Chappell v Revenue & Customs

At the permission stage, an appeal should proceed where its proposed grounds raise points of principle of sufficient importance or general interest, are properly arguable and have a real prospect of success. The court need not determine the substantive tax issues. Arguable questions concerning the Ramsay principle, manufactured overseas dividends, loan notes, annual payments, deductibility and the interaction of sections 3, 348 and 349 of ICTA 1988 warranted permission to appeal.

Mr Andrew Chappell sought oral reconsideration of Lewison LJ’s refusal on the papers of permission to appeal. His proposed appeal challenged the Upper Tribunal’s dismissal of his appeal from the First-tier Tribunal. The underlying dispute concerned an HMRC amendment to his 2005/2006 self-assessment, disallowing a deduction of just over £300,000 relating to payments on loan notes said to be manufactured overseas dividends under Schedule 23A of ICTA 1988.

The Upper Tribunal had accepted three arguments for HMRC:

1. the Ramsay principle meant that the notes were not securities, the applicant had not made payments and there was no relevant transfer;
2. the payments were not deductible because there was no obligation or option to deduct tax; and
3. section 3 of ICTA 1988 continued to impose basic-rate tax.

The central issue was whether the proposed grounds were sufficiently important, properly arguable and had a real prospect of success.

Permission to appeal was granted. Lord Justice Kitchin held that the applicant’s proposed grounds raised points of principle which merited consideration. The court did not decide the substantive tax questions.

1. Ramsay issue. The First-tier Tribunal had found that the arrangements formed part of a scheme with no commercial purpose and intended to obtain a tax advantage. The Upper Tribunal applied the Ramsay principle and concluded that the loan notes were not securities for the legislation, that the applicant had made no relevant payments and that there was no relevant transfer. The applicant accepted the factual findings but argued that artificiality could not be assessed in the abstract and that the statutory provisions required a purposive construction. Those submissions, including the arguments about the ordinary meanings of payment, transfer and security, gave the proposed appeal a real prospect of success and raised points of principle.
2. Technical annual payment issue. The contention that regulation 2B(3) would be effectively pointless unless the deemed annual payments were deductible was arguable. The further submission that the regulation’s purpose was to make the relevant payments deductible also merited consideration.
3. Section 3 issue. It was arguable that section 3 of ICTA 1988 applied to annual payments within section 348 but not to payments deemed by the regulation to fall within section 349. The First-tier Tribunal had accepted that construction, while the Upper Tribunal had reversed it. The Upper Tribunal’s conclusion was arguably erroneous.
4. Disposition. The applicant had to succeed on each issue to obtain the desired result, but each ground was sufficiently important, properly arguable and had a real prospect of success. Permission to appeal was accordingly granted.

1. Court of Appeal (Civil Division): on oral reconsideration, granted permission to appeal after Lewison LJ had refused permission on the papers on 15 December 2014.
2. Upper Tribunal (Tax and Chancery Chamber): dismissed the applicant’s appeal against the First-tier Tribunal’s decision.
3. First-tier Tribunal: dismissed the applicant’s appeal against HMRC’s amendment to his self-assessment.