England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/10/2009

Mrs Justice Proudman :

1. There are before me two appeals under the Taxes Management Act 1970 on points of law from the decision of the Special Commissioner, Dr David Williams, given on 15^th December 2008. The appeals concern a tax avoidance scheme known as "Ships 2".

Corresponding Deficiency Relief

2. The first appeal, and the one involving the larger sum of tax, is Mr Mayes's appeal about corresponding deficiency relief and I propose to deal with it first.
3. The primary objective of the Ships 2 scheme was to use the corresponding deficiency relief afforded by Chapter II of Part XIII of the Income and Corporation Taxes Act 1988 (Taxes Act) to reduce the liability to higher rate income tax for UK resident individuals.
4. The product was a Bond comprising a group of 20 pre-existing single premium "non-qualifying" life assurance policies. It was marketed as combining the tax efficiency of a life insurance policy with the advantages of instant access. As is often the case with tax schemes, the applicable provisions of the Taxes Act are complex but the idea behind the scheme was simple. The scheme involved part-surrender of the policies comprised in the Bonds by a non-resident company (thus creating the potential for relief, a chargeable event, without triggering an actual charge to tax), followed by a full surrender by the individual investor who could then claim the relief. To manufacture a chargeable event and maximise the amount of the relief, the non-resident company added and then withdrew a large sum of money by way of purported premiums within the space of a month.
5. Mr Ewart QC on behalf of HMRC usefully divided the scheme as implemented in the present case into seven steps, as follows:

(1) 02 04 2002 A Jersey resident individual purchased from AIG Life (part of the American Insurance Group) by means of single premiums of £5,000 two Bonds comprising several policies on his life.

(2) 06 03 2003 He assigned the Bonds to a Luxembourg company ("JSI") for value.

(3) 07 03 2003 JSI paid £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.

(4) 31 03 2003 JSI withdrew from the Bonds all the sums paid on 07 03 2003.

(5) 06 11 2003 JSI assigned the Bonds to an LLP for value.

(6) 18 12 2003 The LLP assigned the Bonds to Mr Mayes for value.

(7) 13 02 2004 Mr Mayes surrendered both Bonds to AIG Life, receiving in return the remaining proceeds in the Bonds. He then claimed income tax relief arising from the surrender for the tax year 2003-4.

6. HMRC's contention, accepted by the Special Commissioner, relates to Steps 3 and 4, the part of the scheme whereby additional premiums were added and the amounts of those premiums withdrawn within the same month. Mr Ewart submitted that Steps 3 and 4 were, taken together, a pre-ordained, composite, self-cancelling transaction devoid of commercial content which fell to be disregarded pursuant to the principle in Ramsay v. IRC [1981] STC 174. Accordingly, he submitted, there was no chargeable event and no corresponding relief. For fiscal purposes, nothing happened. The steps were (in the language of Lord Goff of Chieveley in Ensign Tankers (Leasing) Ltd v. Stokes [1992] 1 AC 655 at 681), an artificial structure by which "the taxpayer conjures out of the air a loss, or a gain…which otherwise would never have existed…designed to achieve an adventitious tax benefit…"
7. There is a certain amount of common ground between the parties. It is agreed that the transactions in the present case did not constitute a sham. It is also agreed that the transactions comprised a tax avoidance scheme, marketed as such. It is further common ground that the mere fact that the inserted steps were followed solely for tax avoidance purposes is insufficient to invoke the Ramsay principle: see the observations of the Special Commissioners on Craven v. White [1988] STC 476 in Campbell v. IRC [2004] STC (SCD) 396 at 409 [73]. Nor is the fact that some parts of the transaction were circular or pre-ordained. The Court must adopt a purposive interpretation of the legislation in question to decide whether the transaction does or does not fall within the relief it affords. This entails an examination of the underlying purpose that the statutory language is seeking to achieve: see per Lord Nicholls of Birkenhead in MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd [2003] 1 AC 311 at 319 [6].
8. Where the parties are at odds is as to how to apply a purposive construction in the present case. There are clear statements of principle in the authorities but it is not easy to apply them to different situations. It is also true to say that each authority contains slightly different formulations of those principles. Mr Ewart submitted that the case was close to IRC v. McGuckian [1997] 1 WLR 991 in which Lord Browne-Wilkinson said (at 998),

"the statutory principles are to be applied to the substance of the transaction, disregarding artificial steps in the composite transaction or series of transactions inserted only for the purpose of seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the artificial steps but what was its purpose. Having identified the artificial steps inserted with that purpose and disregarded them, then what is left is to apply the statutory language of the taxing act to the transaction carried through stripped of its artificial steps."

9. Mr Ewart relied on the fact that the objective, and the only objective, of the scheme was that future investors should receive the relief, which had been artificially generated through Steps 3 and 4. Those steps were pre-planned; as he put it, "programmed to happen", and they had neither commercial intent nor commercial effect. He relied on the statement of Lord Wilberforce in Ramsay that the court is not obliged to adopt a "step by step, dissecting, approach which the parties themselves may have negated". The transaction must be viewed in the real world, with the focus on the end result.
10. Mr Furness QC submitted on Mr Mayes's behalf that the case was closer to MacNiven. He said that HMRC was trying to revert to the submission which was made in that case and failed (see p. 325) to the effect that there is a rebuttable rule of construction of tax legislation that if a transaction is circular and purely tax-motivated without any commercial purpose it can be disregarded. The correct approach is that of Lord Hoffmann in MacNiven, namely to start by construing the legislation in each case. I observe that Mr Ewart did not renew the submission he made before the Special Commissioners in Campbell (at 406 [54] and see the comment at 410 [77]) to the effect that the ratio of MacNiven was not to be found in the speech of Lord Hoffmann.
11. Mr Furness submitted that the applicable statutory provisions are highly prescriptive, exacting tax on the basis of a formulaic arithmetical approach to transactions. Steps 3 and 4 were real transactions comprising the payment and repayment of real premiums on real life policies with real surrenders. HMRC's case could not account for what the payments were if they were not premiums, or how the repayments fell to be characterised if they were not partial surrenders. Indeed the statement of facts agreed between the parties presupposes that the transactions at Steps 3 and 4 properly fall to be characterised as payments of premiums and part surrenders of the policies.
12. As I understood Mr Ewart, his point was this was irrelevant: steps which are purely artificial can be ignored when applying the fiscal legislation even if they may be considered real steps for other purposes. There is a contrast between the juristic categorisation of the transactions and the "real world" in the sense of the commercial context which is to influence the construction of the words as used in the statute: see per Lord Hoffmann in MacNiven at p.329 ([40]-[41]). As Lord Hoffmann went on to say at p. 331-2 ([47]-[48]), commenting on an oft-quoted passage from Lord Brightman's speech in Furniss v. Dawson [1984] AC 474 at 527 (reformulating what Lord Diplock had said in IRC v. Burmah Oil Co Ltd [1982] STC 30 at 32-3):

"…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. In the Furniss case, this was the concept of a disposal by one person to another. For that purpose, and for that purpose only, the disposal to Greenjacket was disregarded. But that does not mean that it was treated, even for tax purposes, as if it had never happened. The payment by Wood Bastow was undoubtedly to Greenjacket and so far as this might be relevant for tax or any other purposes, it could not be disregarded."

13. Mr Ewart argued that it was irrelevant to analyse the nature of the payments for insurance purposes; the agreed statement of facts to the effect that there were genuine life assurance policies, genuine premiums and genuine partial surrenders does not affect the present argument, neither does the fact that AIG presumably had to account for the deposited premiums for tax purposes. The steps were artificial in that there was no commercial possibility that they would not have cancelled each other out. The terms on which the insurance company agreed to take the additional premiums reduced its exposure to reflect that fact. Accordingly, so the argument runs, commercial reality required the two steps to be disregarded under the Ramsay principle for the purposes of corresponding deficiency relief.

The legislation

14. The starting point in the relevant legislation is TA s. 539(1), which states that the Chapter is to have effect:

"…for the purposes of imposing, in the manner and to the extent therein provided, charges to tax in respect of gains to be treated in accordance with this Chapter as arising in connection with policies of life assurance…"

The first thing to notice is that the purpose of the legislative provisions is expressly stated. The Chapter constitutes a code for identifying and quantifying gains on life policies and for subjecting those gains to tax. The second is that the gains to be taxed are gains attributed by the statute rather than real ones because they are expressed to be "gains to be treated in accordance with this chapter as arising…"

15. S. 547(1) prescribes that where a policy is held beneficially by an individual and, under s. 541, "a gain is to be treated as arising in connection with any policy", that gain forms part of the individual's total income. The income tax charge on UK policies only operates at higher rate: see Taxes Act s. 547(5)(a). S. 549 deals with the circumstances in which a loss can correspondingly be set off against taxable income. If, where a policy comes to an end by death, maturity or, as here, surrender, a loss is produced by the statutory computation instead of a gain, it is deductible.
16. In short, if sums are realised in respect of the rights in the policy during the life of the policy, the taxpayer may deduct a proportion of the premiums from the sum so realised when computing the gain on which he is to be taxable.
17. The amount of a corresponding deficiency is limited to the amount of the gains previously certified under s. 541(1)(d) arising on partial surrenders and partial assignments which are chargeable events. If a policy merely performs poorly, so that when it is surrendered its value is less than the premiums paid, the loss is not deductible.
18. The key concept is that of the "chargeable event", defined in s. 540(1). In the case of non-qualifying policies (with which the present case is concerned) there are five situations which give rise to a chargeable event. The first four deal with the realisation of the policy as a whole: the death of any person giving rise to benefits under the policy, maturity of the policy, surrender of all the rights and assignment for money or money's worth of such rights. The fifth, in s.540(1)(a)(v), stipulates for a chargeable event where there are partial surrenders and partial assignments. There is a chargeable event in the situation at the end of a year of assessment (other than the final year of the policy, if that itself ends in a chargeable event) where "the reckonable aggregate value" (RAV) exceeds "the allowable aggregate amount" (AAA).
19. These expressions are defined in s. 546. That section requires that at the end of each year there shall be calculated the value of any rights under the policy which have been surrendered or assigned for value. The RAV at any point in time is the sum of the values computed up to that point, after deducting any such values which have been taken into account on a previous chargeable event. At the end of each year, the appropriate proportion of any premiums paid under the policy up to that time has to be computed. The AAA is the aggregate of the amounts of the appropriate proportions of premiums computed up to the date in question, less, again, the amount of any appropriate proportions taken into account on any previous chargeable event. The appropriate proportion is 1/20^th of each premium for the year in which it is made, and then 1/20^th for each subsequent year, up to a maximum of 19/20^ths.
20. It is evident that the legislation encourages the retention of life policies as long term investments. If a large part of the value of the policy is surrendered in the early years disproportionately large gains will be attributed. For example, if 80% of the value of the policy is surrendered in Year 2, only 10% of the premium can be set against the receipt rather than the full 80%.
21. Mr Furness demonstrated that the prescriptive nature of the legislation can have arbitrary results. By reference to a series of examples he showed that a greater gain may be taxed on a partial surrender than is eventually realised on the entire policy. Large gains may be thrown up at early stages in the life of the policy which are only offset by a corresponding deficiency on total surrender. This means that the correct amount of gain will be charged eventually, provided, and this is an important proviso, that the tax status of the taxpayer remains unchanged during the life of the policy.
22. Again Mr Furness produced assignment examples showing that an assignee's aggregate taxed gains may exceed his total return on the policy. A massive gain may be attributed to the assignor and a corresponding deficiency to the assignee although neither of them has in reality suffered such a gain or loss. The amount of tax payable overall is correct in such circumstances but the legislation operates unfairly, or at any rate is not concerned with the position, as between the assignor and assignee.
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 thus possible for unfair tax results to arise from transactions which have no tax avoidance element. The legislation does not admit of a purposive interpretation which 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 hold good.
26. A simple tax avoidance scheme could operate where a wife who does not pay higher rate tax takes out a Bond and a chargeable event occurs. She then assigns the policy to her husband so that he will get the benefit of the corresponding deficiency relief. That may well be pre-ordained and certainly has a tax-avoidance motive but it is hard to see what steps can fall to be disregarded in the way Mr Ewart says they should be in the present case. The question therefore arises of where the line should be drawn.
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.
29. After the passage in MacNiven which I have quoted in paragraph 12 above, Lord Hoffmann went on to say (at p. 332 [49]):

"…the point I wish to emphasise is that Lord Brightman's formulation in the Furniss case, like Lord Diplock's formulation in the Burmah 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. It is necessary to make this point because, in the first flush of victory after the Ramsay, Burmah and Furniss cases, there was a tendency on the part of the Inland Revenue to treat Lord Brightman's words as if they were a broad spectrum antibiotic which killed off all tax avoidance schemes, whatever the tax and whatever the relevant statutory provisions."

30. Lord Hoffmann, extra-judicially, in an article entitled "Tax Avoidance" in [2005] BTR 197, developed this point, commenting on the difficulties of distinguishing between acceptable and unacceptable tax avoidance as follows (p. 205):

"…Parliament may not be content to describe the economic event which should attract tax…Instead, it enacts a mass of detailed rules which it is hoped will tie up the taxpayer in a net from which he cannot escape. But sometimes there are holes in the net and the courts find that they cannot plug them by appealing to the economic event which, at a higher level of generality, it appears that Parliament wished to tax. It is one thing to give a statute a purposive construction. It is another to rectify the terms of highly prescriptive legislation in order to include provisions which might have been included but are not actually there."

31. What is "the economic event which should attract tax" here? It cannot be said that the legislation's purpose is to ensure that the correct amount of tax is payable overall because the statutory formula uses the concept of chargeable event rather than the charge to tax. The statute must be taken to contemplate the possibility that one of the parties may be non-resident. It therefore also contemplates that in such an event unfair or arbitrary results may ensue as in the examples given above.
32. This is what Lord Hoffmann described (at p. 206 of the article in BTR) as legislation "by reference to form rather than substance". Indeed the purpose of the statute is expressly stated, showing that it is gains (and by implication losses) deemed to have arisen by application of the statutory formulae, rather than actual gains and losses, which are to be taken into account. It is hard to escape the conclusion that "gain", "loss" and "chargeable event" are artificial constructs designed for the purposes of the statute. The statute does not therefore apply the tests of ordinary business: see per Lord Hoffmann in MacNiven at 327 ([34]).
33. To pose the question implicit in the speech of Lord Wilberforce in Ramsay at 326, "Is this a tax on gains, or gains less losses, or is it a tax on arithmetical differences?" I agree with Mr Furness that the legislation is not designed to allow a line to be drawn between legitimate and illegitimate avoidance on the basis of pre-ordained transactions. It exacts tax on a formulaic approach to the transaction without any overriding purpose that some types of transaction may not count. It is common ground that the tax avoidance motive is insufficient by itself to raise the Ramsay principle. It does not seem to me that the legislation includes terms capable of being construed as business or commercial concepts rather than (as Lord Hoffmann put it (in MacNiven at 327 [33]) held within the confines of purely juristic analysis. Steps 3 and 4 were, respectively, the payment of a premium and the partial surrender of the policies, not just for insurance purposes but for all purposes.
34. The fact that a payment is tax-motivated and even circular does not by itself entitle the court to ignore it. It can only be ignored (absent sham) if there is some indication in the statute that circular payments are not to count.
35. Mr Ewart relied on the speech of Lord Hope of Craighead in MacNiven, where he analysed previous authorities and said (at 344 [93]):

"I consider that an essential element of a transaction to which the Ramsay principle is applicable is that it should be artificial. The requirement that there must be artificiality, and the importance of distinguishing between the real world and the world of make-belief, between a real gain (or loss) and a contrived and unrealistic gain (or loss) have been stressed in a number of judgments of the House where the application of the Ramsay principle has been considered."

Lord Hope then went on to cite from previous authorities. However he was not raising the principle of artificiality to a position of pre-eminence irrespective of the construction of the statute in question. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case: see per Lord Nicholls in MacNiven at 320 [8]. As Lord Hoffmann said (at 334 [58]-[59]), if a transaction falls within the legal description, it makes no difference that it has no business purpose. It is evident from Lord Hope's speech as a whole (see pages 344-5) that the paramount question for the court in each case in relation to the words used in the taxing statute is "What is the sense contemplated by the legislation?"

36. The question therefore remains whether there is some further principle that artificial steps should be ignored in characterising a transaction. In Campbell the Special Commissioners (praised for their perceptive judgment by the House of Lords in Barclays Mercantile v. Mawson [2005] STC 1 at 13) identified four types of case in which the Ramsay principle has been applied. While I do not believe that a rigid taxonomy can be applied in this area, it is perhaps useful to observe that the present case is one of the first and second kinds.
37. The Court is not looking at an end result to see whether the taxpayer has in reality suffered a loss, at what is the nature of an ultimate payment or the identity of the parties to a sale. The end result is the same. The steps in the middle all occurred; they were, at least for some purposes, real transactions with real effects. AIG might have defaulted, or the life assured might have died during the currency of the scheme. The only way to attack the scheme is to ignore Steps 3 and 4 on the basis that they had no purpose or effect other than to create an artificial loss and that Mr Mayes's investment was identical whether or not they were inserted.
38. Mr Ewart relies on the decision in McGuckian and, in particular, the remarks of Lord Browne-Wilkinson quoted in paragraph 8 above. However, to use that statement as a general authority out of its context seems to me to be wrong. It is evident from all their Lordships' speeches in that case that the paramount principle was again one of statutory interpretation. The point at issue was whether a payment was one of capital or income. An assignment to a third party was held to be merely a means to an end of achieving payment to the intended recipient, and the assignee was the "conduit by which the dividend was to reach" the recipient. The ratio of the House appears from the speech of Lord Cooke of Thorndon at 1003-4:

"My Lords, it seems to me that one only has to recount [the] facts to show that what was received by Shurltrust was essentially income. The dividend was intended to be for the benefit of Shurltrust and the circular route by which the payment was made was no more than machinery for giving effect to that intention. The assignment was created simply as a bridge or vehicle for attaining that end. The money was unmistakably traceable through a single link. Whether a receipt is income for tax purposes is a question of mixed fact and law. In this instance the facts, in my view, admit of only one reasonable answer…

The principle of looking on a planned series of steps as a whole transaction appears to be, as one would expect, perfectly natural and orthodox.

[The assignment] was nothing more than a means to the end of achieving payment to Shurltrust of almost all the dividend, in the hope that it would be treated as capital for tax purposes."

39. Thus the ratio of McGuckian was that a complicated series of payments could not magically convert income into capital. The issue was as to the tax treatment of the transaction taken as a whole. It is not to my mind authority for the proposition that steps inserted for tax avoidance purposes can necessarily be ignored. The question is always one of construction of the statute in question. It is also perhaps true to say that the implications and limits of the decision in McGuckian were only worked through in MacNiven.
40. The decision of the Privy Council in Carreras Group Ltd v. Stamp Commissioner [2004] STC 1377 appears at first sight to support HMRC's case. Carreras was concerned with whether a transaction was a reorganisation of share capital by an exchange of shares for a debenture. It was held that that the debenture was only a formal step having no commercial significance in a transaction by which the shares were in reality exchanged for money. The terms of the debenture and its redemption two weeks later were seen as part of a single transaction. However the issue was as to the significance of the issue of the debenture for the purposes of the characterisation required by the taxing statute. As Lord Hoffmann said in that case (at 1379 [7]):

"Sometimes the conclusion that the statute is concerned with the character of a particular act is inescapable."

41. Again, therefore, the paramount question is one of construction. In giving the opinion of the Committee of the House of Lords in Barclays, Lord Nicholls said (at 12-13 [35]-[36]):

"In each case [Burmah, Furniss and Carreras] the court looked at the overall effect of the composite transactions by which the taxpayer company in Burmah suffered no loss, the shares in Furniss passed into the hands of the outside purchaser and the vendors in Carreras received cash. On the true construction of the relevant provisions of the statute, the elements inserted into the transactions without any commercial purpose were treated as having no significance.

Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provisions: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and, secondly, whether the transaction in question does so As Ribiero PJ said in Collector of Stamp Revenue v. Arrowtown Assets Ltd [2003] HKCFA 46 at [35]:

'The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.'"

42. It is true that the present case can be distinguished from MacNiven in that the transaction would remain essentially the same if the steps were disregarded. In MacNiven there was not a self-cancelling transaction. The consideration for the assignment sought to be disregarded was an essential part of the transaction. If the assignment had to be disregarded one could not explain how the recipient had received any money at all: see per Lord Hoffmann at 333 [53]. Indeed, Lord Hoffmann went on to say at 337 ([67]),

"It is easy to understand a commercial sense of a loss which treats as irrelevant the fact that one part of a composite transaction produced a loss which was never intended to be more than momentary and theoretical…But what is the commercial concept of payment of a debt which treats as irrelevant the fact that the debt has been discharged?"

43. However, in MacNiven (at p. 330 [44]) Lord Hoffmann also said:

"Lord Diplock [in Burmah] would have been the first to acknowledge that his remarks should be read in context. To 'ignore' the intermediate stages of the transaction and look at the end result is something which follows logically from the decision to construe 'disposal' and 'loss' in a commercial sense which transcends the individuality of the 'book entries'. It is that decision, to give the statutory language such a construction, which I would regard as 'the Ramsay principle'. But I think that there may have been a tendency to construe Lord Diplock's statement of the consequences of applying the Ramsay principle to the particular provisions with which the House as concerned as if it were itself a general principle, applicable to all tax legislation. Of course such a construction could also be applied to other provisions of the taxing Acts, but this would depend on their language and purpose. At any rate the generalising tendency which I have described seems to me the most likely explanation of the proposition which Mr McCall has claimed to be the Ramsay principle in this appeal."

44. I am thrown back on to the wording of Chapter II, Part XIII of the Taxes Act. Again, for the reasons I have already given, I find that a purposive construction 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 Ribiero 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 to accord to the determination of 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 from and no more extreme than that in MacNiven.
48. I would therefore allow Mr Mayes's appeal as to corresponding deficiency relief.

Capital Gains Tax

49. The relevant steps for the purposes of this appeal are Steps 6 and 7 summarised in paragraph 5 above. The amount which Mr Mayes paid for the bonds at step 6 (in excess of £133,000) was substantially more than their surrender value (less than £1,800). Accordingly Mr Mayes claimed an allowable capital loss when he surrendered the bonds at Step 7.
50. The relevant statutory provision is s.38 of the Taxation of Capital Gains Act 1992:

"(1) 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…"

51. The Special Commissioner decided the capital gains tax issue in favour of Mr Mayes, namely that he was entitled to claim a capital gains tax loss. He said:

"The question is whether the sums paid by Mr Mayes…were, for capital gains tax purposes, 'consideration given by him…wholly and exclusively for the acquisition of the Bonds…. 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 loss can be determined. But as I now find that there was no corresponding deficiency relief 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….I give liberty to apply if final agreement is not reached on this point".

52. The Special Commissioner thus correctly identified the issue, but merely decided in principle that there should be some relief without deciding the main question of the basis on which that relief should be granted.
53. This aspect of the decision is odd in two respects. First, the Special Commissioner appeared to think that it was appropriate to find for Mr Mayes on the second point because he had found against him on the first. Mr Mayes was capable of suffering a gains tax loss regardless of whether he also obtained a corresponding deficiency. Secondly, Dr Williams left the amount to be decided by agreement, with liberty to apply if no such agreement was reached. However, (as he himself recognised) his ruling involves a question of fact as to the basis of computation of loss, namely a decision as to what the purchase consideration was given for. No such finding was made.
54. Both parties say that the principal issue was in fact, contrary to Dr Williams's understanding, argued before him. HMRC argued that on the basis of the documentary evidence, £133,104 of the purported price for the shares was paid by Mr Mayes as fees for his participation in the scheme. Indeed one third of the consideration was paid directly to Matrix Tax Solutions, a promoter of the scheme, rather than to the seller. Thus HMRC contended that only £1,800 of the price was deductible, producing neither a gain nor a loss. Mr Mayes argued to the contrary that the whole of the price paid was deductible on the basis of the construction of the documentary evidence.
55. Mr Furness argued before me that the relevant facts are agreed and the question is one merely of construction of the sale agreement. No additional findings of fact are necessary and it is simply a question of applying the legislation to the documents, properly construed, against the background of the agreed facts. Accordingly there is no need for a remitter to the Special Commissioner.
56. Relying on Spectros International plc v. Madden (Inspector of Taxes) [1997] STC 114 (and cases therein cited) he submitted that the parties were at liberty to and did agree at arm's length the price for the policies. While it is common ground that the amount of the price reflected the value of the policies for tax purposes in Mr Mayes's hands, so that PES LLP could (and did) charge a premium over the surrender value, it does not follow that the whole of the price was not consideration for the policies themselves. How the vendor of an asset computes the price at which he is proposing to sell an asset, and what he does with the sale proceeds, are matters irrelevant to the question of quantification of the amount of the sale consideration. Mr Furness pointed to the facts of Pigott (Inspector of Taxes) v. Staines Investments Ltd [1995] STC 114 in which the price paid on the acquisition of a company reflected the company's corporation tax history giving rise to surplus ACT relief. Nevertheless, it was held that the whole of the price was paid for the shares themselves.
57. In Drummond v. HMRC [2008] STC 2707 and [2008] EWHC (Ch) 1758 the consideration given for the purchase of certain life policies was broken down into a number of discrete sums based on an analysis prepared for the taxpayer reflecting their real nature: commission, independent advice, a contingent payment and a contribution to a fighting fund. Norris J upheld this alternative approach of the Special Commissioner. The Court of Appeal upheld his decision; indeed Rimer LJ (with whom the other members of the Court of Appeal agreed) regarded the contention that the whole of the sum paid should be allowed as a deduction under s. 38(1) as a "hopeless endeavour".
58. Mr Furness sought to distinguish the facts of that case, alternatively, to treat only the sum paid to Matrix as a discrete sum. He submitted either that the commission paid to Matrix was an incidental cost of the acquisition of the policies, or, at worst, that that sum alone should be disallowed as a deduction.
59. HMRC's case is that Drummond is not distinguishable from the present case where the documents indicated that the scheme was designed so that fees and costs were to appear to form part of the acquisition consideration. However Mr Ewart did not go so far as to submit that the motive behind the scheme, namely that it was designed to achieve a tax saving, meant that no consideration could be said to have been given for the acquisition of the asset at all. That argument was adduced by Mr Brennan QC for HMRC before Norris J in Drummond on the basis that the Special Commissioner had made a finding of fact against which no appeal could properly be brought. I respectfully agree with Norris J's observation (at 2732 [26]-[27]),

"I disagree. The primary findings of fact made by the Special Commissioner must stand: but the secondary findings (the analysis of and inferences properly drawn from the primary findings) and the legal consequences are properly the subject of an appeal…The transaction in question was the purchase and disposal of second-hand policies. There is no doubt that such a purchase really occurred and that Mr Drummond acquired an equitable title to the five AIG policies…"

60. It is HMRC's case that as a matter of fact all but the surrender value of the policies was paid as fees and costs for entering into the scheme. Thus Mr Ewart put his case not as a matter of motive but of analysis of each payment.
61. The problem with the appeal before me is that the Court of Appeal held in Drummond (at [21]) that the breakdown of the price made by the Special Commissioner was a finding of fact. He had made a "reasoned finding" that an element of the total price was not given wholly and exclusively for the acquisition of the policies. Rimer LJ said (at [21]),

"In my judgment that was a finding of fact that was properly open to the Special Commissioner. Mr Drummond's challenge to this part of Norris J's decision is, in substance, a challenge to that finding. I see no basis on which this court can, might or should take any different view on it."

62. I am bound by the decision of the Court of Appeal. I therefore agree with Mr Ewart that unless there is only one possible decision that the Special Commissioner could properly reach as to the facts, in which case there would be no point to a remitter, the case has to be remitted back to the Special Commissioner for a decision on the facts.
63. I do not accept that there is only one possible finding of fact which could be made in this case. Dr Williams did not determine on the evidence before him what the purchase consideration or its constituent elements were given for. That was a matter which fell in the first instance within his remit alone. I therefore reluctantly agree with Mr Ewart that the matter must be remitted to the Special Commissioner for him to determine the issue.