However, while the sale of the shares was within that practical certainty, the identity of the purchaser and the terms on which they were sold were not fixed in advance save that it was likely that the sale price would be the amount left in the company less a turn for the purchaser.
6.	I summarise the time scale of the Transactions as follows:
	2000-01	2001-02	
Creation of Children’s Fund	26 September 2000	NA	
Payment to Children’s Fund	£350,000 on 2 October 2000	NA	
Loan, subscription for B shares and new articles	£8.78m on 6 October 2000	£3.9m on 21 December 2001	
Dividend 	£8.85m on 12 January 2001	£3,909,087 on 13 February 2002	
Sale of B shares	1 March 2001 for £19,980 the company having cash assets of £32,705	2 April 2002 for £1 the company having cash assets of about £6,500	
Guidance from the authorities
7.	The following guidance to the approach to be taken to transactions such as these is relevant:
(1)	Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC:
“[29] The Ramsay case ([1981] STC 174, [1982] AC 300) liberated the construction of revenue statutes from being both literal and blinkered. It is worth quoting two passages from the influential speech of Lord Wilberforce. First ([1981] STC 174 at 179, [1982] AC 300 at 323), on the general approach to construction:
‘What are ‘clear words’ is to be ascertained on normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: …’
[30] Secondly ([1981] STC 174 at 180, [1982] AC 300 at 323–324), on the application of a statutory provision so construed to a composite transaction:
‘It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded.’
[31] The application of these two principles led to the conclusion, as a matter of construction, that the statutory provision with which the court was concerned, namely that imposing capital gains tax on chargeable gains less allowable losses was referring to gains and losses having a commercial reality (‘The capital gains tax was created to operate in the real world, not that of make-belief’) and that therefore ([1981] STC 174 at 182, [1982] AC 300 at 326):
‘To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, is not such a loss (or gain) as the legislation is dealing with, is in my opinion well, and indeed essentially, within the judicial function.’”
(2)	Carreras Group Ltd v Stamp Commissioner [2004] STC 1377
“[8] Whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context. Sometimes the conclusion that the statute is concerned with the character of a particular act is inescapable: see MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2001] STC 237, [2003] 1 AC 311. But ever since W T Ramsay Ltd v IRC [1981] STC 174, [1982] AC 300 the courts have tended to assume that revenue statutes in particular are concerned with the characterisation of the entirety of transactions which have a commercial unity rather than the individual steps into which such transactions may be divided. This approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute. This has been said so often that citation of authority since Ramsay’s case is unnecessary.”
(3)	MacNiven v Westmoreland Investments Ltd [2003] 1AC 311:
“[2] The Ramsay case brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties’ intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.
…
[5] Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision? Thus, in Ramsay the taxpayer company sought to create an allowable loss to offset against a chargeable gain it had made on a sale-leaseback transaction. It sought to do so without suffering any financial detriment, by embarking on and carrying through a scheme which created both a loss which was allowable for tax purposes and a matching gain which was not chargeable. In rejecting the efficacy of this contrived ‘loss-creating’ scheme, Lord Wilberforce [1982] AC 300, 326, observed that a loss which comes and goes as part of a pre-planned, single continuous operation ‘is not such a loss (or gain) as the legislation is dealing with’. In Inland Revenue Comrs v Burmah Oil Co Ltd [1982] STC 30, 37 Lord Fraser of Tullybelton described this passage as the ratio of the decision in the Ramsay case. [Lord Nicholls]
…
31 It was not disputed that the transaction [in Ramsay] included a genuine purchase of the shares for £185,034 and a genuine sale of the same shares for £9,387. The taxpayer said that that was the end of the matter. To look at the transaction as a whole would be to commit the heresy condemned by Lord Tomlin in Inland Revenue Comrs v Duke of Westminster [1936] AC 1, 19 as the ‘doctrine that the court may ignore the legal position and regard what is called ‘the substance of the matter’.’ At first, the revenue agreed. Its attack on the scheme concentrated on whether the counterbalancing gain really was outside the charge to tax. In the House of Lords, however, Mr Millett QC argued that no loss within the meaning of the Act had accrued at all. The House accepted the argument. Lord Wilberforce said, at p 323, that while Lord Tomlin's statement was a ‘cardinal principle’, it did not require a court to ‘ook at a document or a transaction in blinkers’. The capital gains tax was, see p 326:
‘a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function." (My emphasis.)
32 My Lords, it is worth pausing at this point to examine the characteristically compressed reasoning in a little more detail. A loss which arises at one stage of an indivisible process and cancelled out at a later stage of the same process is ‘not such a loss as the legislation is dealing with’. The tax was not imposed "on arithmetical differences". In that case, what kind of loss was the legislation dealing with? The contrast being made throughout Lord Wilberforce’s speech is between juristic or arithmetical realities on the one hand and commercial realities on the other. He is construing the words ‘disposal’ and ‘loss’ to refer to commercial concepts which are not necessarily confined by the categories of juristic analysis. In the Ramsay case [1982] AC 300, a director, or an accountant concerned to present a true and fair view of the taxpayer's dealings, would not have said that the company had entered into a transaction giving rise to a loss which happened to have been offset by a corresponding gain. There had never been any commercial possibility that the transactions would not have cancelled each other out. Therefore, notwithstanding the juristic independence of each of the stages of the circular transaction, the commercial view would have been to lump them all together, as the parties themselves intended, and describe them as a composite transaction which had no financial consequences. The innovation in the Ramsay case was to give the statutory concepts of ‘disposal’ and ‘loss’ a commercial meaning. The new principle of construction was a recognition that the statutory language was intended to refer to commercial concepts, so that in the case of a concept such as a ‘disposal’, the court was required to take a view of the facts which transcended the juristic individuality of the various parts of a preplanned series of transactions.
…
35 My Lords, it seems to me that what Lord Wilberforce was doing in the Ramsay case [1982] AC 300 was no more (but certainly no less) than to treat the statutory words ‘loss’ and ‘disposal’ as referring to commercial concepts to which a juristic analysis of the transaction, treating each step as autonomous and independent, might not be determinative. What was fresh and new about Ramsay was the realisation that such an approach need not be confined to well recognised accounting concepts such as profit and loss but could be the appropriate construction of other taxation concepts as well.
…
40 The speeches in the Ramsay case [1982] AC 300 and subsequent cases contain numerous references to the ‘real’ nature of the transaction and to what happens in ‘the real world’. These expressions are illuminating in their context, but you have to be careful about the sense in which they are being used. Otherwise you land in all kinds of unnecessary philosophical difficulties about the nature of reality and, in particular, about how a transaction can be said not to be a ‘sham’ and yet be ‘disregarded’ for the purpose of deciding what happened in "the real world". The point to hold on to is that something may be real for one purpose but not for another. When people speak of something being a ‘real’ something, they mean that it falls within some concept which they have in mind, by contrast with something else which might have been thought to do so, but does not. When an economist says that real incomes have fallen, he is not intending to contrast real incomes with imaginary incomes. The contrast is specifically between incomes which have been adjusted for inflation and those which have not. In order to know what he means by ‘real’, one must first identify the concept (inflation adjustment) by reference to which he is using the word.
41 Thus in saying that the transactions in the Ramsay case were not sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence. They were intended to do precisely what they purported to do. They had a legal reality. But in saying that they did not constitute a ‘real’ disposal giving rise to a ‘real’ loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of ‘disposal’ and ‘loss’ as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income tax legislation was intended to operate "in the real world", one is again referring to the commercial context which should influence the construction of the concepts used by Parliament. [Lord Hoffmann]
…
[78] …There is no question in this case of the taxpayer having to demonstrate that it has sustained a ‘loss’ or achieved a ‘gain’ in circumstances where the result of the transaction was to leave it in no different position from that which it was in before. Had that been the question, the issue, as in W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300, would have been whether at the end of the day there was a real loss or a real gain. [Lord Hope]
…
93 I consider that an essential element of a transaction to which the Ramsay principle is applicable is that it should be artificial. The requirement that there must be artificiality, and the importance of distinguishing between the real world and the world of make-belief, between a real gain (or loss) and a contrived and unrealistic gain (or loss) have been stressed in a number of judgments of the House where the application of the Ramsay principle has been considered. In his judgment in the Ramsay case itself [1982] AC 300, 326 Lord Wilberforce said:
‘The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] AC 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences.’”
[Lord Hutton]
(4)	Ramsay 54 TC 101
“For the commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not ‘shams,’ from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction, or a number of independent transactions. [Lord Wilberforce at 185]
…
The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function. [Lord Wilberforce at 187]
…
On these facts it would be quite wrong, and a faulty analysis, to pick out, and stop at, the one step in the combination which produced the loss, that being entirely dependent upon, and merely, a reflection of the gain. The true view, regarding the scheme as a whole, is to find that there was neither gain nor loss, and I so conclude.” [Lord Wilberforce at 192]
8.	In summary, the factors I have to consider are: that a series or combination of transactions, intended to operate as such, may be regarded as a composite transaction; even though the separate transactions have a legal reality one can treat them as a composite transaction thus ignoring the separate steps; capital gains tax was created to operate in the real world, not that of make-belief; having found the facts, these are then applied to the statutory provision in issue.  While in Ramsay the gain and loss were created as part of the composite transaction, there is no need for this to be the case and there is nothing to prevent the transaction creating the loss being treated as a composite transaction.
Contentions of the parties
9.	Mr Prosser contends:
(1)	There is no requirement that for a gain to be taxed the taxpayer has to be better off.  If the taxpayer makes a capital contribution to a company, that cannot be deducted in computing a gain the may not be better off but he is still taxed.
(2)	The dividend is liable to income tax and this cannot be ignored in excluding it from a capital gains tax computation.  The capital gains tax legislation gives effect to the income tax legislation in for example s 30 TCGA by taking into account a tax-free benefit defined to include income tax.  Ramsay concerned only one tax, and was different factually and in principle.
(3)	The significant time intervals between the acquisition of shares, dividend and disposal of shares prevents its being a composite transaction.  There was real ownership of the shares during this period.  If one ignored all of the Transactions how did the purchaser acquire the shares?
10.	Mr Ewart contends
(1)	Ramsay depends on the transactions not being real transactions.  This case is a straightforward application of the Ramsay principle.  The facts are similar to Lord Wilberforce’s summary of the facts of Ramsay at 192 as follows:
“Of this scheme, relevantly to the preceding discussion, the following can be said: (1) As the tax consultants’ letter explicitly states ‘the scheme is a pure tax avoidance scheme and has no commercial justification in so far as there is no prospect of T [the prospective taxpayer] making a profit; indeed he is certain to make a loss representing the cost of undertaking the scheme.’ (2)  As stated by the tax consultants' letter, and accepted by the special commissioners, every transaction would be genuinely carried through and in fact be exactly what it purported to be. (3) It was reasonable to assume that all steps would, in practice, be carried out, but there was no binding arrangement that they should. The nature of the scheme was such that once set in motion it would proceed through all its stages to completion. (4) The transactions regarded together, and as intended, were from the outset designed to produce neither gain nor loss: in a phrase which has become current, they were self cancelling. The ‘loss’ sustained by the appellant, through the reduction in value of its shares in Caithmead, was dependent upon the ‘gain’ it had procured by selling L2. The one could not occur without the other. To borrow from Rubin v. United States of America (1962) 304 F. 2d. 766 approving the Tax Court in MacRae v. Commissioner of Internal Revenue (1961) 34 T.C. 20, 26, this loss was the mirror image of the gain. The appellant would not have entered upon the scheme if this had not been so. (5) The scheme was not designed, as a whole, to produce any result for the appellant or anyone else, except the payment of certain fees for the scheme. Within a period of a few days, it was designed to and did return the appellant except as above to the position from which it started. (6) The money needed for the various transactions was advanced by a finance house on terms which ensured that it was used for the purposes of the scheme and would be returned on completion, having moved in a circle.”
(2)	 The taxpayer need not be better off to be taxed on a gain as in Mr Prosser’s example, but we are dealing here with a composite transaction.
(3)	The question whether the dividend is taxable as income is a separate question to whether the facts should be analysed as a composite transaction in which the dividend is to be ignored, and therefore its potential liability to income tax has no relevance to capital gains tax.
(4)	Even if ignored for capital gains tax the dividend still exists for income tax and so s 660 or 686 can still apply to it. Each statutory provision should be looked at separately. Alternatively, if it is not ignored for capital gains tax it is still income.
(5)	The time interval is relevant to the factual question.  Here it was a practical certainty that the Transactions would take place.
(6)	In Ramsay it was not denied that the steps were real, see MacNiven at [41] above.
(7)	The investment return condition and not seeking a purchaser until after the dividend were commercially irrelevant contingencies that should be ignored as in Scottish Provident Institution.
Reasons for the decision
11.	I start with the application of the approach to the facts adopted in Scottish Provident Institution.  At [21] Lord Nicholls makes a distinction between, on the one hand, the facts of Craven v White in which the transactions were not composite “in the sense that it could be predicted with any certainty at the date of the intermediate transfer what the ultimate destination of the property would be, what would be the terms of any ultimate transfer or even whether an ultimate transfer would take place at all.”  And on the other hand, the facts in Scottish Provident Institution where the parties had deliberately included as part of the transactions a commercially irrelevant contingency, in which case “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.”  
12.	The investment return condition is clearly in the latter category and this is a case where it should be ignored.  The identity of the purchaser of the shares in this appeal and the terms on which the shares will be sold is at first sight in the former category, but it is relevant that we are dealing with a company designed to enter into the Transactions and nothing else, at the end of which would contain a relatively small amount of cash, whereas Craven v White concerned the genuine sale of a trading company to a third party.  Here, it was certain that the shares would be sold (Dr Emblin said, and I accept, that the company would not be liquidated because of the time factor) by the end of the tax year otherwise no capital loss would have been realised, which was the point of the Transactions.  The identity of the purchaser of the company then holding a relatively small amount of cash at a discount on the amount of the cash is not material.  I infer, and so find, that a purchaser for a company containing cash would be found who would be given a turn so that it was effectively buying cash at a discount.  Accordingly, I find that the purchaser not being identified in advance was a commercially irrelevant condition that should be ignored; and that the terms of sale were sufficiently known in advance as the amount of cash left in the company less a turn for the purchaser.  I consider that in accordance with the approach in Scottish Provident Institution I am entitled to find that these factors should be ignored and treated as satisfied, and I so find. 
13.	There was a considerable gap (6 October 2000 to 12 January 2001 in 2000-01 and 21 December 2001 to 13 February 2002 in 2001-01) between the subscription for shares and the dividend, and from 6 October 2000 to 1 March 2001 between the subscription for shares and their sale for 2000-01, and 21 December 2001 and 2 April 2002 for 2001-02.  Normally one would say that the longer the gap the less likely that one could treat them as part of a single transaction.  In Carreras  in which the gap between the issue and redemption of the debenture was 10 days the question was raised by counsel as recorded at [15] of what would have been the case if it had been a year or a fortnight.  Lord Hoffmann said:  
[16] One answer is that it is plain from the terms of the debenture and the timetable that the redemption was not merely contemplated (the redemption of any debenture may be said to be contemplated) but intended by the parties as an integral part of the transaction, separated from the exchange by as short a time as was thought to be decent in the circumstances. The absence of security and interest reinforces this inference. No other explanation has been offered. In any case, their Lordships think that it is inherent in the process of construction that one will have to decide as a question of fact whether a given act was or was not a part of the transaction contemplated by the statute. In practice, any uncertainty is likely to be confined to transactions into which steps have been inserted without any commercial purpose. Such uncertainty is something which the architects of such schemes have to accept.
14.	Here (having ignored the investment return condition), the amount of the dividend, which was contained in the Articles, was known at the time of the subscription for shares.  The fact that there would be a sale of shares by 5 April 2001 was also known at the time of the subscription for shares, as was, as I have found, the fact that the sale price would be the (relatively small) amount of cash in the company less a turn for the purchaser.  The gap in time between the subscription for shares and the dividend is irrelevant since the Articles adopted contemporaneously with the subscription set the amount of the dividend at an amount that exceed the subscription for the shares, so that the dividend (having ignored the investment return condition) would always cancel the amount of the subscription.  The sale of the shares was merely the making of the disposal needed to create the hoped-for loss.  The terms were not material since the company was not expected then to have any significant assets.  I do not therefore consider that these time gaps prevent me from looking at the Transactions together when they were all planned as one and separated by what was intended to be a decent interval.  
15.	In consequence, I find that the Transactions form a single composite transaction, which was self-cancelling (apart from the effect of the settlors’ claim against the trustees under s 78 which is created by statute).  It was not a transaction in the real world, but one designed solely to create the capital loss.  I do not see any problem in saying that the sale of the shares was a transaction to be taken into account for the purchaser but ignored so far as the seller is concerned because, from the point of view of the seller, the sale was part of a composite self-cancelling transaction.  Applying this finding of fact to the capital gains tax legislation there was neither an acquisition of shares, nor a dividend, nor a disposal of shares.  I see no difficulty in treating the dividend, which is outside the capital gains tax computation as effectively cancelling the acquisition cost of the shares.  If as an appreciation of the facts there is no dividend or acquisition cost then the capital gains tax legislation is applied to that fact.  Accordingly there was no capital loss. 
16.	If I am found to be wrong in law to include the sale of the shares as part of the composite transaction, then I would find that the composite transaction is the subscription for shares and the dividend, together with the borrowing and repayment.  The sale of the shares would be a separate transaction.  Applying this finding to the capital gains tax legislation there would be no acquisition cost and the sale of the shares would be at a small gain.  I do not consider one should be concerned that, taken to its logical conclusion, the nil acquisition cost implies that the subscription for the shares was at less than par in breach of the Companies Act.  The subscription in accordance with the Companies Act did actually take place as a genuine transaction, which is being ignored only for the purposes of computing the loss for capital gains tax.  
17.	On either basis there is no dividend and so on the face of it there can be no taxation of the dividend either in the hands for the settlors or a trust tax rate charge on the trustees.  However, in MacNiven Lord Hoffmann said: “If the ‘disregarded’ steps in Furniss v Dawson [1984] AC 474 had involved the use of documents of a legal description which attracted stamp duty, duty would have been payable,” which suggests that a step disregarded for one tax may be treated as existing for another.  I do not consider that the same applies to the dividend here.  First, stamp duty is a tax of documents and so one needs to know whether it is stampable immediately the document is executed without being able to wait and see if it forms part of a composite transaction.  Secondly, Furness was a linear transaction whereas I am concerned with a circular one in which the dividend disappears if one treats the Transactions as a composite whole.  Thirdly, Lord Hoffmann said this as part of his distinction between legal and commercial concepts, which it was explained in Mawson was not to be regarded as a means of achieving the answer, which was always a matter of interpretation.  If one views the facts realistically (Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 at [35], (2006) 6 ITLR 454 at [35]) and finds them, it seems to me that those are the facts to be applied to statutory provisions generally, although there may be exceptions.  I do not therefore consider that the dividend has any existence for income tax.
The procedural question under section 77 
18.	Section 77 of TCGA 1992 provides:
“77 Charge on settlor with interest in settlement
(1) Where in a year of assessment—
(a) chargeable gains accrue to the trustees of a settlement from the disposal of any or all of the settled property,
(b) after making any deduction provided for by section 2(2) in respect of disposals of the settled property there remains an amount on which the trustees would, disregarding section 3, be chargeable to tax for the year in respect of those gains, and
(c) at any time during the year the settlor has an interest in the settlement,
the trustees shall not be chargeable to tax in respect of those but instead chargeable gains of an amount equal to that referred to in paragraph (b) shall be treated as accruing to the settlor in that year….”
Section 78 provides:
“78 Right of recovery
(1) Where any tax becomes chargeable on and is paid by a person in respect of gains treated as accruing to him under [section 77]1 he shall be entitled—
 (a) to recover the amount of the tax from any trustee of the settlement, and
 (b) for that purpose to require an inspector to give him a certificate specifying—
(i) the amount of the gains accruing to the trustees in respect of which he has paid tax; and
 (ii) the amount of tax paid;
and any such certificate shall be conclusive evidence of the facts stated in it.”
19.	Section 8A of the Taxes Management Act 1970 provides:
“8A Trustee's return
(1) For the purpose of establishing the amounts in which the relevant trustees of a settlement, and the settlors and beneficiaries, are chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, an officer of the Board may by a notice given to any relevant trustee require the trustee—
(a) to make and deliver to the officer, on or before the day mentioned in subsection (1A) below, a return containing such information as may reasonably be required in pursuance of the notice, and
(b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required;
and a notice may be given to any one trustee or separate notices may be given to each trustee or to such trustees as the officer thinks fit….”
Section 9 provides:
 “9 Returns to include self-assessment 
(1) Subject to subsections (1A) and (2), every return under section 8 or 8A of this Act shall include a self-assessment, that is to say—
(a) an assessment of the amounts in which, on the basis of the information contained in the return and taking into account any relief or allowance a claim for which is included in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment;…”
20.	Mr Prosser contends that in s 77(1)(b) the “amount on which the trustees would…be chargeable to tax” is the gain less the loss claimed in the return arising from the Transactions.  This is the amount on which they would be chargeable in the real world, not in the abstract.  The Revenue did not enquire into the return and so they cannot now go behind the return to ignore the existence of the loss in taxing the settlors.  The trustees made a proper disclosure of the Transactions in their return (see paragraph 3(15) above) so as to enable the Revenue to understand them.
21.	Mr Ewart contends that the trustees’ information return does not determine liability at all, and the trustees’ self-assessment return will not include the gain since the trustees are not chargeable in respect of it.  The important return for the Revenue to enquire into is the settlor’s self-assessment return.  There was no need for the Revenue to open an enquiry into the trustees’ return to no effect.
22.	This issue does not arise for the year 2001-02 since the Revenue did enquire into the trustees’ return.
Reasons for the decision
23.	Section 8A of TMA requires a return by the trustees of certain information “for the purpose of establishing the amounts in which the relevant trustees of a settlement, and the settlors and beneficiaries, are chargeable.”  That is merely a means of the Revenue obtaining information.  Section 9 requires a self-assessment of the “amounts in which… the person making the return is chargeable.”  The effect of s 77 is that “the trustees shall not be chargeable to tax in respect of those [gains].”    The trustees are therefore not obliged to return the gains and losses in their self-assessment return.  Since the settlor is chargeable on the trustees’ gains, s 9 will apply to the settlor, and the trustees will not make any self-assessment of the gains.  
24.	The procedures relating to self-assessment therefore apply to the settlor and not to the trustees.  The Trustees are merely providing information about the gains and in so far as they are being self-assessed the gains will not be included as they are not chargeable in respect of them.  I can therefore see no reason why the Revenue need open an enquiry into the trustees’ return when it will not enable them to collect any tax.  I see Mr Prosser’s point that the trustees were trying to fix the amount on which the settlor had a right of recovery but s 78 gives them that entitlement “Where any tax becomes chargeable on and is paid by a person in respect of gains treated as accruing to him under section 77…”.  Actions by the trustees do not affect the amount the settlor actually pays.
25.	Accordingly on this issue I prefer Mr Ewart’s contentions.
Section 660A
26.	In the light of my decision that the dividend is ignored, this and the s 686 points do not arise but I shall deal with them in case I am wrong about ignoring the dividend for the purpose of applying income tax.
27.	Section 660A provides:
“660A Income arising under settlement where settlor retains an interest
(1) Income arising under a settlement during the life of the settlor shall be treated for all purposes of the Income Tax Acts as the income of the settlor and not as the income of any other person unless the income arises from property in which the settlor has no interest.
(2) Subject to the following provisions of this section, a settlor shall be regarded as having an interest in property if that property or any derived property is, or will or may become, payable to or applicable for the benefit of the settlor or his spouse in any circumstances whatsoever….”
Section 660G provides:
“660G Meaning of “settlement” and related expressions
(1) In this Chapter—
  “settlement” includes any disposition, trust, covenant, agreement, arrangement or transfer of assets, and
  “settlor”, in relation to a settlement, means any person by whom the settlement was made….”
28.	The deed of amendment of 26 September 2000  creating the Children’s Fund provided:
“The assets of the Children’s Fund shall be administered as a separate fund within the Scheme separate from the other assets of the Scheme.  Neither of the Members (Roger Keenan and Juliet Keenan) nor any spouse of either of the Members shall be capable in any circumstances whatsoever of benefiting from the income or the capital of any of the assets of the Children’s Fund (whether in the capacity of members or not and whether while a Member or after ceasing to be a Member).”
Other provisions of the deed are expressly made subject to this clause.
29.	Mr Prosser contends:
(1)	The settlors are excluded by the deed of amendment.  Section 660A is narrower that s 77 that was dealt with in West v Trennery [2005] STC 214, the latter including an additional item (b) “the settlor or his spouse enjoys a benefit deriving directly or indirectly from any property which is comprised in the settlement or any derived property.”  Lord Walker at [37] considered that para (b) might include a breach of trust or the possibility of the assignment of an interest under the settlement made to the settlor.  Here we are concerned with whether the funds are applicable for the benefit of the settlor, not whether they are so applied.
(2)	The possibility of any benefit in breach of trust cannot be assumed, see Lord Vestey’s Executors v IRC (1949) 31 TC 1 at 89 per Lord Normand.  Lord Morton makes the distinction, which is applicable here, that while “a loan may well benefit a person even if it is made at a commercial rate of interest, as it may tide him over a difficult period, but I do not think that if money is so lent it is applied ‘for the benefit’ of the debtor within [the forerunner of s 660A].”  Lord Reid said at p 121 “I find it impossible to hold that a sum of money lent at a commercial rate of interest is ‘payable to or applicable for the benefit of’ the borrower in the sense of the section.”
(3)	The surrounding circumstances cannot be used to change the meaning of a document, see the refusal of the Court to look at counsel’s opinion to interpret a document in Rabin v Gerson Berger Association Ltd [1986] 1 WLR 526.  In Sempra Metals Limited v HMRC [2008] STC (SCD) 1062 at [100] the Special Commissioners applied the principles of interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 to a trust rather than a contract 
30.	Mr Ewart contends that:
(1)	The creation of the Children’s Fund was in order to carry out the Transactions.  It was for the settlor’s benefit in that the £200,000 spent on the borrowing was for the benefit of the rest of the Eyretel Pension Scheme of which the settlors could benefit.  The turn given to the purchasers on the sale of the shares was not for the benefit of the Children’s Fund but for the benefit of the settlors.  If the Transactions had not taken place (assuming they were successful) there would be tax on the settlor (or on the fund by virtue on the settlors’ right of recovery) and so the Transactions were intended to benefit them.  The repayment of the borrowing also freed up the deposit for the benefit of the settlors, as in IRC v Wachtel 46 TC 543.
(2)	Lord Morton’s dictum in Vestey was considered in Wachtel in which Goff J said that Lord Morton was contrasting an incidental benefit arising from a commercial transaction, and he went on to say “Here, however, the obligatory application was in its nature for the benefit of the settlor, and nonetheless so because it also benefited the trust.”  The circumstances in Wachtel were that the settlor had made an interest-free deposit in a bank of a sum sufficient to repay the amount the trustees borrowed from the bank in order to invest in a company.  On the company paying dividends the settlor’s interest-free deposit could be withdrawn.  The benefit here was having the (interest-bearing) deposit released.
(3)	Since the creation of the Children’s Fund was part of the Transactions it should be construed so as to authorise them, or there was an implied term that the trustees could undertake the Transactions.
(4)	The Deed of Amendment should be construed so as to give it 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 (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 principle (1)).  See also Breakspear v Acland [2008] 3 WLR 696 in which Briggs J said that a letter of wishes might be disclosable in relation to the construction of the trust deed if it provided relevant background information.
(5)	It is not a question of construing the deed in the light of background history (which the Crown unsuccessfully tried to do in Vestey, see p.105) but of construing the deed in the light of the very Transactions of which it was an integral part.
Reasons for the decision
31.	The settlor can be taxed under s 660A on the income arising under a settlement if he has an interest in the property comprised in the settlement, meaning “if that property or any derived property is, or will or may become, payable to or applicable for the benefit of the settlor or his spouse in any circumstances whatsoever.”  The term settlement for this purpose is wider than the trust document and “includes any disposition, trust, covenant, agreement, arrangement or transfer of assets.”   
32.	If one looks solely at the deed of amendment it is clear that the settlors are excluded.   I do not agree that one can use the Transactions to construe the deed of amendment differently from its terms on the approach to interpretation in Investors Compensation Scheme Ltd, or that there is a doctrine of implied terms applicable to the interpretation of a trust deed.  In whatever way one construes the deed on its own, the settlors are excluded.
33.	I have found as a fact that the sole purpose of creating the Children’s Fund within the Eyretel Pension Scheme was to use it in the Transactions.  I consider that one can look at the terms of the Children’s Fund in the context of the Transactions as a whole, these being “arrangement” that is the settlement, to determine whether the property in the Children’s Fund is, or will or may become applicable to or applicable for the benefit of the settlors.  But doing so makes no difference because they are always excluded from benefit.  Mr Ewart suggested several ways set out in paragraph 30(1) above in which the settlors might indirectly benefit.  I regard these as similar to Lord Morton’s example in Vestey (see paragraph 29(2) above) that while “a loan may well benefit a person even if it is made at a commercial rate of interest, as it may tide him over a difficult period, but I do not think that if money is so lent it is applied ‘for the benefit’ of the debtor.”  I do not consider that this is affected by Wachtel in which the settlor made an interest-free deposit in a bank that was released on the trust receiving income.  Here the circumstances are much closer to Lord Morton’s, as explained in Wachtel as being an incidental benefit arising from a commercial transaction.  To determine whether the property in the Children’s Fund is, or will or may become, payable to or applicable for the benefit of the settlors it is necessary to look at the deed of amendment, and under that they are excluded.  
34.	On this issue, if it arises, I prefer Mr Prosser’s contention. 
Section 686
35.	Section 686 provides:
“686 Accumulation and discretionary trusts: special rates of tax
(1) So far as income arising to trustees is income to which this section applies it shall be chargeable to income tax at the rate applicable in accordance with subsection (1AA) below, instead of at the basic rate or, in accordance with section 1A, at the lower rate or the Schedule F ordinary rate.
(1AA) The rate applicable in accordance with this subsection is—
(a) in the case of so much of any income to which this section applies as is Schedule F type income, the Schedule F trust rate; and
(b) in the case of any other income to which this section applies, the rate applicable to trusts.
(2) This section applies to income arising to trustees in any year of assessment so far as it—
 (a) …
 (c) is not income arising under a trust established for charitable purposes only or, subject to sub-s (6A) below, income from investments, deposits or other property held—
(i) for the purposes of a fund or scheme established for the sole purpose of providing relevant benefits within the meaning of section 612; or…”
36.	Mr Prosser contends:
(1)	The relevant fund or scheme is the Eyretel Pension Scheme.  The trustees were seeking to protect the Eyretel Pension Scheme from the settlors’ right of recovery thus reducing the relevant benefits.
(2)	The relevant purpose must relate to the Eyretel Pension Scheme because the Children’s Fund is a sub-fund within the Pension Scheme.  Its purpose was clearly to provide relevant benefits.  Even if the relevant fund was the Children’s Fund it was, as set out in the deed, established for the purpose of providing relevant benefits.
37.	Mr Ewart contends:
(1)	One should consider the purposes of the Children’s Fund, not the Eyretel Pension Scheme otherwise it would mean that so long as the original scheme satisfies the section nothing that happens later would be relevant.
(2)	Looking at the matter objectively, the purpose of the Children’s Fund was as part of the Transactions in order to avoid capital gains tax.  Therefore the Children’s Fund was not established for the sole purpose of providing relevant benefits.
(3)	£200,000 was paid in financing costs, which is not a relevant benefit.  The borrowed money which became part of the Children’s Fund was not applied in providing relevant benefits.  The Children’s Fund was always intended to do this and so it was not established for the sole purpose of providing relevant benefits.
Reasons for the decision
38.	The issue arises only if the s 660A issue is decided in favour of the Appellants (and also on the assumption that the dividend is not to be ignored).  There are two references to purpose in s 686: whether the property is held for the purposes of the fund, and whether the fund is established for the sole purpose of providing relevant benefits.  The first seems to be entirely objective.  If the property is held in the fund it must be held for the purposes of the fund, so that it is merely linking the income and the property producing the income to the fund.  The second reference to purpose could be either subjective (for what purpose was the fund established by the person who established it?), or objective (is the fund established solely for providing relevant benefits?).  This reference comes adjacent to the reference to “a trust established for charitable purposes only” which also uses the term established, and this colours the meaning of the expression with which I am concerned.  It seems to me that if one asks whether a trust is established for charitable purposes only one looks only at its terms and not to what the settlor had in mind, which is inadmissible, see IRC v Oldham Training and Enterprise Council [1996] STC 1218, following Incorporated Council of Law Reporting v Attorney General 47 TC 321 at 345: “To ascertain for what purposes the Council was established one must refer to its memorandum of association and to that alone” per Buckley LJ, (which I should mention were not cited to me), and also Rabin v Gerson Berger Association Ltd referred to above, concerning the connected issue of whether property was held by a corporation as trustee of a charitable trust, or as its corporate property absolutely.  In my view the same approach should be taken to whether the fund was established was established for the sole purpose of providing relevant benefits.  Reading the terms of the deed creating the Children’s Fund (being the fund with which we are concerned) there is no doubt that it was established for the sole purpose of providing relevant benefits.  It was, as is an agreed fact, established by those establishing it in order to use it in the Transactions and so their subjective purpose was to use it for a tax avoidance transaction, but that is irrelevant.  
39.	On this issue, on the basis that it arises, I find for the Appellant. 
40.	In summary:
(1)	The Transactions, including the subscription for shares, the dividend, and the sale of the shares, and the related borrowing and repayment, are a single composite self-cancelling transaction, the individual steps of which are to be ignored for the purpose of computing the gain or loss.  Alternatively, the composite transaction is the same but excluding the sale of the shares, with a similar result.
(2)	Nothing in s 77 prevents the Revenue from denying the loss in taxing the settlors when they have not opened an enquiry into the trustees’ return.
(3)	Since the dividend is to be ignored as being part of the composite transaction the settlors would not be taxable under s 660A on the dividend.  But even if the dividend was not to be ignored they would still not be taxable.
(4)	Assuming that the dividend were not to be ignored, the trustees would not be liable to the trust rate of tax on the dividend under s 686.
And accordingly I dismiss the appeal.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 12 November 2008

SC 3115-7/07

Authorities referred to in skeletons and not referred to in the decision:
Campbell v IRC [2004] STC (SCD) 396
Astall and Another v HMRC [2008] STC 2920
HMRC v Smallwood [2008] STC (SCD) 629