HOUSE OF LORDS

W T RAMSAY LTD v INLAND REVENUE COMMISSIONERS;

EILBECK (INSPECTOR OF TAXES) v RAWLING

LORD Wilberforce, Lord Fraser of TULLYBELTON, Lord Russell of Killowen, LORD Roskill and Lord Bridge of HARWICH

26, 27, 29 January, 2, 3, 4 February, 12 March 1981 -

Lord Wilberforce The first of these appeals is an appeal by W T Ramsay Ltd, a farming company. In its accounting period ending 31 May 1973 it made a " chargeable gain " for purposes of corporation tax by a sale-leaseback transaction. This gain it desired to counteract, so as to avoid the tax, by establishing an allowable loss. The method chosen was to purchase from a company specializing in such matters a ready-made scheme. The general nature of this was to create out of a neutral situation two assets one of which would decrease in value for the benefit of the other. The decreasing asset would be sold, so as to create the desired loss; the increasing asset would be sold, yielding a gain which it was hoped would be exempt from tax.

In the courts below, attention was concentrated on the question whether the gain just referred to was in truth exempt from tax or not. The Court of Appeal ([1979] 3 All ER 213; [1979] STC 582), reversing the decision of Goulding J ([1978] 2 All ER 321; [1978] STC 253), decided that it was not. In this House, the Crown, while supporting this decision of the Court of Appeal, mounted a fundamental attack on the whole of the scheme acquired and used by the taxpayer. It contended that it should simply be disregarded as artificial and fiscally ineffective.

Immediately after this appeal there was heard another taxpayer ' s appeal, Eilbeck (Insp of Taxes) v Rawling. This involved a scheme of a different character altogether, but one also designed to create a loss allowable for purposes of capital gains tax, together with a non-taxable gain, by a scheme acquired for this purpose. Similarly, this case was decided, against the taxpayer, in the Court of Appeal ([1980] 2 All ER 12; [1980] STC 192) on consideration of a particular aspect of the scheme: and similarly, the Crown in this House advanced a fundamental argument against the scheme as a whole.

I propose to consider first the fundamental issue, which raises arguments common to both cases. This is obviously of great importance both in principle and in scope. I shall then consider the particular, and quite separate arguments, relevant to each of the two appeals.

I will first state the general features of the schemes which are relevant to the wider argument.

In each case we have a taxpayer who has realised an ascertained and quantified gain: In Ramsay £ 187,977, in Rawling £ 355,094. He is then advised to consult specialists willing to provide, for a fee, a preconceived and ready made plan designed to produce an equivalent allowable loss. The taxpayer merely has to state the figure involved, ie the amount of the gain he desires to counteract, and the necessary particulars are inserted into the scheme.

The scheme consists, as do others which have come to the notice of the courts, of a number of steps to be carried out, documents to be executed, payments to be made, according to a timetable, in each case rapid (see the attractive description by Buckley LJ in Rawling [1980] 2 All ER 12 at 16; [1980] STC 192 at 197). In each case two assets appear, like particles in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss, and which gain is intended not to be taxable. Like the particles, these assets have a very short life. Having served their purpose they cancel each other out and disappear. At the end of the series of operations the taxpayer ' s financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses, to the promoter of the scheme.

There are other significant features which are normally found in schemes of this character. First, it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end; they are not intended to be arrested halfway (cf Chinn v Collins (Insp of Taxes) p 189, [1981] 2 WLR 14 ; [1981] STC 1 ; HL ). This intention may be expressed either as a firm contractual obligation (it was so in Rawling) or as in Ramsay as an expectation without contractual force.

Second, although sums of money, sometimes considerable, are supposed to be involved in individual transactions, the taxpayer does not have to put his hand in his pocket (cf IR Comrs v Plummer [1979] 3 All ER 775 ; [1980] AC 896 ; [1979] STC 793 and Chinn v Collins (Insp of Taxes). The money is provided by means of a loan from a finance house which is firmly secured by a charge on any asset the taxpayer may appear to have, and which is automatically repaid at the end of the operation. In some cases one may doubt whether, in any real sense, any money existed at all. It seems very doubtful whether any real money was involved in Rawling; but facts as to this matter are for the commissioners to find. I will assume that in some sense money did pass as expressed in respect of each transaction in each of the instant cases. Finally, in each of the present cases it is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax.

In these circumstances, your Lordships are invited to take, with regard to schemes of the character I have described, what may appear to be a new approach. We are asked, in fact, to treat them as fiscally a nullity, not producing either a gain or a loss. Counsel for Ramsay described this as revolutionary, so I think it opportune to restate some familiar principles and some of the leading decisions so as to show the position we are now in.

1 A subject is only to be taxed on clear words, not on " intendment " or on the " equity " of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are " clear words " is to be ascertained 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: see IR Comrs v Wesleyan and General Assurance Society [1946] 2 All ER 749 at 751; 30 Tax Cas 11 at 16 per Lord Greene MR and Mangin v IR Comrs [1971] 1 All ER 179 at 182; [1971] AC 739 at 746 per Lord Donovan. The relevant Act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains, less allowable losses, arising from disposals.

2 A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect.

3 It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham. In this context, to say that a document or transaction is a " sham " means that, while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that. I shall return to this point.

Each of these three principles would be fully respected by the decision we are invited to make. Something more must be said as to the next principle.

4 Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of IR Comrs v Duke of Westminster [1936] AC 1 ; [1935] All ER Rep 259 ; 19 Tax Cas 490 . This is a cardinal principle but it must not be overstated or over-extended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded; to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transactions to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax: see Chinn v Collins (Insp of Taxes) and IR Comrs v Plummer, supra .

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 Duke of 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 (Insp of Taxes) [1975] STC 372 ) 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.

I will now refer to some recent cases which show the limitations of the Duke of Westminster doctrine and illustrate the present situation in the law.

1 Floor v Davis (Insp of Taxes) [1978] 2 All ER 1079 ; [1978] Ch 295 ; [1978] STC 436 ; CA ; affd [1979] 2 All ER 677 ; [1980] AC 695 ; [1979] STC 379 , HL. The key transaction in this scheme was a sale of shares in a company called IDM to one company (FNW) and a resale by that company to a further company (KDI). The majority of the Court of Appeal thought it right to look at each of the sales separately and rejected an argument by the Crown that they could be considered as an integrated transaction. But Eveleigh LJ upheld that argument. He held that the fact that each sale was genuine did not prevent him from regarding each as part of a whole, or oblige him to consider each step in isolation. Nor was he so prevented by the Duke of Westminster case. Looking at the scheme as a whole, and finding that the taxpayer and his sons-in-law had complete control of the IDM shares until they reached KDI, he was entitled to find that there was a disposal to KDI. When the case reached this House it was decided on a limited argument, and the wider point was not considered. This same approach has commended itself to Templeman LJ and has been expressed by him in impressive reasoning in the Court of Appeal ' s judgment in Rawling. It will be seen from what follows that these judgments, and their emerging principle, commend themselves to me.

2 IR Comrs v Plummer. This was a prearranged scheme, claimed by the Revenue to be " circular " , in the sense that its aim and effect was to pass a capital sum round through various hands back to its starting point. There was a finding by the Special Commissioners that the transaction was a bona fide commercial transaction, but in this House their Lordships agreed that it was legitimate to have regard to all the arrangements as a whole. The majority upheld the taxpayer ' s case on the ground that there was a commercial reality in them: as I described them they amounted to " a covenant, for a capital sum, to make annual payments, coupled with security arrangements for the payments " (see [1979] 3 All ER 775 at 781; [1980] AC 896 at 909; [1979] STC 793 at 798), and I attempted to analyse the nature of the bargain with its advantages and risks to either side.

The case is no authority that the court may not in other cases and with different findings of fact reach a conclusion that, viewed as a whole, a composite transaction may produce an effect which brings it within a fiscal provision.

3 Chinn v Collins (Insp of Taxes). This again was a prearranged scheme, described by the Special Commissioners as a single scheme. There was no express finding that the parties concerned were obliged to carry through each successive step; but the commissioners found that there was never any possibility that the appellant taxpayers and another party would not proceed from one critical stage to another. I reached the conclusion, on this finding and on the documents, that the machinery, once started, would follow out its instructions without further initiative and the same point was made graphically by Lord Russell (see p 196, supra ). This case shows, in my opinion, that although the separate steps were " genuine " and had to be accepted under the Duke of Westminster doctrine, the court could, on the basis of the findings made and of its own analysis in law, consider the scheme as a whole and was not confined to a step by step examination.

To hold, in relation to such schemes as those with which we are concerned, that the court is not confined to a single step approach, is thus a logical development from existing authorities, and a generalization of particular decisions.

Before I come to examination of the particular schemes in these cases, there is one argument of a general character which needs serious consideration. For the appellants it was said that to accept the Crown ' s wide contention involved a rejection of accepted and established canons, and that, if so general an attack on schemes for tax avoidance as the Crown suggest is to be validated, that is a matter for Parliament. The function of the courts is to apply strictly and correctly the legislation which Parliament has enacted; if the taxpayer escapes the charge, it is for Parliament, if it disapproves of the result, to close the gap. General principles against tax avoidance are, it was claimed, for Parliament to lay down. We were referred, at our request, in this connection to the various enactments by which Parliament has from time to time tried to counter tax avoidance by some general prescription. The most extensive of these is the Income and Corporation Taxes Act 1970, s 46off . We were referred also to well-known sections in Australia and New Zealand (Australia, the Income Tax Assessment Act 1936, s 260 ; New Zealand, the Income Tax Act 1976, s 99 , replacing earlier legislation). Further, it was pointed out that the capital gains tax legislation (starting with the Finance Act 1965) does not contain any provision corresponding to s 460. The intention should be deduced therefore, it was said, to leave capital gains tax to be dealt with by " hole and plug " methods; that such schemes as the present could be so dealt with has been confirmed by later legislation as to " value shifting " (see the Capital Gains Tax Act 1979, s 25ff ). These arguments merit serious consideration. In substance they appealed to Barwick CJ in the recent Australian case of FC of T v Westraders Pty Ltd (1980) 30 ALR 353 at 354-5; 11 ATR 24 at 26.

I have a full respect for the principles which have been stated but I do not consider that they should exclude the approach for which the Crown contends. That does not introduce a new principle: it would be to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established; and a legal analysis made; legislation cannot be required or even be desirable to enable the court to arrive at a conclusion which corresponds with the parties ' own intentions.

The capital gains tax was created to operate in the real world, not that of make-believe. As I said in Aberdeen Construction Group Ltd v IR Comrs [1978] 1 All ER 952 at 996; [1978] AC 885 at 893; [1978] STC 127 at 131, 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, 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.

We were referred, on this point, to a number of cases in the United States of America in which the courts have denied efficacy to schemes or transactions designed only to avoid tax and lacking otherwise in economic or commercial reality. I venture to quote two key passages, not as authority, but as examples, expressed in vigorous and apt language, of a process of thought which seems to me not inappropriate for the courts in this country to follow. In Knetsch v United States (1960) 364 US 361 the Supreme Court found that a transaction was a sham because it " did not appreciably affect the [taxpayer ' s] beneficial interest … there was nothing of substance to be realised by [him] from his transaction beyond a tax deduction … the difference between the two sums was in reality the fee for providing the facade of ' loans ' . "

In Gilbert v IR Comr (1957) 248 F 2d 399 Learned Hand J (dissenting on the facts) said: " The Income Tax Act imposes liabilities upon taxpayers based upon their financial transactions … If, however, the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it … "

It is probable that the United States courts do not draw the line precisely where we with our different system, allowing less legislative power to the courts than they claim to exercise, would draw it, but the decisions do at least confirm me in the belief that it would be an excess of judicial abstinence to withdraw from the field now before us.

I will now try to apply these principles to the cases before us.W T Ramsay Ltd v IR Comrs

This scheme, though intricate in detail, is simple in essentials. Stripped of the complications of company formation and acquisition, it consisted of the creation of two assets in the form of loans, called loan 1 and loan 2, each of £ 218,750. These were made by the taxpayer, by written offer and oral acceptance, on 23 February 1973 to one of the intra-scheme companies, Caithmead Ltd. The terms are important and must be set out. They were: (a) loan 1 was repayable after 30 years at par and loan 2 was repayable after 31 years at par, in each case with the proviso that Caithmead could (but on terms) make earlier repayment if it so desired and would be obliged to do so if it went into liquidation; (b) if either loan were repaid before its maturity date, then it had to be repaid at par or at its market value on the assumption that it would remain outstanding until its maturity date, whichever was the higher; (c) both loans were to carry interest at 11% pa payable quarterly on 1 March, 1 June, 1 September and 1 December in each year, the first such payment to be on 1 March 1973; (d) the taxpayer was to have the right, exercisable once and once only, and then only if it was still the beneficial owner of both loan 1 and loan 2, to decrease the interest rate on one of the loans and to increase correspondingly the interest rate on the other. A few days later, on 2 March 1973, the taxpayer under (d) above, increased the rate of interest on loan 2 to 22% and decreased that on loan 1 to zero. The same day the taxpayer then sold loan 2 (which had naturally increased in value) for £ 391,481. This produced a " gain " of £ 172,731 which the taxpayer contends is not a chargeable gain for corporation tax purposes (as to this, see below). Loan 2 was later transferred to a wholly-owned subsidiary of Caithmead and extinguished by the liquidation of that subsidiary. On 9 March 1973 Caithmead itself went into liquidation, on which loan 1 was repayable, and was repaid to the taxpayer. The shares in Caithmead, however, for which the taxpayer had paid £ 185,034, became of little value and the taxpayer sold them to an outside company for £ 9387. So the taxpayer made a " loss " of £ 175,647. It may be added, as regards finance, that the necessary money to enable Ramsay to make the loans was provided by a finance house on terms which ensured that it would be repaid out of the loans when discharged. The taxpayer provided no finance.

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 taxpayer, through the reduction in value of its shares in Caithmead, was dependent on the " gain " it had procured by selling loan 2. The one could not occur without the other. To borrow from Rubin v United States (1962) 304 F 2d 766 approving the Tax Court in MacRae v IR Comr (1961) 34 TC 20 at 26, this loss was the mirror image of the gain. The taxpayer would not have entered on the scheme if this had not been so.

5 The scheme was not designed, as a whole, to produce any result for the taxpayer 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 taxpayer 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.

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 on, 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.

Although this disposes of the appeal, I think it right to express an opinion on the particular point which formed the basis of the decisions below. This is whether the gain made on 9 March 1973 by the sale of loan 2 was a chargeable gain. The assumption here, of course, is that it is permissible to separate this particular step from the whole.

The taxpayer claims that the gain is not chargeable on the ground that the asset sold was a debt within the meaning of the Finance Act 1965, Sch 7 para 11. In that case, since the taxpayer was the original creditor, the disposal would not give rise to a chargeable gain. The Crown on the other hand contends that it was a debt on a security, within the meaning of the same paragraph, and of para 5(3)(b) of the same schedule. In that case the exemption in favour of debts would not apply.

The distinction between a debt and a debt on a security, and the criteria of the difference, have already been the subject of consideration in the Court of Session in Cleveleys Investment Trust Co v IR Comrs 1971 SC 233 ; 47 Tax Cas 300 and Aberdeen Construction Group Ltd v IR Comrs 1977 SC 302 ; [1977] STC 302 , and in this House in the latter case ([1978] 1 All ER 962 ; [1978] AC 885 ; [1978] STC 127 ). I think it no overstatement to say that many learned judges have found it baffling, both on the statutory wording and as to the underlying policy. I suggested some of the difficulties of para 11 and of the definition in para 5(3)(b) of the same schedule in the Aberdeen Construction Group Ltd case and I need not recapitulate them. Such positive indications as have been detected are vague and uncertain. It can be seen, however, in my opinion, that the legislature is endeavouring to distinguish between mere debts, which normally (though there are exceptions) do not increase but may decrease in value, and debts with added characteristics such as may enable them to be realized or dealt with at a profit. But this distinction must still be given effect to through the words used.

Of these, some help is gained from a contrast to be drawn between debts simpliciter, which may arise from trading and a multitude of other situations, commercial or private, and loans, certainly a narrower class, and one which presupposes some kind of contractual structure. In the Aberdeen Construction Group Ltd case [1978] 1 All ER 962 at 968; [1978] AC 885 at 895; [1978] STC 127 at 133 I drew the distinction between " a pure unsecured debt as between the original borrower and lender on the one hand and a debt (which may be unsecured) which has, if not a marketable character, at least such characteristics as enable it to be dealt in and if necessary converted into shares or other securities " .

To this I would now make one addition and one qualification. Although I think that, in this case, the manner in which loan 2 was constituted, viz by written offer, orally accepted together with evidence of the acceptance by statutory declaration, was enough to satisfy a strict interpretation of " security " , I am not convinced that a debt, to qualify as a debt on a security, must necessarily be constituted or evidenced by a document. The existence of a document may be an indicative factor, but absence of one is not fatal. I would agree with the observations of my noble and learned friend Lord Fraser, in relation, in particular, to the Cleveleys Investment Trust Co case. Secondly, on reflection, I doubt the usefulness of a test enabling the debt to be converted into shares or other securities. The definition of para 5(3)(b) is, it is true, expressed to be given for the purposes of para 3 which is dealing with conversion; but I suspect that it was false logic to suppose that, because of this, " securities " are to be so limited, and in any event I doubt whether the test supposed, if a necessary one, is useful, for even a simple debt can, by a suitable contract, be converted into shares or other securities.

With all this lack of certainty as to the statutory words, I do not feel any doubt that in this case the debt was a debt on a security. I have already stated its terms. It was created by a contract the terms of which were recorded in writing; it was designed, from the beginning, to be capable of being sold, and, indeed, to be sold at a profit. It was repayable after 31 years, or on the liquidation of Caithmead. If repaid before the maturity date, it had to be repaid at par or market value, whichever was the higher. It carried a fixed, though (once) variable, rate of interest.

There was much argument whether with these qualities it could be described as " loan stock " within the meaning of para 5(3)(b) of Sch 7 . I do not find it necessary to decide this. The paragraph includes within " security " any " similar security " to loan stock; in my opinion these words cover the facts. This was a contracted loan, with a structure of permanence such as fitted it to be dealt in and to have a market value. That it had a market value, in fact, was stated on 1 March 1973 by Messrs Hoare & Co Govett Ltd, stockbrokers. They then confirmed that an 80% premium would be a fair commercial price having regard to the prevailing levels of long term interest rates. I have no doubt that, in these facts, loan 2 was a debt on a security and therefore an asset which, if disposed of, could give rise to a chargeable gain.

I would dismiss this appeal.Eilbeck (Insp of Taxes) v Rawling

The scheme here was quite different from any of the others which I have discussed. It sought to take advantage of para 13(1) of Sch 7 to the Finance Act 1965; this exempts from capital gains tax any gain made on the disposal of, inter alia , a reversionary interest under a settlement by the person for whose benefit the interest was created or by any other person except one who acquired the interest for consideration in money. The scheme was, briefly, to split a reversion into two parts so that one would be disposed of at a profit but would fall under the exemption and the other would be disposed of at a loss but could be covered by the exception. Thus, there would be an allowable loss but a non-chargeable gain.

The scheme involved the use of a settlement set up in Gibraltar, another settlement set up in Jersey, and six Jersey companies, namely, to use their short titles, Thun, Goldiwill, Pendle, Tortola, Allamanda and Solandra, which were part of the same organization, under the same management and operating from the same address. The Gibraltar settlement was made in 1973 by one Isola of a sum of £ 100. When the taxpayer came into the scheme in 1975 the fund consisted of £ 600,000 all of which was said to be deposited in Jersey with Thun. The trusts were to pay the income to one Josephine Isola until 19 March 1976. Subject thereto the fund was to be held in trust for the settlor Isola, his heirs and assignees. There was a power in cl 5 of the settlement to advance any part of the capital of the trust fund to the reversioner or to the trustees of any other settlement. But it was a necessary condition, in the latter case, that the reversionary should be indefeasibly entitled to a corresponding interest under such other settlement falling into possession not later than the vesting day, (19 March 1976) under the Gibraltar settlement. On the exercise of any such power a compensation advance had to be made to the income beneficiary.

On 20 March 1975 the settlor ' s reversionary interest was assigned to Pendle. On 24 March Thun agreed to lend the taxpayer £ 543,600 to enable him to buy the Gibraltar settlement reversion and agreed with the taxpayer that Tortola would, if required within six months, introduce to the taxpayer a purchaser for the reversion. Pendle then agreed to sell and the taxpayer to buy the reversion for £ 543,600 and this sale was completed. So the taxpayer (conformably with para 13(1)) had acquired the reversion for consideration in money. The taxpayer directed Thun to pay the £ 543,600 to Pendle: he also charged his reversionary interests under the Gibraltar settlement and under the Jersey settlement, next mentioned, to Thun to secure the loan of £ 543,600.

The Jersey settlement was executed, as found by the General Commissioners, as part of the scheme. It was dated 21 March 1975 and made by the taxpayer ' s brother for £ 100 with power to accept additions. The trustee was Allamanda. The trustee was to apply the income for charitable or other purposes until the " Closing Date " and subject thereto for the taxpayer absolutely. The closing date was fixed on 24 March 1975 as the date not later than 19 March 1976, the vesting date under the Gibraltar settlement (the exact date seems not to be proved).

On 25 March 1975 the taxpayer requested the Gibraltar trustee to advance £ 345,000 to the Jersey settlement, to be held as capital of that settlement. On 27 March the Gibraltar trustee appointed £ 315,000 accordingly, and also appointed £ 29,610 to compensate the income beneficiary, which had become Goldiwill. These appointments were given effect to by Thun transferring money in Jersey to Allamanda, the Jersey trustee, and Goldiwill. So the taxpayer was now a person for whose benefit a reversion had been created under the Jersey settlement (see again para 13(1)). There was left £ 255,390 unappointed in the Gibraltar settlement.

On 1 April the taxpayer requested Thun to cause Tortola to nominate a purchaser of his interest under the Gibraltar settlement and on 3 April Tortola nominated Goldiwill. Also on 3 April the taxpayer agreed to sell his reversion under the Gibraltar settlement to Goldiwill for £ 231,130; the agreement recited that the trust fund then consisted of £ 255,390. The taxpayer assigned his reversion accordingly. This is the transaction supposed to create the loss. Also on 3 April the taxpayer agreed to sell his reversion under the Jersey settlement to Thun for £ 312,100. The agreement recited that the trust fund then consisted of £ 315,100. Payment for these various transactions was effected by appropriations by Thun. The price for the two reversions ( £ 231,130 and £ 312,100) making £ 543,230 due to the taxpayer was set off against the loan of £ 543,600 made by Thun, leaving a balance due to Thun of £ 370. The taxpayer paid this and Thun released its charges. The only money which passed from the taxpayer was the £ 370, £ 3500 procuration fee and £ 6115 interest.

Of this scheme the following can be said.

1 The scheme was a pure tax avoidance scheme, designed by Thun and entered into by the taxpayer for the sole purpose of manufacturing a loss matched by a corresponding but exempt capital gain. It was marketed by Thun as a scheme available to any taxpayer who might purchase it, the sums involved being adapted to the purchaser ' s requirements.

2 Every individual transaction was, as found by the General Commissioners, carried through and was exactly what it purported to be.

3 It was held by the judge and not disputed by the Court of Appeal that, by its agreement with the taxpayer, Thun agreed to procure the implementation of all the steps comprised in the scheme and was in a position to obtain the co-operation of the associated companies Pendle and Goldiwill.

4 The scheme was designed to return all parties within a few days to the position from which they started, and to produce for the taxpayer neither gain nor loss, apart from the expenses of the scheme, the gain and the loss being " self-cancelling " . The loss could not be incurred without the gain, because it depended on the reversion under the Gibraltar settlement being diminished by the appointed sum of £ 315,000 which produced the gain. The taxpayer would not have entered into the scheme unless this had been the case.

5 The scheme required nothing to be done by the taxpayer except the signing of the scheme documents, and the payment of fees. The necessary money was not provided by the taxpayer but was " provided " by Thun on terms which ensured that it would not pass out of its control and would be returned on completion having moved if at all in a circle.

On these facts, it would be quite wrong, and a faulty analysis, to segregate, from what was an integrated and interdependent series of operations, one step, viz the sale of the Gibraltar reversion on 3 April 1975, and to attach fiscal consequences to that step regardless of the other steps and operations with which it was integrated. The only conclusion, one which is alone consistent with the intentions of the parties, and with the documents regarded as interdependent, is to find that, apart from a sum not exceeding £ 370, there was neither gain nor loss and I so conclude.

Although this disposes of the appeal I think it right to deal with the particular point which, apart from the judgment of Templeman LJ, formed the basis of the decisions below. This is whether the sale of the reversion under the Gibraltar settlement on 3 April 1975 gave rise to an allowable loss if regarded in isolation. I regard this, with all deference, as a simple matter. What was sold on 3 April 1975 was the taxpayer ' s reversionary interest in £ 255,390; for this the taxpayer received £ 231,130 certified by Solandra to be the market price. Not only was this the fact (the trust fund at that time was of that amount) but the agreement for sale specifically so stated. It recited that the vendor, the taxpayer, was beneficially entitled to the sole interest in reversion under the Gibraltar settlement, " being a Settlement whereof the trust fund presently consist [ sic ] of £ 255,390 " . What he had bought, on the other hand, for £ 543,600 was a reversionary interest in £ 600,000, subject to the trustee ' s power to advance any part to him or to a settlement in which he had an equivalent reversionary interest. After the advance of £ 315,000 was made (effectively to the taxpayer, so that to this extent he had got back part of his money), all he had to sell was the reversionary interest in the remainder; this he sold for its market price. Alternatively, if the £ 315,000 is to be considered as in some sense still held under the Gibraltar settlement, the sale on 3 April 1975 to Goldiwill for £ 231,130 did not include it. On no view can he say that he sold what he had bought; on no view can he demonstrate any loss. I think that substantially this view of the matter was taken by Buckley and Donaldson LJJ, and I agree with their judgments.

I would dismiss this appeal.