The High Court has upheld the decision of the Special Commissioners in D'Arcy v HMRC. According to the case report, the taxpayer had entered into a REPO transaction for the sole purpose of reducing her income tax liability. This transaction had created a manufactured interest deduction under the REPO legislation. HMRC contended, at first, that the Ramsay principle applied to the transaction as a whole to deny a deduction for the manufactured interest. However, they later abandoned this argument and contended instead that the deduction was allowable but that an almost equal amount of income was taxable under the accrued income scheme.
The Special Commissioner held that there was no charge under the accrued income scheme. The High Court agreed. Henderson J said that HMRC's real complaint appeared to be that the accrued income scheme legislation does not throw up a charge to counterbalance the deduction available to the taxpayer under the REPO legislation. He pointed out that the accrued income scheme legislation and the REPO legislation were enacted at different times with different purposes, and do not form part of a single unified code. He described the case as one of those “which will inevitably occur from time to time in a tax system as complicated as ours, where a well-advised taxpayer has been able to take advantage of an unintended gap left by the interaction between two different sets of statutory provisions.”
John Cullinane, President of The Chartered Institute of Taxation, comments: “The lesson to be drawn from this is that it is the complexity of the legislation that gave this taxpayer the opportunity to reduce her tax liability in a way that HMRC clearly did not approve of. This points to the folly of repeatedly counteracting avoidance by introducing new complexity into the legislation, which not only increases the compliance burdens on the majority of taxpayers, but results in more, rather than less, 'disapproved of' opportunities of this type.”
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