Mayes v HM Revenue & Customs

The Ramsay principle is not a general rule permitting tax-motivated or circular steps to be ignored. The court must first construe the relevant legislation purposively and identify the statutory concept to which the principle may apply. Where legislation adopts a prescriptive formula based on statutory gains, losses and chargeable events, rather than commercial gains and losses, genuine payments and surrenders cannot be disregarded merely because they are pre-arranged and self-cancelling. On a disputed capital gains deduction, the character and amount of the consideration may involve findings of fact. If those findings have not been made, the matter should be remitted to the tribunal.

These were two appeals on points of law under the Taxes Management Act 1970 from a decision of the Special Commissioner concerning the Ships 2 tax avoidance scheme.

The first appeal concerned corresponding deficiency relief under Chapter II of Part XIII of the Income and Corporation Taxes Act 1988. The second concerned whether the appellant could deduct the whole price paid for life assurance bonds in computing a capital loss under section 38 of the Taxation of Capital Gains Act 1992.

The central issues were whether pre-arranged premium payments and partial surrenders could be ignored for the deficiency-relief provisions, and whether the amount of deductible consideration was a question of construction or fact.

1. Corresponding deficiency relief. The appeal was allowed. Chapter II of Part XIII of the Income and Corporation Taxes Act 1988 used a formulaic and prescriptive scheme for identifying and quantifying statutory gains and losses on life policies. It did not seek to tax actual commercial gains or losses.

2. The Ramsay principle required a purposive construction of the particular statutory provisions before any artificial step could be disregarded. Tax motivation, circularity and pre-arrangement were insufficient by themselves. Genuine premium payments and partial surrenders could be ignored only if the legislation indicated that such transactions were not to count.

3. The relevant provisions distinguished a chargeable event from an actual charge to tax. They contemplated that statutory gains and losses might produce arbitrary results, including where the parties had different residence or tax statuses. It was therefore impermissible to disregard the additional premiums and partial surrenders simply because they were intended to create corresponding deficiency relief.

4. The Special Commissioner had applied the statutory question correctly in formulation but had conflated the existence of a chargeable event with the resulting tax charge. That was an error of law. The appellant was entitled to corresponding deficiency relief.

5. Capital gains tax. The Special Commissioner had correctly recognised that some relief might be available under section 38 of the Taxation of Capital Gains Act 1992, but had not decided what the purchase consideration was given for. Following Drummond v HMRC, the allocation of the total payment between acquisition consideration and fees or costs was a question of fact. The issue was remitted to the Special Commissioner for determination.

1. High Court (Chancery Division): appeals from the Special Commissioners were heard under the Taxes Management Act 1970. The corresponding deficiency-relief appeal was allowed, and the capital gains tax issue was remitted for factual determination.