Review of the House of Lords decision in Westmoreland Investments Ltd v MacNiven (HMIT) [2001] UKHL 6 case and the Court of Appeal decision in Cook v Billings [2001] STC 16
Published in the March 2001 issue of "Tax Adviser"
The House of Lords gave its decision in
Westmoreland Investments Ltd v MacNiven (HMIT)[2001] UKHL 6 (as discussed in this column in January) on 8 February 2001 (unreported at the date of writing).
Westmoreland is an important statement on the limitations of the Ramsay principle. Their Lordships held that Ramsay is relevant only where the statutory words refer to commercial concepts such as ‘loss’, ‘gain’ and ‘disposal’. In Ramsay where these concepts were in issue this approach meant that the legislation could be applied to a preplanned series of transactions by reference to the overall effect rather than the various distinct parts of that series. However, not all statutory words refer to commercial concepts. If the statutory word concerned is a legal concept such as ‘conveyance or transfer on sale’ then it makes no difference to the application of the statute to particular a transaction that it had no business purpose.
An example of the difference between the ‘old’ (i.e. formalistic) Ramsay approach and the new is the analysis given of the NMB Holdings case (referred to in the January column). Their Lordships would have concluded that the payment of bonuses to directors in the form of platinum sponge with arrangements already in place for its resale was not a ‘payment in kind’ for the purposes of the NIC legislation (as the judge did). Importantly, however, their reason for this was not that there were any inserted steps to be ignored, but simply that ‘in commercial terms the directors were paid in money.’
Its application to the facts in Westmoreland was reasonably straightforward. Under ICTA 1988, s. 338, payments of interest could be set against profits and any excess carried forward under s. 75. Westmoreland owed a group pension scheme a substantial amount of accrued interest under loans; if it paid that interest, that amount would be available for relief (and Westmoreland could be sold to a purchaser with income profits that needed sheltering). In order to fund repayment of the interest, the pension scheme made a further loan. The Revenue contended that a circular payment such as this should be ignored for tax purposes. Their Lordships, however, held that Westmoreland had made a ‘payment’ of interest within the normal (legal) meaning of that word and that there was nothing in the legislation to justify a different meaning.
Lord Hoffmann also commented on the relevance of the distinction between ‘tax avoidance’ and ‘tax mitigation’. These concepts put ‘the cart before the horse’ and are only relevant as a test where expressly laid down by statute. Essentially, one only knows whether one has achieved acceptable tax mitigation after the statutory language has been applied to the transaction. This is as true for the Revenue as for the taxpayer. Tax planning is certainly possible, provided that the statutory language (read commercially where necessary) is satisfied. Thus, Lord Hoffmann approved Lord Greene MR’s example in IRC v Wesleyan and General Assurance Society 30 TC 11, of a choice between selling property for a lump sum payable in ten annual instalments (capital) and selling for a fixed-sum annuity payable for ten years (income). A sidenote to this is that, in doing so, he appeared to regard ‘income’ and ‘capital’ as ‘business concepts’. This is surprising, since the question of whether expenditure, say, was income or capital has traditionally been the preserve of lawyers.
The ramifications of this decision will be explored by the courts on a case by case basis. What the courts are left to decide is the crucial question whether a given word has, in context, a ‘commercial’ or a ‘legal’ meaning (or, rather, whether the legal meaning of a statutory word is determined by its commercial meaning). Certainly some words will have no recognised legal meaning (‘profits’ for example) and in such cases, a commercial or ‘ordinary business’ approach will have to be adopted. In other cases the statutory language clearly referred to legal language: ‘conveyance on sale’ was an example of a term that lawyers, rather than businessmen, would recognise. Other cases will be more difficult.
In summary this is a significant analysis of the Ramsay approach which will no doubt be referred to in the decisions of DTE (heard in the Court of Appeal on 8 and 9 February) and Citibank v Griffin.
Business Enterprise Relief: Cook v Billings [2001] STC 16
The Court of Appeal upheld the Revenue's construction of the BES provisions so as to make it “impossible” for a group of associated individuals to obtain BES relief where they form a company for the purpose of carrying on their own business.
The facts in Cook v Billings were as follows: In 1993 seven individuals subscribed for ordinary shares in a property company. They each held under 15 per cent of the issued share capital of the company and of the voting rights. Collectively they held 100 per cent of the shares and voting rights in the company. All seven were partners in the same partnership. Although the shares were eligible shares and various other requirements were met, BES relief was refused on the grounds that each individual was ‘connected’ with the company for the purposes of TA 1988, s.291.
It was common ground that all seven partners were ‘associates’ of each other. It was also common ground that individually none were connected with the company because they each possessed or were entitled to acquire less than 30 per cent of the issued ordinary share capital of the company. However, s. 291(8) provided that:
‘For the purposes of …section [291] an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his’
The sole issue was whether s. 291(8) attributed to each individual the rights and powers of his associates. If it did each of the seven possessed 100 per cent of the company so that they were connected with the company and the BES relief was unavailable.
The majority of the Court of Appeal held that s. 291(8) must be construed ‘within the arcane context of revenue law’ (which appeared to mean, without regard to the practical consequences) and as such should be read in two parts. First, for the purposes of s. 291, it treats an individual as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire. Secondly, for the purposes of s. 291 it requires the attribution of the rights or powers of any associate of a person to that person. This second part operates independently of the first part of (8) and may apply even if (as in this case) the first part did not.
The result was that no investor obtained BES relief because each investor possessed more than 30 per cent of the shares.
The Court of Appeal noted the absence of a comma after ‘For the purposes of this section’, and that this absence suggested that the second part of s. 291(8) was relevant only to the first part of s. 291(8). However, the distinction between the word ‘individual’ in the first part and ‘person’ in the second part was held to be more significant. These words have separate and distinct meanings and a separate and distinct purpose needed to be found for them. After all, ‘person’ covers a wider class of entity than ‘individual’, and must have been intended to have a wider application.
Less significant was the fact that BES relief would be denied in many surprising cases. For example, a husband and wife who each applied for 16 per cent of the shares in a start-up company, and a father and son who (without informing the other) each apply for 16 per cent of the shares.
The Court of Appeal’s construction of s. 291(8) also denies relief to an individual owning 29 per cent of the shares where an associate of an associate owns 2 per cent of the shares in the company. For example, an individual is a partner is an accountancy firm. Under s. 291(8) the associate’s rights and powers are attributed to the individual. The associate has no shares. However, s. 291(8) applies for the purposes of the whole of s. 291. It therefore applies to determine the rights and powers of the associate. That partner will be associated with other partners in the same or other partnerships, with his own relatives, and with trustees of a settlement of which he or one of his relatives is a settlor. If any of these have shares, the individual in question will be denied relief. It is unlikely that any of this information could reasonably be discovered by the original individual – yet relief depends upon it. Only Ward LJ gave proper consideration to these very practical difficulties. Unfortunately, his was a dissenting judgment.
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March 2001 by
