Astall & Anor v Revenue and Customs

Paragraphs 2 and 3 of Schedule 13 to the Finance Act 1996 require a purposive interpretation. Income tax relief for a loss on a relevant discounted security is available only where there was a real possibility of a deep gain.

The court must identify the statutory purpose and determine whether the transaction, viewed realistically, fulfils the statutory conditions. A commercially irrelevant contingency may be disregarded even if it creates a real risk, where the parties accepted that risk solely to obtain the intended tax treatment. A redemption premium does not constitute a deep gain where it produces no real gain for the holder and was funded from capital recently provided by that holder.

The taxpayers participated in schemes intended to create artificial losses deductible from income. Each established a trust, subscribed for zero-coupon loan notes and later sold the notes at a substantial loss. The notes contained early-redemption provisions which appeared capable of producing a deep gain, but the trusts would fund any redemption premium from capital provided by the taxpayers.

The Special Commissioner held that the notes were not relevant discounted securities under Schedule 13 to the Finance Act 1996. Peter Smith J dismissed the taxpayers’ appeal in [2008] EWHC 1471 (Ch).

The Court of Appeal considered whether all redemption terms had to be recognised, whether artificial or commercially improbable contingencies could be disregarded, whether finding a purchaser was practically certain, and whether the self-funded redemption premium involved a deep gain.

1. The appeal was dismissed unanimously. The securities did not satisfy the statutory requirements for relevant discounted securities. Arden LJ gave the judgment, with which Keene and Sullivan LJJ agreed.

2. Paragraphs 2 and 3 of Schedule 13 to the Finance Act 1996 were subject to ordinary purposive interpretation. The process involved identifying the discernible statutory purpose and then asking whether the transaction, assessed realistically on the facts, fulfilled the statutory conditions. The court could assess legal arrangements by reference to their practical reality, although it could neither attribute to a transaction a legal nature it did not possess nor fill gaps in the legislation.

3. The purpose of paragraphs 2 and 3 was to grant income tax relief for a loss on a security otherwise satisfying the statutory conditions on which a deep gain could also be made. The terms capable of producing that gain therefore required reality beyond the printed document. A tax-avoidance motive alone did not make an available relief inapplicable.

4. The purposive approach was not confined to composite transactions. It could apply to a single, multi-faceted transaction which appeared formally to operate in one way but, when examined against the facts, was outside the class of transaction to which the statute was directed.

5. The 15% possibility that the market-change condition would fail could be disregarded. Although it created a real commercial risk, the parties accepted that risk solely in the interests of the scheme. Likewise, the possibility that a purchaser would not be found could be disregarded because the Special Commissioner was entitled to find that a purchaser was a practical certainty. The challenge to that factual conclusion did not satisfy the high threshold applicable to an appeal on a point of law.

6. The early-redemption premium did not involve a deep gain within paragraph 3(3). Purposively construed, the provision required a possible gain capable of being subjected to income tax. The premium produced no real overall gain because it had to be met from income already belonging to the taxpayers or from capital they had recently settled. Its inclusion merely to secure a tax advantage placed it outside the statutory definition.

1. Court of Appeal (Civil Division): The taxpayers’ appeal was dismissed unanimously. The court upheld the conclusion that the securities were not relevant discounted securities, although its reasoning differed substantially from that of the judge.
2. High Court, Chancery Division: Peter Smith J, in [2008] EWHC 1471 (Ch), dismissed the appeal and held that the Special Commissioner had made no error of law.
3. Special Commissioner: Dr John F Avery Jones CBE held that the securities did not qualify as relevant discounted securities under Schedule 13 to the Finance Act 1996.