Scottish Provident Institution v Inland Revenue Commissioners

The appeal concerned corporation tax treatment of a series of cross options over gilts and associated collateral arrangements. The principal legal questions were whether the options were self-cancelling or part of a single composite transaction designed only to obtain a tax advantage (applying the Ramsay principle), whether a commercially irrelevant contingency prevented characterization as a single composite transaction, and how profit and loss should be computed (including whether mark-to-market valuation and exclusion of a collateral amount were appropriate).

The House of Lords considered whether each option was a qualifying contract for tax purposes and whether, on the morning of 1 April 1996, the options should be assigned a nil value for tax computation. The court analysed the statutory deeming provisions in the Finance Act 1994 (including sections 147A, 150A, 154, 155, 156 and 177(2)) and Finance Act 1996 (Schedule 15, paragraph 25) in that context.

This appeal to the House of Lords arose from corporation tax proceedings over a structured arrangement involving cross options in respect of gilts and associated collateral payments. The parties were the Scottish Provident Institution (appellant) and the Inland Revenue Commissioners (respondent). The statutory provisions engaged included various deeming and anti-avoidance provisions in the Finance Act 1994 and a provision in the Finance Act 1996 (Schedule 15, paragraph 25).

The nature of the application: the case turned on the proper tax treatment of gains and losses arising from the option arrangements and whether those arrangements should be treated as a single composite transaction engineered for the sole or main purpose of securing a tax advantage. The relief effectively sought was a determination of the correct tax characterisation and the appropriate computation of taxable profits or losses arising from the transactions.

Issues framed by the court included: (i) whether the cross options were self-cancelling or constituted a single composite transaction under the Ramsay principle; (ii) whether any commercially irrelevant contingency precluded treating the steps as parts of a single scheme; (iii) whether each option was a qualifying contract for tax purposes; (iv) whether a mark-to-market basis of computing profit and loss was appropriate; and (v) whether collateral payments should be included or excluded from the computation of tax consequences.

The court reasoned by analysing the factual structure of the option transactions and the statutory wording of the relevant Finance Act provisions, applying the Ramsay principle to determine whether the steps should be disregarded as merely preordained elements of a tax-driven composite. The court also addressed the appropriate valuation point for the options (notably the morning of 1 April 1996) and the treatment of collateral amounts in computing tax results. Not stated in the judgment are the detailed factual findings and the precise dispositive order of the House of Lords.