In Clavis Liberty Fund 1 LP v HMRC[2017] UKUT 418 (19 October 2017), the UT found that a scheme was too artificial to amount to a trade.
The claimed loss arose out of an ‘artificial scheme’, which worked as follows. A partnership bought the right to the bulk of dividends declared by a company for a price of £59,958,000; the dividends amounted to £60,000,000, generating a profit of £42,000. The scheme was based on ICTA 1988 s 730, which provided that the dividends would be deemed to have remained the income of the seller and not of the partnership, thus generating a loss.
The FTT had found that the scheme failed under the Ramsay doctrine [1981] STC 174; ‘viewed realistically’, the sale of the right to receive the dividends and the payment of those dividends were a ‘single composite transaction’. The transaction was therefore not a trade, as it was too artificial to be viewed as such. The UT found that the criticisms of the FTT’s decision in applying the Ramsay doctrine were misplaced.
Referring to Lupton [1972] AC 634, the UT also observed that tax considerations do not denature a concurrent trading purpose. However, if the fiscal purpose is ‘the real purpose’ and a suggested trading element is no more than a ‘fig leaf’, it can be concluded that there is no trading purpose. The UT pointed out that the transaction had involved the purchase of a right to a dividend in a company set up for the express purpose of being funded to pay the dividend. There was ‘nothing at all normal about that structure’. The UT added: ‘It is an odd trade where the trader finances his or her own profit.’ The UT also pointed to the fact that all the partners had lost their personal contributions to the capital of the partnership and yet there was no evidence of any complaint.
Why it matters: Counsel for the taxpayer contended that trading transactions do not cease to be such merely because they are entered into in the hope of later obtaining a tax advantage. However, in the UT’s view, the transactions were so artificial that they could not amount to a trade.
In Clavis Liberty Fund 1 LP v HMRC[2017] UKUT 418 (19 October 2017), the UT found that a scheme was too artificial to amount to a trade.
The claimed loss arose out of an ‘artificial scheme’, which worked as follows. A partnership bought the right to the bulk of dividends declared by a company for a price of £59,958,000; the dividends amounted to £60,000,000, generating a profit of £42,000. The scheme was based on ICTA 1988 s 730, which provided that the dividends would be deemed to have remained the income of the seller and not of the partnership, thus generating a loss.
The FTT had found that the scheme failed under the Ramsay doctrine [1981] STC 174; ‘viewed realistically’, the sale of the right to receive the dividends and the payment of those dividends were a ‘single composite transaction’. The transaction was therefore not a trade, as it was too artificial to be viewed as such. The UT found that the criticisms of the FTT’s decision in applying the Ramsay doctrine were misplaced.
Referring to Lupton [1972] AC 634, the UT also observed that tax considerations do not denature a concurrent trading purpose. However, if the fiscal purpose is ‘the real purpose’ and a suggested trading element is no more than a ‘fig leaf’, it can be concluded that there is no trading purpose. The UT pointed out that the transaction had involved the purchase of a right to a dividend in a company set up for the express purpose of being funded to pay the dividend. There was ‘nothing at all normal about that structure’. The UT added: ‘It is an odd trade where the trader finances his or her own profit.’ The UT also pointed to the fact that all the partners had lost their personal contributions to the capital of the partnership and yet there was no evidence of any complaint.
Why it matters: Counsel for the taxpayer contended that trading transactions do not cease to be such merely because they are entered into in the hope of later obtaining a tax advantage. However, in the UT’s view, the transactions were so artificial that they could not amount to a trade.
