Schofield v HM Revenue and Customs

For capital gains tax purposes, a pre-ordained series of interdependent, self-cancelling transactions must be viewed as a whole where the statutory purpose requires that approach. The court must identify the relevant transaction by purposive and contextual construction, rather than isolate a step which produces an apparent loss. Where the composite transaction is not one to which the statutory provisions apply, the apparent loss is not an allowable loss. The Ramsay principle is a general principle of statutory construction, not a special rule confined to revenue law or tax avoidance schemes.

The taxpayer incurred a substantial capital gains tax liability and entered into four linked options transactions designed to create an allowable loss while he became non-resident. The First-tier Tribunal found that the transactions were interdependent, pre-ordained, self-cancelling and devoid of commercial purpose, and dismissed his appeal. The Upper Tribunal upheld that conclusion, holding that the composite transaction was the relevant transaction and did not generate a loss within the Taxation of Chargeable Gains Act 1992. The taxpayer appealed to the Court of Appeal, contending that each option was a separate asset and that the loss on one option had to be computed independently. The central issue was whether the options had to be considered separately or as a composite transaction under the purposive approach established in Ramsay.

1. Appeal dismissed. The First-tier Tribunal’s findings established that the four options formed an overall pre-ordained scheme designed to produce neither a gain nor a loss. It was therefore wrong to adopt a step-by-step approach and consider Option 1 in isolation.
2. The relevant transaction was the scheme as a whole. The options were interdependent and self-cancelling, and were created merely to be destroyed by the others. For the purposes of sections 1 and 2 of the Taxation of Chargeable Gains Act 1992, the composite transaction generated no asset, no disposal and no allowable loss to which the statutory provisions applied.
3. The principle in Ramsay (PVT) Ltd v Inland Revenue Commissioners [1982] AC 300 remains valid. It requires purposive and contextual construction of legislation and displaces a literal, blinkered or formalistic step-by-step approach where the statutory scheme so requires. It is not a special doctrine confined to revenue law or to transactions entered into solely for tax avoidance.
4. The authorities relied on by the taxpayer did not assist. Aberdeen Construction Group Ltd v IRC, Whittles v Uniholdings and Garner v Pounds Ltd did not prevent application of Ramsay where that principle applied. The court declined to determine the alternative argument concerning whether sections 115 and the options code applied to Options 3 and 4, because that issue did not arise.

The court accepted the Chancellor’s reasoning unanimously. Lady Justice Hallett described the appeal as an attempt to undermine the continuing validity of Ramsay; Lord Justice Patten agreed with the Chancellor’s reasons.

1. Court of Appeal (Civil Division) — Appeal dismissed on 11 July 2012: [2012] EWCA Civ 927.
2. Upper Tribunal (Tax and Chancery Chamber) — Appeal dismissed; the tribunal held that the four options had to be treated as a composite transaction and did not generate an allowable loss: [2011] UKUT 306 (TCC).
3. First-tier Tribunal (Tax Chamber) — Appeal dismissed after finding that the options formed an interdependent, pre-ordained scheme which produced no real loss.