Furniss v Dawson (Murdoch v Dawson)

A preordained series of transactions is assessed as one composite transaction where it contains inserted steps with no commercial or business purpose apart from obtaining a tax advantage. Those steps are disregarded for fiscal purposes, and the end result is taxed under the relevant statute.

The principle does not require a binding arrangement, a self-cancelling scheme or steps without enduring legal effects. It may apply where the scheme achieves a genuine commercial end. Whether the required features exist is a question of fact for the tax commissioners. An appellate court may interfere with their inference only where it is insupportable on the primary facts.

The Dawson family agreed in principle to sell shares in two operating companies to Wood Bastow Holdings Ltd. To defer capital gains tax, they first exchanged the shares for shares in Greenjacket Investments Ltd, an Isle of Man company. Greenjacket then sold the operating-company shares to Wood Bastow for cash on the same day.

The Special Commissioners held that Greenjacket had acquired control within Paragraph 6 of Schedule 7 to the Finance Act 1965 and discharged the assessments. Vinelott J and the Court of Appeal upheld that result because Greenjacket's introduction had enduring legal consequences.

The central issue in the consolidated appeals was whether the composite-transaction principle applied despite those consequences and despite the scheme's achievement of a genuine commercial sale.

1. Disposition. The House unanimously allowed the Revenue's consolidated appeals. Lord Brightman delivered the leading speech. Lord Fraser, Lord Scarman, Lord Roskill and Lord Bridge each agreed with his reasoning or allowed the appeals for the reasons he gave.

2. The composite-transaction principle. Per Lord Brightman, a preordained series of transactions must be treated as a single composite transaction where it contains inserted steps having no commercial or business purpose apart from securing a tax advantage. The inserted steps are disregarded for fiscal purposes, after which the end result is taxed according to the applicable statute. This formulation applied and explained W T Ramsay Ltd v IRC [1982] AC 300 and CIR v Burmah Oil Co Ltd 54 TC 200.

3. Scope of the principle. Per Lord Brightman, preordination need not take the form of a binding contract. A planned sequence cannot escape the principle merely because the arrangement is informal or states that it is not binding. Nor must the scheme be self-cancelling. The composite transaction may achieve a legitimate commercial end, and an inserted step may have enduring legal or business effects, provided that it lacks a commercial purpose apart from the tax advantage.

4. Application. Per Lord Brightman, the introduction of Greenjacket between the Dawsons and Wood Bastow served no business purpose apart from tax deferment. Viewed as a whole, the transaction was a disposal by the Dawsons to Wood Bastow for money paid, with their concurrence, to Greenjacket. Section 19 of the Finance Act 1965 therefore imposed capital gains tax. Paragraph 6 of Schedule 7 did not shelter the inserted exchange. Disregarding Greenjacket for this fiscal purpose did not create the additional double taxation feared by the Court of Appeal.

5. Fact-finding and appeals. Per Lord Brightman, the existence of a preordained composite transaction and of purposeless inserted steps comprises findings of fact for the Commissioners. An appellate court may interfere with an inferred fact only where the inference cannot be supported by the primary facts. It may not substitute its preferred inference where the primary facts reasonably permit alternatives.

6. Additional observations. Lord Scarman and Lord Bridge stressed that the lawful ability to arrange affairs so as to reduce tax remained. Its limits, and the distinction between the form and substance of composite transactions, would develop judicially from case to case.

7. No order was made as to costs in the House or in the courts below.

1. House of Lords: Unanimously allowed the Revenue's consolidated appeals from the Court of Appeal orders dated 27 May 1983. No order was made as to costs in the House or below.

2. Court of Appeal: Upheld Vinelott J's conclusion. Oliver and Kerr LJJ treated the enduring consequences of Greenjacket's participation as sufficient to distinguish the composite-transaction authorities. Slade LJ accepted that the facts were not materially distinguishable from the first stage of Floor v Davis but considered the earlier House of Lords discussion non-binding.

3. High Court: Vinelott J rejected the Revenue's composite-transaction argument. He held that the principle did not render fiscally ineffective an inserted transaction having enduring legal consequences.

4. Special Commissioners: Found that Greenjacket acquired control of the operating companies within Paragraph 6 of Schedule 7 to the Finance Act 1965 and discharged the capital gains tax assessments.