Bretten is the latest tax avoidance case involving RDS-based income tax planning by individuals – in this instance, a well-known tax QC who is representing himself on the appeal. It was perhaps predictable that the taxpayer would lose, given how other such cases have gone in recent years. But the decision serves as a reminder that Ramsay remains a powerful weapon in HMRC’s anti-avoidance armoury. Indeed, in some ways, the post-BMBF approach increasingly resembles Ramsay in its ‘traditional’ guise.
This article is about a First-tier Tribunal decision denying a taxpayer an income tax loss from a scheme involving relevant discounted securities (RDSs): George Rex Bretten QC v HMRC [2013] UKFTT 189. Bretten is the most recent in a long line of cases dealing with such planning; the taxpayer has lost all of them – or at least, all of them since the Ramsay approach was reformulated by the House of Lords in BMBF v Mawson [2005] STC 1 and IRC v Scottish Provident Institution [2005] STC 15.
Readers could be excused for presuming that the case will just rehash old ground. On the other hand, we might expect that this particular taxpayer would know better than to run a hopeless appeal: there must be something to distinguish it from what has gone before. And so it transpires. The scheme was a bit different, partly perhaps because it needed to plan around anti-avoidance rules targeting earlier versions of the planning. But the outcome (so far, of course, as the decision may be appealed) is the same: Ramsay operates to do the planning down, even without the specific anti-avoidance rule.
Bretten and the other RDS cases show us just how powerful Ramsay still is. Outliers such as Mayes v HMRC [2011] STC 1269 aside, it does not seem too wide of the mark still to think of Ramsay as a ‘broad spectrum antibiotic’, even though that is precisely what the House of Lords in MacNiven v Westmoreland Investments Ltd [2003] STC 237 said it was not.
The building blocks of RDS planning were the same in Bretten as in all the cases that have gone before. The RDS rules as a whole can themselves be viewed as anti-avoidance provisions: their main purpose is to treat capital appreciation built into the terms of a debt security as giving rise to income for income tax purposes. But the corollary is (or at least was at the time) to give income tax relief in respect of losses. So the planning involved acquiring RDSs for a high value, disposing of them in a way designed to realise low value proceeds for tax purposes, and claiming a loss in respect of the difference. The table (opposite)briefly explains the variations on this theme and the tribunals’ and courts’ responses to them.
As originally enacted in FA 1996 Sch 13, the RDS rules contained a market value rule for connected party transfers, but not acquisitions by way of initial subscription. It was this (remarkably obvious) design flaw that many of the schemes sought to exploit. In each of Campbell v IRC [2004] STC (SCD) 396, Audley v HMRC [2011] UKFTT 219 and Pike v HMRC [2011] SFTD 830, the taxpayer substantially overpaid for RDSs issued by a company he (or a family trust) owned. Soon afterwards, he gave the RDSs away to his wife (or a family trust). By that combination of transactions, the taxpayer effectively gave away the full subscription price for the RDSs – the (low) fair value of the RDSs to the connected transferee, and the difference between that fair value and the subscription price to the connected issuer.
The planning in Astall and another v HMRC [2010] STC 137 took a slightly different form. In that case, the purported RDSs were structured so as initially to be worth the amount subscribed for them, by reason of incorporating a time-limited holder option to redeem at that amount. However, if a specified external ‘market’ condition was met, and the holder transferred the security, then the RDSs would collapse in value: the maturity date was pushed out by 50 years, and the amount at which the holder could redeem dropped to circa 5% of the issue price. The external condition was duly met, and a third party was found who bought the RDSs from the taxpayer at (a little less than) the 5% amount, and then immediately redeemed them at that amount. The difference between the subscription and redemption prices accrued to the benefit of the RDS issuer, which was connected to the taxpayer (a family trust).
By the time Mr Bretten QC implemented his planning, a market value rule had been introduced that would apply in certain circumstances upon issue of the RDS (FA 1996 Sch 13 para 9A). That provision closed down the overpayment version of the planning, but was not obviously effective against the collapsing value version. Mr Bretten QC’s planning took that form, although the disposal transaction was not the same as in Astall. The collapse in the value of the RDSs in Bretten occurred automatically if the holder did not redeem within two weeks of issue (and as long as an external ‘market’ condition was not met, which would have forced a redemption at par): there was no requirement for a transfer. The taxpayer could simply wait for the two weeks to elapse, and then give the RDSs to a connected party.
As is shown in the diagram (above), Mr Bretten QC’s scheme had one further tweak. The RDSs were initially issued by an unconnected company (a creation of the taxpayer’s advisers), and the family trust was substituted later – albeit pursuant to a call option granted at the outset. At the time, this was intended to head off an argument (which HMRC did not pursue) that only a company could issue an RDS. But before the tribunal, Mr Bretten QC argued that it provided a further layer of defence against para 9A, because para 9A only applied where the taxpayer was connected with the RDS issuer.
Only in Campbell has the taxpayer won. The case was argued by reference to the authorities at the time: principally Westmoreland and Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46. The Special Commissioners determined that the taxpayer had a non-tax purpose in seeking to inject equity into the connected RDS issuer, but that the use of the RDSs as the means of achieving that aim was entirely tax-motivated. Nevertheless, they held that the concept of ‘loss’ in the RDS code was sufficiently ‘legal’ (in Westmoreland terms) and ‘closely articulated’ (in Arrowtown terms) that the taxpayer’s purpose in undertaking the RDS transactions was not relevant. Crucially, the Revenue did not challenge the taxpayer’s overpayment for the RDSs on issue.
The House of Lords in BMBF referred to Campbell as a ‘perceptive’ decision. It is striking, then, that the taxpayer has lost every one of the cases since. It is now clear that the RDS code as a whole – and a number of the particular concepts deployed within it, including the concept of ‘loss’ – is susceptible to a Ramsay-based purposive construction. Allied to a ‘realistic’ view of the facts, this has permitted some sweeping conclusions to be reached. In Astall, where the scheme involved a redemption of the securities at a fraction of their issue price, there was no real possibility of a ‘deep gain’ arising and so the securities were not RDSs at all.
In Audley, where HMRC did challenge an overpayment, the amount really ‘paid’ for the RDSs was the fair value upon issue. And in Berry v HMRC [2011] STC 1057, there was no real ‘loss’. (Berry was a slightly different scheme, involving gilt strips. The strips were acquired for £x and immediately disposed of for £x – y under a call option granted for a premium of £y. The ambition was to generate a loss under FA 1996 Sch 9 para 14A, by reason of only the strike price being taken into account as an ‘amount payable’ to the taxpayer on the disposal.)
While BMBF sets out the modern restatement of the Ramsay approach and how it applies to composite transactions, Scottish Provident has been equally influential in defining what constitutes a composite transaction. In particular, Scottish Provident permits the courts to disregard ‘anti-Ramsay’ devices and to focus on how a scheme is intended to work, ignoring deliberately inserted contingencies that might derail it. To that extent, in looking to the content of pre-planned arrangements, rather than only a pre-ordained series of steps, the modern approach has effectively gone beyond (or at least developed) what the House of Lords was prepared to do in Craven v White [1988] STC 476.
The First-tier Tribunal rightly acknowledged that the question of whether (and how) it is appropriate to adopt a ‘realistic’ view of the facts itself turns on the construction of the relevant statutory provisions. This is an important point, which has sometimes been lost in the post-BMBF shorthand of ‘construe the legislation purposively and view the facts realistically’. (Lewison J was perhaps guilty of this in his bullet-point Ramsay summary in Berry – a summary which is now commonly cited in other cases.)
Having said that, Bretten also illustrates just how easy it is for the courts to identify a suitable candidate for Ramsay-based purposive construction. The results can appear almost arbitrary: for example, the tribunal considered particular concepts used in the FA 1996 Sch 13 para 9A anti-avoidance rule – and came to the conclusion that ‘market value’ should be interpreted mechanistically (unlike Blumenthal v HMRC [2012] SFTD 1264, where the tribunal was inclined to the opposite view in the TCGA 1992 context), but that ‘exceeds’ could be given a purposive construction!
More importantly, as regards the basic ‘loss’ concept, the Court of Appeal in Mayes held that a Ramsay approach could not be applied to the relevant ICTA 1988 provisions dealing with ‘gains’ and ‘corresponding deficiencies’ from life assurance policies. In Bretten, however, the tribunal followed Berry in holding that ‘loss’ in the RDS code was susceptible to Ramsay. The difference between the two is apparently that the ICTA 1988 provisions referred to amounts being ‘treated as’ gains, whereas FA 1996 Sch 13 para 2 just referred to a person ‘sustain[ing] a loss’.
This is a pretty thin distinction – particularly given that other relevant provisions within the RDS code do use the ‘treated as’ formulation (for example, the market value rule for connected party transfers). The difference is surely rather that the ICTA 1988 code in Mayes was riddled with obvious anomalies that could operate either for or against the taxpayer (as the taxpayer has found to his cost in Joost Lobler [2013] UKFTT 141 (TC)), and so could not be subjected to an overarching Ramsay analysis. As to what ‘loss’ then means, purposively construed in the RDS code, the tribunal had to grapple with the fact that Mr Bretten QC did make a loss in a real sense (in that he alienated £500k of capital), and that he had a non-tax purpose in doing so (putting assets outside the reach of potential creditors). Nevertheless the tribunal decided that this did not count, precisely because it was ‘a loss that was intended to arise’.
What is possibly most striking about Bretten is just how far the tribunal was prepared to go (having decided that a Ramsay-based ‘realistic’ view was appropriate) in effectively recharacterising the facts. Mr Bretten QC conceded that the external ‘market’ condition that might have triggered redemption of the RDSs at par should be ignored on Scottish Provident grounds. Going beyond that, however, the tribunal decided that on a realistic view, the taxpayer did not pay £500k for the RDSs, even though that was the cash price paid and their value on issue – rather he gave £475k to family trust 1, and only ‘paid’ the £25k reduced value of the RDSs after 14 days. Furthermore, the RDSs were ‘issued by’ family trust 1, rather than the unconnected company. Most significantly, the taxpayer never even ‘acquired’ the RDSs – rather family trust 2 was the true acquirer. So the ‘realistic’ view of the facts in this particular case gives a result that is on all fours with Furniss v Dawson [1984] STC 153 – which, of course, is now somewhat discredited, at least as a general approach.
Some of the tribunal’s reasoning on these points is certainly open to question. For example, it seems quite radical (particularly when one thinks of the specific codes framed to deal with repos, stock loans, etc.) to suggest that parliament intended to exclude from the concept of ‘acquisition’ a case where the holder is not economically at risk.
But the broader point to keep in mind – particularly as the focus naturally shifts to the incoming general anti-abuse rule – is that Ramsay is alive and well, and that in its post-BMBF guise it gives the courts wide scope to label a tax-motivated pre-planned set of steps as ‘composite’, and then effectively to tax it as such.
