THE HON MRS JUSTICE PROUDMAN
CH/2009/APP/0072 & 0063
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE THOMAS
LORD JUSTICE TOULSON
| THE COMMISSIONERS FOR HM REVENUE & CUSTOMS
|- and -
MR MICHAEL FURNESS QC (instructed by McGrigors LLP) for the Respondent
Hearing dates: 28th & 29th July 2010
Crown Copyright ©
Lord Justice Mummery :
Two linked appeals
"45. I sympathise with the instinctive reaction that such an obvious scheme ought not to succeed…"
"…the ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
"(8) … But ever since [Ramsay] the courts have tended to assume that revenue statutes in particular are concerned with the characterisation of the entirety of transactions which have 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 authorities since Ramsay's case is unnecessary."
(1) Step 1: 2 April 2002.
A Jersey resident individual, Mr Christopher Lovell, purchased from AIG Life (part of the American Insurance Group-AIG), by means of 2 single premiums of £5,000 each, 2 AIG Bonds comprising several policies on his life. It was part of a larger purchase of AIG Bonds for use in SHIPS 2. It is agreed that the premiums were paid out of borrowed funds. It is agreed that the AIG Bonds were life assurance policies, being standard form life policies issued by AIG and marketed to potential investors as an investment product under the name Premium Access Bond (PAB) invested in the Premier Access Fund (PAF) managed by AIG. Each Bond was a cluster of 20 single premium life assurance policies, the initial premium paid under each being £250. They were claimed to be an attractive alternative to cash deposits. Money invested was available on instant access. It was claimed that there were tax advantages and a death benefit.
(2) Step 2: 6 March 2003
Mr Lovell assigned the Bonds to a Luxembourg company, January Storm Investments SA (JSI), for value. The full consideration was £256,085.
(3) Step 3:7 March 2003
JSI paid a top-up premium of £375,000 to AIG Life in respect of each policy in the first Bond and £50,000 in respect of each policy in the second Bond. The total top-up premium paid in respect of the PABs was £150m. HMRC accept that the payments were premiums. They were paid out of borrowed funds.
(4) Step 4: 31 March 2003
JSI withdrew from AIG on 31 March 2003 all of the sums paid at Step 3 on 7 March 2003. It is agreed by HMRC that the repayment to JSI was a partial surrender of the policies reflecting the amount of top-up premiums paid and the investment return from the issue of the policies up to the date of partial surrender. The income comprised of over 1 year's interest accruing on the initial investment of £5,000 and over 3 weeks' interest accruing on the additional investment. After the withdrawal, £5,000 remained in each bond at the year end i.e. 5 April 2003.
(5) Step 5: 6 November 2003
JSI assigned the Bonds to PE Shirley & Co LLP (PES), a limited liability partnership registered in England, for value.
(6) Step 6:18 December 2003
Mr Mayes appeared on the scene at Step 6, having used Barclays Private Bank as his investment adviser. PES assigned the Bonds to Mr Mayes for value, £125,949 in the case of one Bond comprising 5 policies and £7,155 in the case of the other Bond comprising 2 policies.
(7) Step 7: 13 January 2004
Mr Mayes then surrendered in whole both Bonds to AIG Life. He received in return the remaining proceeds in the Bonds (£1,780.94). He then claimed income tax relief arising from the surrender in the tax year 2003-4. The amount of "corresponding deficiency relief" claimed by him was £1,876,134. He also claimed an allowable loss for CGT purposes of £131,326 on the surrender of the life policies. His case is that the deficiency arose due to a chargeable event arising at the end of the year in which Step 3 and Step 4 occurred.
Corresponding deficiency relief appeal: outline
CGT appeal: outline
The ICTA provisions
"..for the purposes of imposing…charges to tax…in respect of gains to be treated in accordance with this Chapter as arising in connection with policies of life assurance..."
"24. …At step 3…JSI made substantial payments under the two policies. Mr Mayes says that these are clearly premiums, because they are paid to secure further benefits under the Bonds. At step 4, the withdrawal of the funds paid by way of premium at step 3 is a partial surrender of benefits under the Bonds, which gives rise to a section 540(1)(a)(v) computation which produces a large gain, because the rights to all the sums paid by way of premium other than the initial premiums of £5,000 are being surrendered, but only 1/20th of the total amount of premiums is available as a deduction against the value of those rights. The assignment to Mr Shirley generates a computation under section 541(1)(c) which results in a loss equal to the gain made on the partial surrender, but JSI cannot deduct that loss as a corresponding deficiency under section 549(1), (a) because it does not occur at the end of final year of the policy, and (b) because JSI is not an individual. The onward assignment to Mr Mayes is of no significance to Mr Mayes' tax position. On surrender Mr Mayes makes a calculation under section 541(1)(b), which results in the gain made by JSI at step 4 being added to the total premiums, and then being deducted from the aggregate of the surrender value and the capital payments made (which are the sums returned to JSI at Step 4.) This results in a corresponding deficiency for Mr Mayes which corresponds to the gain made by JSI at step 4."
" 23. The point that Mr Furness sought to draw is this. The legislation operates in an arbitrary way in the sense that the sections about assignments make no provision for successive owners of the policy to be taxed only on the gains and losses that they themselves respectively make. It is then possible for unfair tax results to arise from transactions which have no tax avoidance element. The legislation does not admit of a purposive interpretation that might ameliorate them. It shows a lack of interest in (a) attributing gains to the person who made them, (b) not attributing gains to a person who did not make them and (c) timing the taxation of the gain fairly. Instead it operates mechanically according to a series of statutory formulae.
24. Mr Ewart submitted that the overall purpose of the legislation was to ensure that the policies were subjected to the correct amount of tax over their lifetime, rather than to ensure that individual taxpayers paid an appropriate amount. Some taxpayers end up by paying more or less tax than is strictly equitable, but over the lifetime of the policy the correct amount of tax is charged.
25 However, it seems to me that Mr Ewart's purposive construction assumes that chargeable events will result in a charge to tax and that overall at the end of the day the correct amount of tax will be exacted. Neither of these assumptions necessarily holds good."
" 27. If a taxpayer takes out a policy while non-resident, and effects a partial surrender while non-resident, but then becomes UK resident before effecting a total surrender, the gain made on the partial surrender falls outside the charge to tax but he is still entitled to claim corresponding deficiency relief from UK tax on the total surrender. Conversely, if he takes out the policy and effects the partial surrender while UK resident, but then because of initially unforeseen force of circumstances becomes non-resident, he pays tax on the large gain on partial surrender, but loses the benefit of the compensating corresponding deficiency on total surrender. The former situation is capable of apparently legitimate avoidance possibilities, the latter is capable of causing hardship. Both illustrate the formulaic and prescriptive nature of the legislation.
28. The statute does not tax actual losses. If the transaction had proceeded in exactly the same way but JSI had been a UK taxpayer the gain and loss would have been offset and there would and could have been no HMRC objection."
Special Commissioner's decision
"80. …I am satisfied that Steps 3 and 4 were inserted in the transactions for no purpose other than the avoidance of tax. If, as Mr Ewart contends, steps 3 and 4 are elided, what actually happened? Standing back from the individual Bonds and looking at the whole transaction and the common elements present, one sees that a series of companies of which JSI was one deposited some £300,000,000 with AIG Life and then encashed the entire sum a short time later. It was known by all concerned that the entire funds were to be withdrawn within a pre-defined short period of them being deposited into the Bonds. Further, the terms on which the money was held during the period were not standard terms of the Bonds but specific and uncommercial terms to the investors and required a third party subsidy to the providers of the funds to make the scheme acceptable in market terms. And the companies that paid the funds into and then in name withdrew them from AIG Life were created from the same funds as were used by those companies, once established, to purchase the Bonds prior to these Steps. Steps 3 and 4, in the real world, left the Bonds worth in commercial terms much the same after the funds had been encashed as before they had been put in. The steps did not create any other direct value to the companies undertaking those steps. The only difference is that there was, in the view of those who undertook the scheme, a tax advantage to anyone liable to higher rate United Kingdom income tax. That, of course, was not relevant in Jersey where the initial purchaser of the Bonds lived and the main funder was based, nor in Luxembourg, where JSI was based. It only became relevant when, after both Mr Lovell and JSI had ceased to have any interest in the Bonds, they were sold by JSI to an associate of someone from the United Kingdom involved in the planning from the beginning.
81. My conclusion on all the evidence is that Mr Ewart's argument is right. The payment of sums of money to AIG Life pro rata into the Bonds was formally in the name of JSI. The subsequent pre-arranged withdrawal of all those funds pro rata from those Bonds after a brief period was in the name of JSI. But in reality the investment of funds was arranged by, the encashment of funds was ordered by, and the funds came from and went directly to, SGH. Steps 3 and 4 were pre-arranged self-cancelling steps with no commercial purpose to JSI or its immediate funders other than the tax advantage that it was intended to secure in the United Kingdom under the terms of the Chapter on the onward sales of the Bonds through a third party associated with the funding operation. They followed a pre-set time table that had been discussed by all concerned. The encashment had been arranged with AIG Life before the funds went in, and was understood by AIG Life to be part of the deal under which it received the deposit.
82. On those findings, my answer to "the ultimate question" is that to apply the sections in question to Steps 3 and 4 as evidenced above, with the result that the two steps generated a "reckonable aggregate value" such as to create a "corresponding deficiency" would not be a rational application of the Chapter and is not to be accepted as intended by the legislature. The calculations required by the Chapter are properly to be undertaken without reference to the payments in by and the payments out to, JSI. That involves no distortion or forced interpretation of the language of the Chapter. Rather, it reflects both the plans and the language used by those who took part in the actual funding operation. Nor does it involve any recharacterisation of what occurred or the imposition of some economic reality in place of what actually happened. All the other steps remain as before, and this is reflected in the history of the Bonds aside from these two Steps. The answer also accepts and reflects a coherence of the drafting of, and the purpose behind, the provisions in the Chapter."
Judgment of Proudman J
"44. … I find that a purposive construction [of Chapter I, Part XIII ICTA] does not enable the Court to disregard the additional payment of premiums and the partial surrender constituted by Steps 3 and 4. This is legislation which does not seek to tax real or commercial gains. Thus it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance.
45. I sympathise with the instinctive reaction that such an obvious scheme ought not to succeed. However I cannot extract from the legislation any underlying or overriding purpose enabling me to conclude that parts of the scheme may be ignored. To do so would conflate the definition of a chargeable event with the concept of an actual charge to tax and would, I believe, revert to an acceptance of the type of submission that was roundly rejected in MacNiven. I am bound by the ratio of the decision in MacNiven and in my judgment it points only one way on the facts of this case.
46. I agree with the Special Commissioner's formulation of the statutory question to be answered in the words of Ribeiro PJ, that is to say, whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction viewed realistically. He further noted the fact that steps 3 and 4 were pre-arranged self-cancelling steps with no immediate advantage to JSI or its funders other than the tax advantage they were intended to secure. He drew attention to the fact that steps 3 and 4 were arranged and funded by companies in the SG Hambros Group, the architect of the scheme. He asked the question whether a corresponding deficiency can be claimed when the deficiency related back "not to an actual chargeable event but to the coordinated series of events evidenced here." That in my judgment begged the very question that was being formulated and also conflated the concept of chargeable event with the charge to tax itself. It seems to me that the Tribunal made an error of law which, despite the circumspection and due deference I accord to the determination to Dr Williams, requires me to intervene.
47. In summary it seems to me that Chapter II of the Taxes Act adopts a formulaic and prescriptive approach. No overriding principle can be extracted from the legislation, or from the authorities, that some types of transaction should be ignored in the application of the Chapter. To say that there is no premium and no partial surrender, that those steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self–cancelling nature of the transaction was no different and no more extreme that that in MacNiven."
A. HMRC APPEAL ON CORRESPONDING DEFICIENCY RELIEF
Submissions of Mr Mayes
(1) The payments made under the two policies at Step 3 were paid to secure further benefits under the Bonds. They are therefore premiums.
(2) The withdrawal at Step 4 of those funds paid at Step 3 was a partial surrender of benefits under the Bonds.
(3) The partial surrender at Step 4 gave rise to a computation under s540(1)(a)(v).
(4) That computation produced a large gain, because the right to all the sums paid by way of premium, other than the initial premium of £5,000 were being surrendered, but only 1/20th of the total amount of the premiums is available as a deduction against the value of those rights.
(5) The assignment to PES generated a computation under s541(1)(c) which resulted in a loss equal to the gains made on the partial surrender.
(6) On surrender Mr Mayes makes a calculation under s541(1)(b). That results in the gain made by JSI at Step 4 being added to the total premiums and then being deducted from the aggregate of the surrender value and the capital payments made, which are the sums returned to JSI at Step 4.
(7) That results in a "corresponding deficiency" for Mr Mayes. It corresponds to the gain made by JSI at Step 4.
Discussion and conclusions
"27. …too much to expect that any exposition will remove all difficulties in the application of the principles because it is in the nature of questions of construction that there will be borderline cases about which people have different views."
Result of HMRC appeal
B. CGT APPEAL BY MR MAYES
Decision of Special Commissioner
"86. … An amount is allowable to Mr Mayes for the loss on the final surrender of the Bonds. For myself, I am not entirely clear how the entire amount is allowable given the terms of the final payment if there is in reality a dual purpose behind the price he paid. And I note as a matter of fact that it was neither the seller nor Mr Mayes that determined the price he paid, but a third party to the transaction. There are therefore questions of fact, not argued before me, to be decided before the exact amount of any loss can be determined. But as I now find that there was no corresponding deficiency for income tax purposes, it appears only appropriate on these facts to accept that Mr Mayes did have a capital loss in buying the Bonds and to enquire into the detail no further at this stage. Accordingly, I allow that aspect of the appeal in principle. Again, I give liberty to apply if final agreement is not reached on this point."
Judgment of Proudman J
Submissions of Mr Mayes
Lord Justice Thomas:
Lord Justice Toulson: