‘We understand that some readers of this decision may find it surprising that an artificial series of transactions which, on the unchallenged findings of the FTT, were devoid of business purpose and effected only to achieve a “magical” increase in qualifying expenditure should survive a challenge based on the Ramsay line of cases.’
Those were the words of the Upper Tribunal as they allowed the taxpayer’s appeal in Altrad Services Ltd v HMRC [2022] UKUT 185 (TCC), a case which involved an arrangement disclosed under the UK’s DOTAS rules intended to deliver capital allowances in respect of ‘magical’ expenditure. So why did it survive?
Seemingly for two reasons. The first being that the FTT failed to apply the two step Ramsay approach properly. The second being that HMRC did not run the right Ramsay argument.
Essentially, the taxpayer owned plant and machinery (‘the assets’) on which they were already entitled to capital allowances. The assets were sold to a leasing company (SGLJ) owned by Societe Generale for £100 and then immediately leased back under a short-term (three to four week) finance lease for total rental of £5. The taxpayer granted SGLJ a put right over the assets for £95 and SGLJ granted another company in the taxpayer’s group (not the taxpayer, to avoid hire purchase treatment) a call right over the assets for £95. When the lease expired, the put option was exercised and the taxpayer reacquired the assets for £95.
So the net effect of the arrangement was that the taxpayer sold the assets to SGLJ for £100 then reacquired them a few weeks later for total payments of £100 (£5 of rent, £95 under the put option). Plus the taxpayer paid SGLJ a fee, of course.
However, the effect of this for tax purposes, according to the taxpayer, was that it got additional qualifying expenditure for capital allowance purposes of £95. This was on the basis that whilst the sale of the assets was a disposal event for the purposes of CAA 2001 s 61(1)(a), with a disposal value of £100 to be brought into account, that was offset by qualifying expenditure under the long funding finance lease rules. And that when the lease terminated, there was no disposal value to be brought into account under those rules but the £95 incurred under the put option was qualifying expenditure.
HMRC had successfully argued before the FTT that the arrangement simply did not give rise to a disposal event under s 61(1)(a) in the first place. Section 61(1)(a) is engaged where ‘the person ceases to own the plant or machinery’. The FTT concluded HMRC’s Ramsay argument succeeded because of: (i) the absence of any commercial purpose to the transactions; (ii) the fact that the taxpayer lost ownership of the assets for just a few weeks; (iii) the fact that the taxpayer on selling the assets immediately retained the right to use them under the lease; and (iv) the fact that the exercise of the put option was effectively pre-ordained.
But, as we all know, and as was confirmed by the Supreme Court last year in Hurstwood Properties v Rossendale Borough Council [2021] UKSC 16, the Ramsay approach is simply a rule of statutory construction, not confined to tax cases, which has two components. Do the facts, viewed realistically, answer the statutory description, interpreted purposively?
Here the FTT had viewed the facts realistically. The problem was that they had failed correctly to interpret s 61(1)(a) purposively. The Upper Tribunal began by noting that there was something odd in the first place about HMRC seeking to argue that s 61(1)(a) might not be engaged where a person had – as was agreed – ceased legally and beneficially to own plant or machinery, given it would usually operate to a taxpayer’s detriment. The Upper Tribunal then took account of the fact that s 61(1)(a) operated by reference to a snapshot in time – whether a person had ceased to own an asset at any time – not over a period of time, the fact that it did not expressly invite any analysis of why a person had ceased to own an asset and the fact that it did not invite any analysis of whether it was possible, likely or pre-ordained that the person would own the asset again unlike other limbs of s 61(1) which looked at, for example, whether a loss of plant or machinery was ‘permanent’.
The Upper Tribunal also thought the FTT had misunderstood the taxpayer’s arguments based on the House of Lords decision in Melluish v BMI (No. 3) Ltd [1995] STC 964. In Melluish, the taxpayer acquired plant and machinery and leased it to local authorities who then owned it, legally and beneficially, as a result of it being fixed to their land. The taxpayer argued that the plant and machinery nonetheless ‘belonged’ to it for capital allowance purposes (belonging being the predecessor concept to owning before the capital allowance legislation was rewritten in CAA 2001). The House of Lords found it did not. Lord Browne-Wilkinson noted that:
All of which led the Upper Tribunal to the conclusion that construed purposively, what s 61(1)(a) was asking was whether the taxpayer had lost legal and beneficial ownership of the assets when they were sold to SGLJ. And, on the facts found by the FTT, even viewed realistically, the answer to that was yes. Appeal allowed.
Although you may recall that I noted above that the taxpayer seemed to have won for two reasons, the other being that HMRC had not run the right Ramsay argument.
Certainly I infer from the Upper Tribunal judgment that it thought that there was a way in which HMRC could have put its Ramsay argument which meant it would have won. But it had not, so did not, and the Upper Tribunal was not going to do it for them. There were repeated references throughout the judgment along the lines of ‘given the way in which HMRC chose to put their Ramsay argument’. And the second half of para 94, which I quoted at the top of this post, provides:
‘We stress that we have reached our conclusion based on the Ramsay argument that HMRC chose to put forward ... it is not for us to comment on other ways in which the Ramsay argument could have been advanced, or the conclusions we might have reached if different arguments had been put forward.’
So all in all, something of a masterclass in statutory interpretation, coupled with an invitation to appeal and do better?
‘We understand that some readers of this decision may find it surprising that an artificial series of transactions which, on the unchallenged findings of the FTT, were devoid of business purpose and effected only to achieve a “magical” increase in qualifying expenditure should survive a challenge based on the Ramsay line of cases.’
Those were the words of the Upper Tribunal as they allowed the taxpayer’s appeal in Altrad Services Ltd v HMRC [2022] UKUT 185 (TCC), a case which involved an arrangement disclosed under the UK’s DOTAS rules intended to deliver capital allowances in respect of ‘magical’ expenditure. So why did it survive?
Seemingly for two reasons. The first being that the FTT failed to apply the two step Ramsay approach properly. The second being that HMRC did not run the right Ramsay argument.
Essentially, the taxpayer owned plant and machinery (‘the assets’) on which they were already entitled to capital allowances. The assets were sold to a leasing company (SGLJ) owned by Societe Generale for £100 and then immediately leased back under a short-term (three to four week) finance lease for total rental of £5. The taxpayer granted SGLJ a put right over the assets for £95 and SGLJ granted another company in the taxpayer’s group (not the taxpayer, to avoid hire purchase treatment) a call right over the assets for £95. When the lease expired, the put option was exercised and the taxpayer reacquired the assets for £95.
So the net effect of the arrangement was that the taxpayer sold the assets to SGLJ for £100 then reacquired them a few weeks later for total payments of £100 (£5 of rent, £95 under the put option). Plus the taxpayer paid SGLJ a fee, of course.
However, the effect of this for tax purposes, according to the taxpayer, was that it got additional qualifying expenditure for capital allowance purposes of £95. This was on the basis that whilst the sale of the assets was a disposal event for the purposes of CAA 2001 s 61(1)(a), with a disposal value of £100 to be brought into account, that was offset by qualifying expenditure under the long funding finance lease rules. And that when the lease terminated, there was no disposal value to be brought into account under those rules but the £95 incurred under the put option was qualifying expenditure.
HMRC had successfully argued before the FTT that the arrangement simply did not give rise to a disposal event under s 61(1)(a) in the first place. Section 61(1)(a) is engaged where ‘the person ceases to own the plant or machinery’. The FTT concluded HMRC’s Ramsay argument succeeded because of: (i) the absence of any commercial purpose to the transactions; (ii) the fact that the taxpayer lost ownership of the assets for just a few weeks; (iii) the fact that the taxpayer on selling the assets immediately retained the right to use them under the lease; and (iv) the fact that the exercise of the put option was effectively pre-ordained.
But, as we all know, and as was confirmed by the Supreme Court last year in Hurstwood Properties v Rossendale Borough Council [2021] UKSC 16, the Ramsay approach is simply a rule of statutory construction, not confined to tax cases, which has two components. Do the facts, viewed realistically, answer the statutory description, interpreted purposively?
Here the FTT had viewed the facts realistically. The problem was that they had failed correctly to interpret s 61(1)(a) purposively. The Upper Tribunal began by noting that there was something odd in the first place about HMRC seeking to argue that s 61(1)(a) might not be engaged where a person had – as was agreed – ceased legally and beneficially to own plant or machinery, given it would usually operate to a taxpayer’s detriment. The Upper Tribunal then took account of the fact that s 61(1)(a) operated by reference to a snapshot in time – whether a person had ceased to own an asset at any time – not over a period of time, the fact that it did not expressly invite any analysis of why a person had ceased to own an asset and the fact that it did not invite any analysis of whether it was possible, likely or pre-ordained that the person would own the asset again unlike other limbs of s 61(1) which looked at, for example, whether a loss of plant or machinery was ‘permanent’.
The Upper Tribunal also thought the FTT had misunderstood the taxpayer’s arguments based on the House of Lords decision in Melluish v BMI (No. 3) Ltd [1995] STC 964. In Melluish, the taxpayer acquired plant and machinery and leased it to local authorities who then owned it, legally and beneficially, as a result of it being fixed to their land. The taxpayer argued that the plant and machinery nonetheless ‘belonged’ to it for capital allowance purposes (belonging being the predecessor concept to owning before the capital allowance legislation was rewritten in CAA 2001). The House of Lords found it did not. Lord Browne-Wilkinson noted that:
All of which led the Upper Tribunal to the conclusion that construed purposively, what s 61(1)(a) was asking was whether the taxpayer had lost legal and beneficial ownership of the assets when they were sold to SGLJ. And, on the facts found by the FTT, even viewed realistically, the answer to that was yes. Appeal allowed.
Although you may recall that I noted above that the taxpayer seemed to have won for two reasons, the other being that HMRC had not run the right Ramsay argument.
Certainly I infer from the Upper Tribunal judgment that it thought that there was a way in which HMRC could have put its Ramsay argument which meant it would have won. But it had not, so did not, and the Upper Tribunal was not going to do it for them. There were repeated references throughout the judgment along the lines of ‘given the way in which HMRC chose to put their Ramsay argument’. And the second half of para 94, which I quoted at the top of this post, provides:
‘We stress that we have reached our conclusion based on the Ramsay argument that HMRC chose to put forward ... it is not for us to comment on other ways in which the Ramsay argument could have been advanced, or the conclusions we might have reached if different arguments had been put forward.’
So all in all, something of a masterclass in statutory interpretation, coupled with an invitation to appeal and do better?
