England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
(Mr Justice Hart)

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 3rd April 2001

LORD JUSTICE JONATHAN PARKER

INTRODUCTION

1. This is an appeal by DTE Financial Services Ltd (DTE) against an Order of Hart J dated 28 October 1999. By his Order Hart J dismissed DTE's appeal against a decision of a single Special Commissioner, who had in turn dismissed DTE's appeal against a determination made by the respondent Inspector of Taxes under regulation 49(2) of the Income Tax (Employment) Regulations 1993. Hart J's judgment is reported at [1999] STC 1061.
2. The Inspector's determination, upheld by the Special Commissioner and by Hart J, was that DTE was accountable to the Revenue under the PAYE system in respect of income tax on bonuses which had been paid by DTE to its three directors, who were employees of DTE. The Inspector determined DTE's liability in the sum of £48,720, on the footing that the bonuses totalled £121,800. It is, however, common ground (as it was before the Special Commissioner and Hart J) that each of the three directors received a payment of £40,000, and accordingly that DTE's true liability, should the determination be correct in principle, is £48,000. It is also common ground that the transactions which took place resulting in the three payments were the same in the case of each director. Accordingly, for convenience the arguments both below and in this court have been confined to the payment to one of the three directors, Mr Mervyn MacDonald.
3. The case turns on the effectiveness or otherwise of a tax avoidance scheme designed to avoid liability for national insurance contributions and to enable an employer to make payments to employees in a manner which falls outside the PAYE system. No questions arise in this case in relation to national insurance contributions.
4. The scheme in question involves a number of distinct steps or transactions, the nature of which I shall explain in due course. DTE contends that on a true analysis the effect of the scheme was that DTE provided Mr MacDonald not with a cash payment of £40,000 but with a contingent reversionary interest under a settlement (albeit that the contingent reversionary interest shortly thereafter turned into cash, as both parties had throughout intended). On that basis, DTE contends that although the contingent reversionary interest was a taxable emolument of Mr MacDonald's employment, the provision of that emolument falls outside the PAYE system. The Revenue, however, while not attacking any of the transactions as shams, contends that, adopting the approach of the House of Lords in W.T. Ramsay Ltd v. IRC [1982] AC 300, the court should conclude that Mr MacDonald received a payment from DTE which was subject to deduction of tax under the PAYE system, and that DTE is accordingly accountable for the tax which should have been deducted. I will refer to this issue as "the Ramsay issue". In the alternative, the Revenue contends that if on a true analysis DTE provided Mr MacDonald not with cash but with a contingent reversionary interest, the transaction is nevertheless brought within the PAYE system by section 203F of the Income and Corporation Taxes Act 1988 (the Act). I will refer to this issue as "the section 203F issue".
5. DTE appears on this appeal by Mr Andrew Thornhill QC and Mr James Henderson; the Revenue by Mr Ian Glick QC and Mr Timothy Brennan.

THE RELEVANT TAX LEGISLATION

6. The relevant legislation is that which applied in the tax year 1995/6, and references to the legislation in this judgment are to the legislation in its then form.
7. The PAYE system is introduced by section 203 of the Act. Section 203(1) provides as follows:

"On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment, notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for some year of assessment other than the year during which the payment is made." (My emphasis.)

8. Section 203A(1) provides (so far as material) that for the purposes of section 203 a payment shall be treated as made "at the time when payment is actually made", or (if earlier) "the time when a person becomes entitled to the payment".
9. Section 203B deals with payments of assessable income made by an intermediary of the employer. Although this section was the subject of argument before the judge, it has not been relied on by the Revenue on this appeal as a separate ground for contending that the PAYE system applies. Accordingly I need not make further reference to it.
10. Section 203F provides as follows (so far as material):

"(1) Where any assessable income of an employee is provided in the form of a tradeable asset, the employer shall be treated, for the purposes of PAYE regulations, as making a payment of that income of an amount specified in subsection (3) below.

a) For the purposes of subsection (1) above "tradeable asset" means –

b) ......

c) ......

d) any other asset for which, at the time the asset is provided, trading arrangements exist.

e) The amount referred to is –

f) .....

g) in the case of an asset for which trading arrangements exist at the time when the asset is provided, the amount which is obtained under those arrangements.

h) ......

i) ..... for the purposes of subsection (2) above "asset" includes any property ...."

11. The expression "trading arrangements" is defined in section 203K(2) as meaning, in relation to an asset:

"..... arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset".

12. Section 203K(3)(a)(ii) provides that for the purposes of section 203K(2):

".... any reference to enabling a person to obtain an amount includes .... a reference to enabling an amount to be obtained by any means ...."

13. Thus, the section 203F issue is whether (assuming that the Revenue fails on the Ramsay issue) the contingent reversionary interest provided by DTE to Mr MacDonald was a "tradeable asset" for the purposes of the section. If it was, then (as is accepted by DTE) section 203F brings the transaction within the PAYE system.

THE SCHEME

14. As already explained, it is essential to the success of the tax avoidance scheme (a) that the emolument received by the employee should consist not of cash but of the contingent reversionary interest (the Ramsay issue), and (b) that the contingent reversionary interest is not itself a tradeable asset (the section 203F issue). So the scheme has to steer clear of both Scylla and Charybdis. It seeks to do this by the creation of an offshore discretionary settlement of a sum of cash (borrowed by the settlor), under which the settlor becomes entitled (by virtue of an appointment made by the trustee) to a contingent reversionary interest in a sum equal to the intended bonus, plus a sum in respect of costs. The interest is "contingent" in a theoretical sense only; in reality there is no risk of the contingency not occurring. Thus, for all practical purposes the so-called contingent reversionary interest is no more nor less than a right to a specified sum of cash on a future date; the specified sum being the amount of the intended bonus and the specified date being the date on which the employer wishes the employee to receive the bonus. The circle is squared by the employer taking an assignment of the interest for a consideration equal to the amount of the intended bonus (plus an additional sum representing the fee for entering into the scheme) and then assigning it on to the employee. The settlement provides that the interest may only be assigned twice, so that (if that provision is valid) in the hands of the employee the interest is non-assignable. Result: on the specified date the employee receives a cash payment equal to the amount of his intended bonus.

THE FACTS

15. The facts in relation to Mr MacDonald's bonus are not in dispute and can be shortly stated.
16. According to a minute of a board meeting held on or before Wednesday 19 April 1995 (the precise date is not material) the three directors "contemplated" - without, of course, deciding - that DTE would pay them each a bonus of £40,000. On 19 April 1995 DTE provided the operator of the scheme with all the details necessary to set the scheme machinery in motion in relation to each of the three directors. On Monday 24 April 1995 the requisite contingent reversionary interest was created. The following day, Tuesday 25 April 1995, DTE took an assignment of the interest for a consideration of £40,600 (the additional £600 representing the fee payable by DTE for entering into the scheme). Next day, Wednesday 26 April 1995, DTE assigned the interest on to Mr MacDonald. On Friday 28 April 1995 the interest fell into possession and a sum of £40,000 was duly remitted to Mr MacDonald's bank account.
17. DTE's accounts for the year ended 30 April 1995 record, with admirable candour:

"Bonus payments were made in the form of assignments of interests in Offshore Trusts."

THE DECISION OF THE SPECIAL COMMISSIONER

18. Before the Special Commissioner the Revenue contended that any payment to an employee made by a third party (in this case the trustee of the settlement) was a payment to which section 203(1) applied, without the need to have recourse to the Ramsay approach. The Special Commissioner rejected this contention, holding that although DTE had made a payment, it had made the payment to the assignor of the contingent reversionary interest and not to Mr MacDonald. He further concluded (in paragraph 16 of his decision):

"When [DTE] decided to assign its interest to Mr MacDonald on 26 April 1995, it was doing something which would enure to his benefit but it was not making a payment to him."

19. The Special Commissioner then turned to the section 203F issue, and addressed the question whether DTE had provided Mr MacDonald with a tradeable asset within the meaning of the section. He concluded that it had not. He expressed his conclusion thus (in paragraph 18 of his decision):

"The asset which [DTE] provided was an interest in a settlement consisting of a sum of money. The employee, being a secondary assignee, could not assign that interest; all he could do was wait a day or two for it to fall in. In my view, that does not constitute "trading arrangements". This is not the mischief at which the section is aiming. Had one asked Parliament (or, to be more realistic, those advising ministers of the Crown) whether they intended a transaction such as this to be caught by those words, the answer would almost certainly have been that, while they clearly wanted it to be caught, they would prefer to introduce more carefully focused provisions to catch it - as they did in later Finance Acts."

20. Turning to the Ramsay issue, the Special Commissioner began by referring to the passage from Lord Oliver's speech in Craven v. White [1988] STC 476 at 507a, where Lord Oliver identified the four essentials for the application of the approach described by Lord Brightman in Furniss v. Dawson (viz. a pre-ordained series of transactions; in which the intermediate transaction had no other purpose than tax mitigation; where there was no practical likelihood that the series of transactions would not take place in the order ordained; and where they did in fact so take place). The Special Commissioner continued (in paragraphs 20 and 21 of his Decision):

" 20. I have no hesitation in finding that all these four essentials are to be found in the present case. The series of transactions was pre-ordained in order to produce the result that Mr MacDonald received £40,000; the intermediate transactions had no other purpose than tax mitigation; there was no practical likelihood .... that the pre-planned events would not take place in the order ordained; those events did in fact so take place.

21. Mr Thornhill contends that Ramsay cannot apply in this case unless one postulates an independent life for one of the transactions which, on Ramsay principles, cannot be regarded as having been contemplated as having that independent life. It would be odd if Ramsay could be circumvented by planning the intermediate transactions in this particular way. [DTE] decided that Mr MacDonald should have a £40,000 bonus; Mr MacDonald got that bonus; that is - in both senses - the beginning and end of the matter. £40,000 started off in [DTE's] bank account; it ended up in Mr MacDonald's bank account. ...... [I]n effect, the company paid Mr MacDonald a bonus of £40,000."

THE JUDGMENT OF HART J.

21. Before the judge, the Revenue contended that the determination should be upheld on the additional ground that, apart from any application of the Ramsay principle, the payment made by the trustee of the settlement to Mr MacDonald was a payment of assessable income by an intermediary for the purposes of section 203B of the Act. The judge rejected that contention, concluding that the emolument received by Mr MacDonald was the contingent reversionary interest, and that the subsequent payment to Mr MacDonald was the fruit of that emolument but not the emolument itself. It followed that the payment was not a payment of assessable income and that accordingly it did not fall within section 203B. As I indicated earlier, the Revenue has not challenged that conclusion on this appeal.
22. The Revenue's argument on the Ramsay issue before the judge differed from its argument in this court. Before the judge, Mr Glick contended that the composite transaction for Ramsay purposes started with the creation of the settlement and ended with the payment to Mr MacDonald, and that the Ramsay principle enabled the court to strip out all the intermediate transactions and see the payment for what it was, namely a payment of assessable income by DTE to Mr MacDonald. In response to that analysis, Mr Thornhill submitted that that was an impermissible application of the Ramsay principle since it involved taking one of the intermediate stages in the composite transaction which began with the creation of the settlement (namely the payment made by DTE as consideration for the assignment of the contingent reversionary interest) and recharacterising it as a payment of assessable income to Mr MacDonald. In support of this submission Mr Thornhill relied on IRC v. McGuckian [1997] STC 908.
23. The judge accepted Mr Thornhill's submission. However, the judge went on to conclude that, applying the Ramsay principle, there had nevertheless been a payment within section 203B. He held that, properly analysed, the transaction was one under which the trustee (being an intermediary) had made a payment of assessable income to Mr MacDonald, and that the inspector's determination should be upheld on that ground
24. The judge went on to address the 203F issue, and concluded that the definition of "trading arrangements" in section 203K(2)(a) was wide enough to encompass the trusts of the appointment which created the contingent reversionary interest, describing those trusts as:

".... arrangements which had as their purpose to enable the owner of the asset represented by the contingent reversionary interest to obtain the relevant amount when that interest fell into possession".

25. He accordingly concluded that the determination should be upheld on the additional ground that section 203F applied.

THE RAMSAY ISSUE

26. In the course of the hearing of this appeal the judgment of the House of Lords in MacNiven v. Westmoreland Investments Ltd [2001] UKHL 6 was published, and both Mr Thornhill and Mr Glick made submissions thereon. It is accordingly convenient to preface this section of the judgment by referring to their Lordships' speeches in MacNiven.
27. The issue before the House of Lords in MacNiven was whether transactions which had taken place between the taxpayer company and the trustees of a pension scheme constituted payments of interest within the meaning of section 338 of the Act. In addressing that question, their Lordships (and in particular Lord Nicholls and Lord Hoffmann) took the opportunity to reappraise the significance and effect of the decision of the House in Ramsay.
28. Lord Nicholls emphasised that in Ramsay their Lordships did not enunciate any new legal principle. Rather, the decision in Ramsay illustrated the duty of the courts, when confronted with new and sophisticated tax avoidance devices, to determine the legal nature of the transactions in question and then relate them to the fiscal legislation. Lord Nicholls considered that Ramsay brought out three points in particular. First, that where a series of transactions is involved (as in the case of a pre-arranged tax avoidance scheme), the court may regard the series of transactions as a whole; and that it may do so notwithstanding that the parties' intention to carry through the series of transactions takes the form of an expectation without contractual force. Second, that this approach does not involve treating any step in the series of transactions as a sham. And third, that the task of the court, having identified the legal nature of the transaction, is to relate it to the language of the statute.
29. Referring to later authorities in which the Ramsay approach (an expression which he regarded as preferable to the Ramsay principle) has been adopted, Lord Nicholls warned against regarding such decisions "as laying down factual pre-requisites which must exist before the court can apply the purposive, Ramsay approach to the interpretation of a taxing statute." Later in his speech, after referring to the much-quoted passage from Lord Brightman's speech in Furniss v. Dawson [1984] AC 474 at 527, in which Lord Brightman summarised the effect of the Ramsay approach when applied to a pre-ordained series of transactions, Lord Nicholls said (at paragraph 8):

"My Lords, I readily accept that the factual situation described by Lord Brightman is one where, typically, the Ramsay approach will be a valuable aid. In such a situation, when ascertaining the legal nature of the transaction and then relating this to the statute, application of the Ramsay approach may well have the effect stated by Lord Brightman. But, as I am sure Lord Brightman would be the first to acknowledge, the Ramsay approach is no more than a useful aid. This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds on the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute."

30. Lord Hoffmann, referring to Lord Wilberforce's speech in Ramsay, said this:

"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 [Ramsay], 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."

31. Lord Hoffmann returned to this point later in his speech (at paragraph 35), saying this:

"My Lords, it seems to me that what Lord Wilberforce was doing in [Ramsay] 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."

32. Referring to Lord Brightman's formulation in Furniss v. Dawson, Lord Hoffmann said this (at paragraphs 48 and 49):

"My Lords, this statement is a careful and accurate summary of the effect which the Ramsay construction of a statutory concept has upon the way the courts will decide whether a transaction falls within that concept or not. If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be disregarded "for fiscal purposes", I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept. ..... For present purposes, the point I wish to emphasise is that Lord Brightman's formulation in the Furniss case ..... is not a principle of construction. It is a statement of the consequences of giving a commercial construction to a fiscal concept. Before one can apply Lord Brightman's words, it is first necessary to construe the statutory language and decide that it refers to a concept which Parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component parts. But there are many terms in tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning. In such cases, the Ramsay principle can have no application."

33. Later in his speech, Lord Hoffmann returned to the limitations of the Ramsay principle, saying this (at paragraph 58):

"The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before [Ramsay]. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they mean, would say: "You had better ask a lawyer".

34. Later, under the heading "The concept of payment", Lord Hoffmann said this (at paragraph 67 and 68):

"My Lords, payment of a debt such as interest ordinarily means an act, such as the transfer of money, which discharges the debt. It was accepted that in this case the interest debt was indeed discharged. So why did this not count as payment for the purposes of the Act? One of the difficulties which I have with the argument for the Crown is that I find the alternative concept of payment for which it contends completely elusive. ..... What the Crown finds objectionable is the circularity of the cash flow combined with the fact that the transaction took place entirely for tax purposes. And I accept that for the purposes of some concepts used in tax legislation, these two features would stamp the transaction as something different from that contemplated by the legislature. For example, I have no doubt that Langley J was right when he recently decided in NMB Holdings Ltd v. Secretary of State for Social Security (unreported, 14 July 2000) that a payment of bonuses to directors in the form of platinum sponge held in a bank, accompanied by arrangements under which they could immediately sell it for cash to the bank, was not a "payment in kind" which fell to be disregarded for the purposes of National Insurance Contribution. In commercial terms the directors were paid in money. It is obvious that such a transaction was not what the Social Security (Contributions) Regulations 1979 .contemplated as a payment in kind. But there can be equally little doubt that the bonuses were "paid" and, in the absence of some contrary context, I can see no reason not to treat them as paid when the directors were credited with platinum sponge and the employer's obligation to pay them was discharged."

35. Lord Hope of Craighead, agreeing with Lord Hoffmann, said this (at paragraphs 80 and 81):

"The question that has to be addressed in these circumstances relates .... to the fiscal effectiveness of the transaction entered into by the taxpayer. The answer to this question is to be found in the statute. A course of action that was designed to defeat the intention of Parliament would fall to be treated as tax avoidance and dealt with accordingly. But one must first discover what the statute means. The ordinary principles of statutory construction must then be applied to the words used by Parliament which describe the effect of the transaction for tax purposes. On this approach the case does not seem to me, in the end, to give rise to any real difficulty. The words "paid" and "payment" are to be construed according to their ordinary meaning. The question whether a payment has been made is a question of fact."

36. Mr Glick's argument on the Ramsay issue in this court is less closely focused on the individual elements in the scheme than the argument which he addressed to the judge. Mr Glick submits that all the essentials for the application of the Ramsay principle are present in the instant case and that, applying the Ramsay principle, the payment to Mr MacDonald is to be regarded as having been effected by the composite transaction as a whole, rather than by any single step in the scheme taken by itself. He submits that the arrangements for the creation and assignment of the contingent reversionary interest were purely artificial and had no business purpose other than tax avoidance, and accordingly should be disregarded for present purposes in so far as they have the effect of creating and transferring a beneficial interest. On a true analysis, he submits, the transaction must be seen for what it was: a payment of money rather than the transfer of a benefit in kind.
37. Turning to MacNiven, Mr Glick submits that the concept of "payment" in the context of the PAYE system is par excellence a practical, commercial concept as opposed to a juristic concept of the kind referred to by Lord Hoffmann; and that the statutory provisions relating to PAYE focus on the actual transfer of money from employer to employee rather than on the discharge of an employer's obligation. He submits that the significance of actual payment is illustrated by section 203A(1). Under that subsection, payment is to be treated as made at the latest when it is "actually made", but it will be treated as made earlier in certain circumstances; in particular, it will be treated as made at the time when the employee becomes entitled to "the payment", that is to say at a time when the employer has by definition not discharged his obligation to the employee (see ibid. subparagraph (b)). The plain purpose of this provision, he submits, is to ensure that an employer cannot defer his obligation to deduct and account for income tax under the PAYE system merely by delaying making the relevant payment. Referring to the final sentence of paragraph 68 in Lord Hoffmann's speech in MacNiven (quoted above) Mr Glick submits that in the context of the PAYE system payment means payment in cash or its equivalent. Mr Glick submits that the Special Commissioner's analysis was wholly correct. The £40,000 started off in DTE's bank account and ended up in Mr MacDonald's bank account, and, as the Special Commissioner said, that is the beginning and the end of the matter.
38. Mr Thornhill concedes that the creation and assignment of the contingent reversionary interest in lieu of direct payment of bonus had no business purpose other than tax avoidance. However, he says that all the intermediate legal steps in the composite transaction were genuinely taken. He accordingly submits that the judge was correct to reject the analysis put forward by the Revenue on the ground that it involved a recharacterisation of one of the intermediate steps in the composite transaction. In essence, he says, the same analysis is being put forward by the Revenue on this appeal and it should once again be rejected. The Ramsay principle, he submits, is concerned with looking at the end result, and the end result of the transactions in the instant case was that Mr MacDonald received a sum of cash which represented the proceeds of the contingent reversionary interest and not a payment as a reward for his services as an employee. Mr Thornhill submits that the vesting of the contingent reversionary interest in Mr MacDonald cannot be ignored because that was a real transaction which provided him with a real asset. If that transaction is ignored, he submits, the transaction which creates the tax charge goes. He submits that the Revenue cannot levy tax by reference to a transaction and at the same time ignore it and re-create the tax charge by a different route.
39. As to MacNiven, Mr Thornhill submits that the concept of "payment" in a PAYE context is not a commercial concept which is susceptible of a Ramsay approach; rather (he submits) it is a legalistic concept.
40. Mr Thornhill further submits that to adopt a Ramsay approach to the workings of the PAYE system would be to introduce confusion and uncertainty into a system where simplicity and certainty are of paramount importance. The Act and the regulations made pursuant to it lay down a complete code, he submits, and there is no scope for (in effect) adding to or varying that code through the application of a Ramsay analysis.
41. In my judgment the Revenue's argument before the judge was, as Mr Glick now accepts, somewhat over-complicated. As I see it, viewing the matter through Ramsay eyes, the composite transaction in the instant case involved only three relevant stages: first, the purchase by DTE of the contingent reversionary interest; second, the assignment of that interest to Mr MacDonald; and third, the payment of the cash sum by the trustee to Mr MacDonald when the interest fell into possession. If it is legitimate to apply the Ramsay principle to the application of the provisions relating to PAYE to that composite transaction, then to my mind only one result can follow. As the Special Commissioner rightly said:

"The company decided that Mr MacDonald should have a £40,000 bonus; Mr MacDonald got that bonus; that is - in both senses - the beginning and the end of the matter."

42. So far as the Ramsay issue is concerned, therefore, the only question (to my mind) is whether it is legitimate to apply the Ramsay principle - or, if one prefers, adopt a Ramsay approach - to the concept of "payment" in the context of the statutory provisions relating to PAYE. In my judgment it plainly is. I accept Mr Glick's submission that in the context of the PAYE system the concept of payment is a practical, commercial concept. In some statutory contexts the concept of payment may (as Lord Hoffmann pointed out in MacNiven) include the discharge of the employer's obligation to the employee, but for the purposes of the PAYE system payment in my judgment ordinarily means actual payment: i.e. a transfer of cash or its equivalent.
43. Nor can I accept Mr Thornhill's submission that to apply the Ramsay principle to the PAYE system will inevitably introduce confusion and uncertainty into the statutory code. The true position, as I see it, is that for those employers who operate the PAYE system in a straightforward manner, and who do not resort to the complexities of tax avoidance schemes, there will be neither confusion nor uncertainty; whereas for those employers who choose to operate such schemes the effect of applying the Ramsay principle is to restore the certainty which the legislature intended.
44. In my judgment, therefore, the cash payment received by Mr MacDonald was a payment of assessable income within the meaning of section 203(1). On that basis, the analysis involving section 203B does not arise.
45. That conclusion is enough to dispose of this appeal, but for completeness I turn briefly to the section 203F issue.

THE SECTION 203F ISSUE

46. Mr Glick submits that the judge reached the correct conclusion on this issue, for the reasons he gave. Mr Thornhill, on the other hand, submits that one cannot find the existence of "trading arrangements" relating to an asset by analysing the incidents of the asset itself. He points out that in the instant case the interest itself was limited to turn into cash on the specified day: there was no scope, indeed no need, for any arrangements to enable that result to be achieved.
47. I accept Mr Thornhill's submission on this issue. As I read it, section 203F contemplates trading arrangements which are extraneous to the asset itself: see in particular the definition of "tradeable asset" in section 203F(2)(c) as including "any other asset for which, at the time the asset is provided, trading arrangements exist". The definition of "trading arrangements" in section 203K(2)(a) as meaning, in relation to an asset, "arrangements for the purpose of enabling the person to whom the asset is provided to obtain an amount similar to the expense incurred in the provision of the asset" seems to me to provide further support for this interpretation. Accordingly I would disagree with the judge on this aspect of the case. However, in the light of my conclusion on the Ramsay issue this does not affect the outcome of this appeal.

RESULT

48. In the result, for the reasons I have given I would dismiss this appeal.

LORD JUSTICE SEDLEY

49. I agree.

LORD JUSTICE POTTER

50. I also agree
ORDER: Appeal dismissed; costs in favour of Respondent to be assessed; Application to appeal to the House of Lords refused. (Order does not form part of approved Judgment)