England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM the Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Warren and Upper Tribunal Judge Clark
[2011] UKUT 306 (TCC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/07/2012

The Chancellor:

Introduction
1. On 31st December 2002 the appellant, Howard Schofield, incurred a liability to capital gains tax in respect of the gain in the sum of £10,726,438 accruing to him on the redemption of loan notes issued to him as consideration for his disposal of his shares in P.L.Schofield Ltd. On 9th January 2003 representatives of PricewaterhouseCoopers advised Mr Schofield of a tax avoidance scheme whereby he might defer or avoid such liability by the creation of an allowable capital loss in an amount equivalent to or greater than his chargeable gain. Mr Schofield accepted such advice, later confirmed by a letter dated 13th February 2003, and entered into the transactions with Kleinwort Benson Private Bank Ltd ("KBPB"), which I describe in the next paragraph, on the assumption that he would cease to be resident in the UK for tax purposes before 6th April 2003.
2. The relevant transactions were the following:

(1) On 17th January 2003 Mr Schofield and KBPB entered into an International Swap Dealers Association Master Agreement. It provided, so far as relevant, that:

(a) "all transactions are entered into in reliance on the fact that this Master Agreement and all confirmations form a single agreement between the parties.." (clause 1(c)), and

(b) with certain limited exceptions, neither party might transfer any interest or obligation thereunder to a third party without the consent of the other party (clause 7).

(2) On 7th February 2003 Mr Schofield and KBPB entered into four European Style options, expiring on 7th April 2003, consisting of two pairs. The first pair (Options 1 and 2) were bought by Mr Schofield from KBPB and were to be settled in cash, the second pair (Options 3 and 4) were sold by Mr Schofield to KBPB and were to be settled by physical delivery of the underlying stock. The basic terms of the options were:

(a) a put option over £333m FTSE 100 Index at a strike price of 3389.91 at a premium of £12,037,617 ("Option 1");

(b) a call option over £333m FTSE 100 Index at a strike price of 3390.4 at a premium of £12,141,846 ("Option 2");

(c) a put option over £333m 7.25% Treasury Stock 2007 at a strike price indicated by a formula related to the movement of the FTSE 100 index at a premium of £12,153,834 ("Option 3"); and

(d) a call option over £333m 8.5% Treasury Stock 2007 at a strike price indicated by the like formula at a premium of £11,915,073 ("Option 4").

The difference of £110,556 payable by Mr Schofield to KBPB was the fee payable by the former to the latter.

3. The letter of advice from PricewaterhouseCoopers to Mr Schofield dated 13th February 2003 explained:

"1. The first possibility is that the index does not move sufficiently for any Option to be exercisable, in which case both cash Options are closed out on 4 April and you will have lost £11.8 x 2 = £23.6 million. This amount will be a capital loss available to set against your current gain leaving £11.8 million to be set against future gains. The exempt options are both closed out at the same time giving rise to a non-taxable gain of £23.6 million.

2. The second possibility is that the FTSE index falls below 94.2 per cent. The put options become valuable and exercisable, but the call options are not exercisable. You will close out the call option showing the loss on 4 April i.e. in this tax year, thus generating a loss of £11.8 million for tax purposes. You will close out at the same time the equal and opposite call over the gilts which will give rise to a non taxable gain of the same amount. On 7 April, which is in the new tax year the other two put options expire. These give rise to a taxable gain and non-allowable loss. However, as you will be non-resident and outside the scope of United Kingdom tax in that year, there will be no charge to capital gains tax.

3. The third possibility is that the index moves above 103.5 per cent and the call options become valuable and exercisable. In this case the same process is followed in that the put options which are not exercisable are closed out on 4 April giving an allowable loss and a non taxable gain for the current year. The valuable call options are deferred until the new tax year when they expire giving a taxable gain and a non allowable loss. However, as you will be non resident no tax will be payable in this situation it is likely that you will realise a commercial profit of about €50,000."

4. Mr Schofield left for Spain on 29th March 2003. He stayed there for the five or so years needed to establish non residence. In the event the FTSE 100 Index went up. On 4th April 2003, when it stood at 3814.30, Options 1 and 3 were closed out giving rise to a loss on Option 1 of £11,305,017 and a gain on Option 3 of £11,416,239. As indicated in the advice letter, the loss, if allowable, was available to be set off against the gain which had already accrued to Mr Schofield on the redemption of the loan notes issued to him as consideration for the sale of his shares in P.L.Schofield Ltd. At this stage the closure payments passing between the parties resulted in a balance in favour of Mr Schofield of £4,995.
5. On 7th April 2003 Option 2 was exercised by Mr Schofield and Option 4 by KBPB. FTSE 100 Index then stood at 3935.8. The results were:

(a) in respect of Option 2 KBPB paid Mr Schofield £19,487,605 yielding a profit to him over cost of £7,354,759;

(b) in respect of Option 4 the £333m nominal 8.5% Treasury Stock 2007 Mr Schofield was obliged to deliver to KBPB was acquired by him from another company in the same group resulting in a loss to him of £7,522,570.

Mr Schofield was, accordingly, entitled to receive from KBPB £49,962. The gain was not chargeable if, as assumed, Mr Schofield was not resident in the UK for tax purposes in the year 2003/04.

6. The overall result of the acquisition and closure/exercise of all four options was, in cash terms, that Mr Schofield had paid out £65,589 more than he had received. On the other hand, if the scheme were effective for tax purposes, Mr Schofield had avoided a liability to capital gains tax on his gain of £10,726,438. In his self-assessment tax return for the year 2002/03 Mr Schofield claimed to be entitled to deduct from that gain the loss of £11,305,017. On 8th December 2004 the Inspector initiated an enquiry into Mr Schofield's return. On 28th May 2008 the Inspector disallowed the deduction of that amount on the ground that "…the avoidance scheme…is ineffective".
7. Mr Schofield duly appealed to the Tax Chamber of the First Tier Tribunal. His appeal was heard over three days in January 2010. For the reasons given in their judgment dated 3rd September 2010, to which I shall refer in some detail later, the First Tier Tribunal dismissed Mr Schofield's appeal. Mr Schofield duly appealed to the Upper Tribunal. His appeal was heard over two days in March 2011. For the reasons given in their judgment dated 27th July 2011, to which I shall refer later also, the Upper Tribunal dismissed Mr Schofield's appeal and, following a further hearing, refused him permission to appeal. This, second, appeal is brought with the permission of Patten LJ. Before considering the arguments addressed to us it is necessary to set out the relevant provisions of the TCGA and to consider the judgments of the First Tier and Upper Tribunal in some detail.
Taxation of Chargeable Gains Act 1992
8. The scope of the tax is set out in sections 1 and 2. In relation to individuals, so far as relevant, they provide:

"1 The charge to tax

(1) Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets.

[(2) and (3)]

2 Persons and gains chargeable to capital gains tax, and allowable losses

(1) Subject to any exceptions provided by this Act, and without prejudice to sections 10 and 276, a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom.

(2) Capital gains tax shall be charged on the total amount of chargeable gains accruing to the person chargeable in the year of assessment, after deducting–

(a) any allowable losses accruing to that person in that year of assessment, and

(b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous year of assessment, any allowable losses accruing to that person in any previous year of assessment (not earlier than the year 1965-66).

[(3)]"

9. Ss.15 and 16 provide that "gains accruing on the disposal of assets" and losses similarly accruing are to be computed in accordance with the Act. S.21(1) provides:

"(1) All forms of property shall be assets for the purposes of this Act, whether situated in the United Kingdom or not, including–

(a) options, debts and incorporeal property generally, and

(b) any currency other than sterling, and

(c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired."

10. S.38 provides, so far as relevant, that in the computation of gains or losses:

"(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to–

(a) the amount or value of the consideration, in money or money´s worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset,"

11. S.115, which is relevant to Options 3 and 4 provides:

"(1) A gain which accrues on the disposal by any person of–

(a) gilt-edged securities or qualifying corporate bonds, or

(b) any option or contract to acquire or dispose of gilt-edged securities or qualifying corporate bonds, shall not be a chargeable gain.

(2) In subsection (1) above the reference to the disposal of a contract to acquire or dispose of gilt-edged securities or qualifying corporate bonds is a reference to the disposal of the outstanding obligations under such a contract.

(3) Without prejudice to section 143(5), where a person who has entered into any such contract as is referred to in subsection (1)(b) above closes out that contract by entering into another contract with obligations which are reciprocal to those of the first-mentioned contract, that transaction shall for the purposes of this section constitute the disposal of an asset, namely, his outstanding obligations under the first-mentioned contract."

12. S.144 deals with options in some detail. It is only necessary to refer to the following subsections:

"(1) Without prejudice to section 21, the grant of an option, and in particular–

(a) the grant of an option in a case where the grantor binds himself to sell what he does not own, and because the option is abandoned, never has occasion to own, and

(b) the grant of an option in a case where the grantor binds himself to buy what, because the option is abandoned, he does not acquire, is the disposal of an asset (namely of the option), but subject to the following provisions of this section as to treating the grant of an option as part of a larger transaction.

(2) If an option is exercised, the grant of the option and the transaction entered into by the grantor in fulfilment of his obligations under the option shall be treated as a single transaction and accordingly–

(a) if the option binds the grantor to sell, the consideration for the option is part of the consideration for the sale, and

(b) if the option binds the grantor to buy, the consideration for the option shall be deducted from the cost of acquisition incurred by the grantor in buying in pursuance of his obligations under the option.

(3) The exercise of an option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person, but, if an option is exercised then the acquisition of the option (whether directly from the grantor or not) and the transaction entered into by the person exercising the option in exercise of his rights under the option shall be treated as a single transaction and accordingly–

(a) if the option binds the grantor to sell, the cost of acquiring the option shall be part of the cost of acquiring what is sold, and

(b) if the option binds the grantor to buy, the cost of the option shall be treated as a cost incidental to the disposal of what is bought by the grantor of the option.

(4) The abandonment of–

(a) a quoted option to subscribe for shares in a company, or

(b) a traded option or financial option, or

(c) an option to acquire assets exercisable by a person intending to use them, if acquired, for the purpose of a trade carried on by him, shall constitute the disposal of an asset (namely of the option); but the abandonment of any other option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person."

It is clear that all the Options with which this appeal is concerned are financial options within the definition of that term set out in subsection (8)(c). In the case of Options 1 and 2 s.144A(2) and (3) apply in place of s.144(2) and (3). It is not necessary to set them out.

Judgment of the First Tier Tribunal
13. The First Tier Tribunal (Michael Tildesley OBE and Richard Thomas) had before them an agreed statement of facts and a bundle of relevant documents. In addition they heard oral evidence from Mr Schofield, Mr Wilkinson, a merger and acquisition specialist in relation to gilts transactions, Mr Hamilton-Ely, the head of structured products at KBPB at the time of the relevant transactions and Mr Stanton a banking consultant. In paragraph 40 the Tribunal identified the principal factual issue as

"… whether the dealings in the four Options were inextricably linked with each other to form a continuous process which could be viewed commercially as a single or composite transaction."

14. The facts as found by the Tribunal were set out at length in paragraph 53 of their judgment. This paragraph is reproduced in full as an appendix to the judgment of the Upper Tribunal. It is not necessary for me to do the same. It is sufficient to refer to the conclusion of the Tribunal in paragraph 54. They said:

"The Tribunal is satisfied on the facts found that the Appellant's arrangements consisted of a series of interdependent and linked transactions with a guaranteed outcome of a capital loss at least equivalent to the chargeable gain arising from the [sale of the shares in P.L.Schofield Ltd]. The structure of the Options and their interrelationship were such that it provided the funding for the scheme, determined the size of the loss and eliminated the risks associated with movements in FTSE 100 Index with the result that there were only three possible scenarios all favourable to the Appellant. The transactions followed a pre-ordained path which involved the Appellant becoming non-resident and implementing the necessary steps required by whichever of the three known scenarios existed on 4 April 2003. All three scenarios guaranteed a loss of at least around £12 million which the Appellant would claim by deducting it from his chargeable gain. There was no prospect of a party departing from the pre-ordained path. The sole aim of the transactions was to avoid tax. The transactions were bereft of a commercial purpose. The implementation of the scheme achieved the desired result."

15. Having referred to the relevant provisions of TCGA the Tribunal identified the principal question to be "whether the statutory provisions dealing with allowable losses construed purposively applied to the facts of this case". The Tribunal then considered at some length the principles to be derived from the well known decision of the House of Lords in Ramsay (PVT) Ltd v Inland Revenue Commissioners [1982] AC 300 and those which followed it. The Tribunal considered, in paragraph 84, that the correct approach was to consider:

"…whether the relevant statutory provisions, construed purposively, were intended to apply to the facts of the transactions, viewed realistically. The question whether a loss was a real loss is a question of fact, and depends upon the circumstances of the individual case."

16. The Tribunal concluded in paragraph 89:

"When viewed as whole the basic structure of the arrangements was that Options Three and Four funded the Appellant's purchase of Options One and Two with the result that a cash flow as represented by book entries in relation to four premiums went from and immediately back to the Bank on 7 February 2003. On 4 April 2003, on the closing out of Options One and Three, a cash flow as represented by book entries in relation to two close out payments went from and immediately back to the Bank. On 7 April 2003 a cash flow as represented by book entries in relation to the cash payments under Option Two and the sale of assets acquired under Option Four went from and immediately back to the Bank. The combined effect of Options One, Two, Three and Four ensured that the Appellant did not bear the burden of paying any premium at all for Options One and Two, and did not suffer the economic consequences of either the grant or the exercise of the Options. At the end of the planned arrangements the Appellant's financial position was precisely the same as it was at the beginning, except for the fees he paid to PWC and KBPB, and the security of £50,000 lodged with KBPB to cover the contrived loss. The Appellant, therefore, suffered no real loss."

Accordingly, the Tribunal concluded in paragraph 91 that the loss claimed by Mr Schofield was not an allowable loss and dismissed his appeal.

17. The Tribunal then considered an alternative contention of HMRC to the effect that s.115(1) TCGA did not apply to either Option 3 or Option 4 so that the dispositions thereby effected did give rise to a chargeable gain or an allowable loss. Though the issue was rendered academic by their decision on the first issue the Tribunal considered it fully but concluded that Options 3 and 4 were options to acquire or dispose of gilt-edged securities and s.115 applied.
The Judgment of the Upper Tribunal
18. Mr Schofield appealed with the permission of and to the Upper Tribunal. After setting out the facts, they referred to certain criticisms of counsel for Mr Schofield in respect of some of the factual conclusions of the First Tier Tribunal. They are not material to any issue before this court and I need say no more about them. The Upper Tribunal then set out the relevant provisions of the TCGA and considered the authorities relied on by the parties in some detail. They concluded in paragraph 82:

"On the facts of the present case, it is our view that the options code is to be ignored in deciding whether there was a loss within the meaning of s 2 TCGA 1992 when Option 1 was closed out on 4 April 2003. We conclude that the composite transaction – the grant of all four Options and, in the events which happened, their exercise or closing out – is to be seen as the relevant transaction. That is the transaction in relation to which it is appropriate to ask whether it satisfied the requirements of the statute (to adopt the more "convenient" analysis formulated by Lord Nicholls in BMBF at [32] p327H). But even if one analyses the case by reference to the first formulation (determine the nature of the transaction to which the statutory provision was intended to apply and then decide whether the actual transactions answered to the statutory description) we reach the same conclusion. The composite transaction in the present case is not, in our view, a transaction having the nature of a transaction to which s 2 CGTA applies so as to generate a loss. And, whichever analysis one chooses to apply, the options code to which we have referred does not fall to be applied to each Option separately as if each Option existed as a discrete entity on its own apart from the overall scheme to which it owed its existence in the first place."

19. The Upper Tribunal added by way of explanation in paragraph 86:

"We make clear that it is no part of our reasoning that steps are to be ignored for no other reason than that they are steps in a tax avoidance scheme. They are to be ignored in the present case, as we think that they were ignored in Ramsay, because the composite transaction in the present case is not one to which sections 2 and 16 TCGA 1992 apply so as to give rise to the loss claimed by Mr Schofield; and Mr Schofield fails to establish that the options code must be applied independently of the composite transaction."

20. In relation to the alternative case concerning the application of s.115 to Options 3 and 4 the Upper Tribunal arrived at the same conclusion as the First Tier Tribunal for substantially the same reasons. In the result Mr Schofield's appeal was dismissed.
The arguments for the parties and my conclusions
21. The basic argument of counsel for Mr Schofield is to the effect that both the First Tier and Upper Tribunal were wrong in failing to recognise that each option was a separate transaction giving rise to four separate assets. Options 1 and 2 were assets of Mr Schofield. Options 3 and 4 were assets of KBPB but liabilities of Mr Schofield. He pointed out that undertaking a liability does not involve the debtor in the acquisition (or disposal) of an asset, but the grant of each of Options 1 and 2 did. He submitted that Options 1 and 2 were assets within the clear words of s.21 as well as s.144 and each of them was clearly disposed of on 4^th and 7^th April respectively.
22. How, he asked forensically, can these undoubted facts be ignored or merged into a nullity or void? He illustrated the absurdity, as he contended, of the position of HMRC and both Tribunals by analogy with equivalent transactions conducted in a betting shop. If he bet on two horses in a race there were undoubtedly two bets either might win or both might lose. If one of them won the winnings were real even if the profit was reduced by the bet on the horse that lost. So, he submitted, in the case of these options; each was a separate transaction and must be regarded as such when applying the provisions of TCGA. Only Options 1 and 2 involved any asset of Mr Schofield; the disposal of Option 1 realised a loss but the disposal of Option 2 generated a gain. The only difference was that the loss on the disposal of Option 1 was an allowable loss but the gain on Option 2 was not chargeable because it occurred in a year of assessment when Mr Schofield was not resident in the United Kingdom.
23. Counsel for Mr Schofield submitted that this approach was consistent with authority at the highest level. He relied on Aberdeen Construction Group Ltd v IRC [1978] AC 885, 893 where Lord Wilberforce emphasised the need to consider each asset disposed of separately in the light of the rules which apply to that asset. That statement was made before the decision of the House of Lords in Ramsay (PVT) Ltd v Inland Revenue Commissioners [1982] AC 300 but, counsel submitted, the same principle was applied in the post-Ramsay decision of the Court of Appeal in Whittles v Uniholdings (1996) 68 TC 528. In that case the taxpayer sought to rely on the Ramsay decision as justification for deducting the amount of a loan incurred to buy the asset disposed of when computing the gain arising on that disposal. The claim was disallowed notwithstanding the contractual link between the loan and the acquisition of the asset. To the like effect is the decision of the House of Lords in Garner v Pounds Ltd [2000] 1 WLR 1107 on which counsel for Mr Schofield also relied.
24. Counsel for Mr Schofield referred us to the speech of Lord Hoffmann in MacNiven v Westmoreland Developments Ltd [2003] AC 311, 334 where he emphasised the need to give effect to the statutory language. In paragraphs 58 and 59 he said:

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

59. Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones."

25. Counsel for Mr Schofield forcefully contended that the principles reiterated by Lord Hoffman in MacNiven required the Tribunal to recognise the options for what they were and apply to them the unambiguous provisions of TCGA. So regarded Mr Schofield disposed of an asset, Option 1, on 4^th April 2003. S.38 required him to deduct his cost of acquisition from the proceeds of the disposal. The result is a loss and an allowable loss notwithstanding that it was an element of a scheme for the avoidance of a liability to capital gains tax arising from Mr Schofield's unconnected gain on the disposal of his shares in P.L.Schofield. He submitted that as HMRC accept that a gain was made on the disposal of Option 2 they cannot consistently deny that a loss was made on the disposal of Option 1.
26. Counsel for HMRC accepted that the principle established in Ramsay requires the court to identify the relevant transaction and consider whether the provisions of TCGA on their proper construction are apt to apply to it. In this case, he submits, the findings of the First Tier Tribunal established that the relevant transaction was the aggregate of all four options. That aggregation shows that each constituent was set up in order to be destroyed by the others with the consequence that there was no asset, no disposal and no loss to which ss.1 and 2 TCGA can apply. Accordingly, Option 1 cannot be considered in isolation from the preordained scheme of which it was a part and did not generate any such loss as s.2(2)(a) contemplates. He confirmed that, consistently with that submission, HMRC do not contend that the closure of Option 2 on 7th April gave rise to a chargeable gain even if Mr Schofield were then resident in the United Kingdom. In his submissions none of the four options was capable of giving rise to any chargeable gain or allowable loss.
27. Counsel for HMRC took us through the decisions of the House of Lords in Ramsay and many of the cases which followed in order to demonstrate the propositions for which he contends. They include, in chronological order, IRC v Burmah Oil Co Ltd [1982] STC 30; Furniss v Dawson [1984] 1 AC 474; Craven v White [1989] 1 AC 398; MacNiven v Westmoreland Developments Ltd [2003] AC 311 and IRC v Scottish Provident Institution [2004] 1 WLR 3172. In short the submission of counsel for HMRC was that the principle of Ramsay clearly applies to the pre-ordained transactions in this case. The only uncertainty was which of the three possibilities clearly explained in the advice letter I have quoted in paragraph 3 above would occur. In the event it was the second but the resolution of that doubt by the movement of the FTSE 100 Index could not confer any greater reality on Option 1 than its movement in the opposite direction would have done to Option 2.
28. In essence, therefore, the case for HMRC is simple. It depends on the application of the principle of Ramsay. If that applies the Tribunals were right; if it does not the Tribunals were wrong. HMRC do not in this court contend that s.38(1)(a) does not permit the deduction of the cost of the acquisition of Option 1 because the premium of £12,037,617 was not paid wholly and exclusively for the acquisition of that option but was merely one segment of a circular movement of cash. HMRC consider that this court would be bound to reject any such submission by the decision of the Court of Appeal in Drummond v HMRC [2009] EWCA Civ 608. In addition it was not raised in either of the Tribunals; but HMRC seek to reserve it for argument in the Supreme Court if necessary.
29. Accordingly, in considering the rival submissions for the parties the essential starting point is the decision of the House of Lords in Ramsay. In that case the taxpayer had sold the freehold of his farm and thereby realised a chargeable gain. He then engaged in a scheme designed to produce an off-setting capital loss. That scheme involved buying shares in a newly formed investment company and, contemporaneously with that acquisition, making two loans to the company for 30 and 31 years respectively at an interest rate of 11%. The following year the interest on one of the loans was increased to 22% and on the other reduced to zero. The loan carrying interest at 22% was sold to a finance company at its then market value. The company was then wound up causing both loans to be immediately repayable. In the liquidation of the company its shares were reduced in value well below their original subscription price. The taxpayer sought to deduct that loss from the gain made on the sale of the farm. The claim was allowed by the court at first instance but disallowed by the Court of Appeal. The taxpayer's appeal to the House of Lords was dismissed.
30. The argument for the Revenue, as recorded on page 314, was that

"Where the taxpayer enters into a preconceived series of interdependent transactions deliberately contrived to be self-cancelling, that is to say, to return him substantially to the position he enjoyed at the outset, and incapable of having any appreciable effect on his financial position, no single transaction in the series can be isolated on its own as a disposal for the purposes of the statute."

This argument was accepted by Lord Wilberforce, with whom Lords Russell of Killowen, Roskill and Bridge of Harwich agreed, and by Lord Fraser.

31. On page 323 Lord Wilberforce set out the argument for the taxpayer in opposition to that of the Revenue, namely the subject was to be taxed by clear words and if a transaction is genuine the courts cannot go behind it and continued:

"This is a cardinal principle but it must not be overstated or overextended. 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 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."

32. At page 326 Lord Wilberforce added:

"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 courts to arrive at a conclusion which corresponds with the parties' own intentions."

33. On page 328 Lord Wilberforce applied this principle to the facts of the Ramsay case. In the light of submissions made to us it merits repeating in full. He said:

"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 L.2. The one could not occur without the other. To borrow from Rubin v. U.S. (1962) 304 Fed. 2nd 766 approving the Tax Court in MacRae 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.

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."

34. Lord Fraser was of the same view. At page 337 he said:

"Although none of the steps in these cases was a sham in that sense, there still remains the question whether it is right to have regard to each step separately when it was so closely associated with other steps with which it formed part of a single scheme. The argument for the Revenue in both appeals was that that question should be answered in the negative and that attention should be directed to the scheme as a whole. This question must, of course, be considered on the assumption that the taxpayer would have been entitled to succeed on the separate point in each case. In my opinion the argument of the Inland Revenue is well founded and should be accepted."

35. After analysing the facts of each case Lord Fraser expressed the view that there was no reason why the court should stop short at one particular step in the whole scheme. At page 338 Lord Fraser added:

"Counsel for the taxpayer naturally pressed upon us the view that if we were to refuse to have regard to the disposals which took place in the course of these schemes, we would be departing from a long line of authorities which required the courts to regard the legal form and nature of transactions that have been carried out. My Lords, I do not believe that we would be doing any such thing."

36. In my view the citations from the speeches of Lords Wilberforce and Fraser I have set out in paragraphs 31 to 35 above are wholly inconsistent with the argument of counsel for Mr Schofield. The First Tier Tribunal concluded as matters of fact that the four options in this case were parts of an overall preordained scheme designed to produce neither a gain nor a loss. In those circumstances it is wrong to adopt the step by step approach for which counsel for Mr Schofield contended and consider only Option 1.
37. There is nothing in any of the later cases referred to by either party to cast doubt on either the principle enunciated in Ramsay or its application in that case. Inevitably the facts with which they were concerned and some of the formulations of principle they contain vary but not in any way supportive of the argument of counsel for Mr Schofield. As Mummery LJ put it in HMRC v Mayes [2011] STC 1269, 1287 para 74:

"Ramsay did not lay down a special doctrine of revenue law striking down tax avoidance schemes on the ground that they are artificial composite transactions and that parts of them can be disregarded for fiscal purposes because they are self-cancelling and were inserted solely for tax avoidance purposes and for no commercial purpose. The Ramsay principle is the general principle of purposive and contextual construction of all legislation. ICTA is no exception and is not immune from it. That principle has displaced the more literal, blinkered and formalistic approach to revenue statutes often applied before Ramsay."

Accordingly, I see no useful purpose in referring further to IRC v Burmah Oil Co Ltd [1982] STC 30; Furniss v Dawson [1984] 1 AC 474; Craven v White [1989] 1 AC 398; MacNiven v Westmoreland Developments Ltd [2003] AC 311 and IRC v Scottish Provident Institution [2004] 1 WLR 3172.

38. I should however deal with the three cases relied on by counsel for Mr Schofield which I have summarised in paragraph 23 above. The dictum of Lord Wilberforce in Aberdeen was explained by Lord Wilberforce himself in his speech in Ramsay at page 326. He 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. I.R.C.[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. 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."

Similarly in his judgment in Whittles, at page 586, Nourse LJ made it clear that the court's conclusion in that case depended on the Ramsay principle having no application. In Garner it was not suggested that the Ramsay principle applied. Thus, it is clear that the Ramsay principle, where it applies, displaces the step by step approach for which counsel for Mr Schofield contends.

39. Where the Ramsay principle does apply the conclusion may be expressed in a number of different ways; for the purposes of ss.1 and 2 TCGA no asset, no disposal, no loss or all three. Counsel for HMRC contended that the relevant transaction was the four options together and such a transaction does not constitute a disposal to which ss.1 and 2 TCGA apply. This accords with the conclusion of Lord Fraser in Ramsay itself, see p.339G, and I am content to accept it.
40. In these circumstances the alternative case put forward by HMRC does not arise. It was to the effect that if the step by step approach is correct then s.115 did not apply to exempt the gain made on the closure of Option 3. The basis of this submission was that the formula for setting the strike price did not depend on the value of the gilts but on the different yardstick of the level of the FTSE 100 Index. It was contended that in consequence Options 3 and 4 were not "options...to acquire or dispose of gilt-edged securities". The argument was not accepted by the First Tier Tribunal. In the Upper Tribunal, one of the Commissioners' alternative arguments was rejected. The Upper Tribunal accepted the Commissioners' other argument, that Options 3 and 4 were not options to acquire or dispose of gilts within s115 TCGA, but went on to hold that they were not options within the options code of TCGA at all. As the point does not arise I consider that it is better not to express any view on it.
41. For all these reasons I would dismiss this appeal.

Lady Justice Hallett:

42. I am indebted to the Chancellor for his admirably succinct analysis. I add only this. To my mind, this appeal was a thinly disguised attempt to undermine the Ramsay principle. Once it was accepted that the principle remains valid, and once the findings of the First Tier Tribunal were accepted, this appeal was doomed to fail.
43. The relevant transaction here is plainly the scheme as a whole: namely a series of interdependent and linked transactions, with a guaranteed outcome. Under the scheme as a whole, the options were created merely to be destroyed. They were self cancelling. Thus, for capital gains purposes, there was no asset and no disposal. There was no real loss and certainly no loss to which the TCGA applies. There is in truth no significant difference between this scheme and the scheme in Ramsay, other than the nature of the "asset". A consideration of the scheme "asset by asset" (or step by step) as urged upon us by Mr Scholfield ignores the reality of the scheme, the findings of the First Tier Tribunal and the Ramsay principle.
44. For the reasons given by the Chancellor, I too would dismiss this appeal.

Lord Justice Patten:

45. I also agree that the appeal should be dismissed for the reasons given by the Chancellor.