Commissioners of Inland Revenue v. McGuckian

The House of Lords applied the Ramsay line of authority as a purposive principle of statutory construction to disregard pre-ordained artificial steps inserted solely to obtain a tax advantage. The court held that once those steps are disregarded the dividend paid by the Irish company to the trustee (Shurltrust Ltd) must be treated as income for the purposes of section 478 of the Income and Corporation Taxes Act 1970. Section 470 did not apply because, on the Ramsay approach, the intermediate assignment to the United Kingdom assignee falls to be disregarded and therefore the statutory requirement for section 470 was not met. The assessment under section 478 for IR£396,054 was therefore upheld.

This appeal concerned an income tax assessment raised on Mr McGuckian in respect of a dividend declared on 27 November 1979 by Ballinamore Textiles Ltd, an Irish company. Mr and Mrs McGuckian had earlier transferred their Ballinamore shares into a settlement whose trustee was a Guernsey company (Shurltrust Ltd) and Mrs McGuckian was the income beneficiary. Shortly before the dividend was declared Shurltrust assigned the right to the 1979 dividend to a United Kingdom company (Mallardchoice Ltd) for 99 per cent of the dividend, Mallardchoice received the declared dividend and, through a solicitor, paid 99 per cent back to Shurltrust.

The Commissioners assessed Mr McGuckian under section 478 of the Income and Corporation Taxes Act 1970. Before the special commissioner the Crown argued sham or alternatively that section 470 applied; the special commissioner held the transactions were not a sham and, because the assessment recited section 478, would not uphold it under section 470. On appeal the Court of Appeal rejected the Crown's Ramsay-based argument by majority but held it could remit to the special commissioner to uphold an assessment under section 470.

The House of Lords heard the Crown's appeal. Issues framed by the court included:

• whether the series of transactions constituted a pre-ordained composite transaction with steps inserted for no commercial purpose so as to engage the Ramsay approach to construction;
• whether, applying that approach, the receipt by Shurltrust should be treated as income for the purposes of section 478; and
• whether section 470 displaced the application of section 478 where an assessment under section 470 might in theory have been open.

The court concluded that the steps involving Mallardchoice were artificial and inserted only to obtain a tax advantage and thus were to be disregarded. Stripping out those steps left the real transaction as the payment of a dividend to the shareholder (Shurltrust), which received the money as income. Section 470 did not apply because, after disregarding the assignment to Mallardchoice, there had been no sale or transfer of the right to receive the dividend within the meaning of section 470. Further, section 478 may be applied even if other provisions might in principle have been available: the opening words of section 478 indicate legislative purpose but do not make actual success in avoidance a precondition to its operation. The assessment for IR£396,054 under section 478 was therefore restored.

Appeal allowed. The House of Lords held that the Ramsay principle applies to disregard artificial, pre-ordained steps inserted solely to obtain a tax advantage; once those steps are stripped out the dividend received by the trustee is income for the purposes of section 478 of the Income and Corporation Taxes Act 1970. Section 470 did not apply because the relevant sale or transfer was to be disregarded under Ramsay and there was therefore no operative sale within section 470.

Appeal from the Court of Appeal (Northern Ireland) [1994] S.T.C. 888 where by majority the Crown's Ramsay-based argument was rejected but the court remitted the matter to the special commissioner with a direction to consider section 470. At first instance the Special Commissioner held the transactions were not a sham and would not uphold assessment under section 470 since the assessment recited section 478. The Commissioners appealed to the House of Lords which allowed the appeal ([1997] UKHL 22).