Revenue & Customs v Mayes

The Ramsay principle is an application of ordinary purposive and contextual statutory construction. It does not authorise courts to disregard genuine legal events merely because they are pre-ordained, self-cancelling, commercially artificial or undertaken solely to avoid tax.

The court must construe the legislation closely, analyse the transaction realistically and decide whether the transaction answers the statutory description. Where a formulaic statutory regime attaches fiscal consequences to the payment of genuine life-policy premiums and genuine surrenders, those consequences cannot be removed solely because they produce an unintended tax advantage. Under the wholly and exclusively test for capital gains tax acquisition expenditure, identifying what consideration was paid for is a question of fact for the tribunal.

A marketed tax arrangement used non-qualifying life assurance policies to generate corresponding deficiency relief. A non-resident company paid substantial top-up premiums and shortly afterwards withdrew the same funds by partially surrendering the policies. The policies were later assigned to David Mayes and surrendered in full.

The Special Commissioner held that the top-up and partial surrender should be disregarded for fiscal purposes, but Proudman J reversed that decision and held that the statutory life-policy regime applied to those genuine legal events. She remitted a separate question concerning the deductible acquisition expenditure for capital gains tax.

HMRC appealed on corresponding deficiency relief. Mr Mayes cross-appealed against the remittal. The central questions were whether the Ramsay principle deprived the top-up premium and partial surrender of fiscal effect, and whether the Court of Appeal could determine the deductible consideration under section 38 of the Taxation of Chargeable Gains Act 1992.

1. Both the appeal and the cross-appeal were dismissed unanimously. Mummery LJ delivered the leading judgment. Thomas and Toulson LJJ agreed, although reluctantly because the income tax result bore no relation to commercial reality and produced an unforeseen windfall.

2. The Ramsay principle is not a special doctrine which strikes down artificial tax-avoidance schemes. It is the general principle of purposive and contextual statutory construction. Following Barclays Mercantile v Mawson [2004] UKHL 51, the court must first identify, by close analysis, the transaction to which the statute was intended to apply. It must then analyse the actual transaction realistically and decide whether it answers that statutory description.

3. Chapter II of Part XIII of the Income & Corporation Taxes Act 1988 established a formulaic regime for deemed gains and corresponding deficiencies arising from life policies. Its operation could be disconnected from commercial gains and losses. The regime attached fiscal consequences to specified legal events rather than to an equivalent commercial result.

4. The top-up payments were genuine premiums paid to secure benefits under real policies. The subsequent withdrawals were genuine partial surrenders with real legal consequences. Considered as elements of the composite arrangement, they still answered the statutory descriptions of premium and partial surrender. Their pre-ordained, self-cancelling and exclusively tax-motivated character did not permit the court to treat them as if they had never occurred. The corresponding deficiency relief under section 549 was therefore available.

5. The amount deductible as acquisition expenditure under section 38 of the Taxation of Chargeable Gains Act 1992 depended on what consideration was given wholly and exclusively for acquiring the policies. That was an unresolved question of fact. The Special Commissioner had erred by allowing a capital loss in principle without determining the relevant facts or amount.

6. The capital gains tax issue was properly remitted to the First-tier Tribunal (Tax Chamber). The tribunal could determine the factual composition of the consideration and consider the parties’ legal arguments in the context of the evidence.

1. Court of Appeal (Civil Division): HMRC’s appeal on corresponding deficiency relief and Mr Mayes’s cross-appeal against remittal of the capital gains tax issue were both dismissed by [2011] EWCA Civ 407.
2. High Court, Chancery Division: Proudman J allowed Mr Mayes’s appeal on corresponding deficiency relief but remitted the capital gains tax issue for further findings of fact. No citation is stated in the judgment.
3. Special Commissioner: The Commissioner rejected the corresponding deficiency claim, but allowed a capital loss in principle without determining its amount. The decision was given on 15 December 2008; no citation is stated in the judgment.