Article analysing recent cases dealing with the Revenue's gathering powers and those considering the scope of the Ramsay doctrine. In each case, appeals continue and there will undoubtedly be further developments in the next twelve months. Edited by Elizabeth Wilson, Richard Vallat, James Henderson and Sarah Dunn, all from Pump Court Tax Chambers
Published in the January 2001 issue of "Tax Adviser"
Revenue Information Gathering Powers Last year, the High Court heard five judicial review applications in which notices under TMA 1970, s. 20 were challenged by the taxpayer or the recipient. All five applications were dismissed. The first two were principally concerned with the Board’s ability to delegate its powers under TMA 1970, ss. 20(8A) and 20B(3). The other three raised questions about the scope of legal professional privilege and the application of article 8 of Sch. 1 to the Human Rights Act 1998 in the context of a s. 20 notice.
In R v Special Commissioner, ex parte Inland Revenue Commissioners; R v Inland Revenue Commissioners, ex parte Ulster Bank Ltd. ([2000] STC 537), an inspector had failed in his application for consent to the issue of a s. 20(3) notice. The notice, intended to be addressed to the bank, concerned the affairs of an unnamed taxpayer. Accordingly, the inspector’s application had to be authorized by order of the Board under subsection (8A). Such authorization was given by an officer of the Board acting under delegated authority. The Commissioner’s view was that this was unsatisfactory and that the Board itself must exercise those powers expressly reserved to it. Dyson J disagreed. Section 4A of the Inland Revenue Regulation Act 1890 permitted the Board to delegate any of its functions to an authorized officer. Where Parliament wished to oust that provision in the s. 20 context, it did so by express words as it had done in s. 20C(2) in relation to the more intrusive s. 20C powers.
R v Inland Revenue Commissioners, ex parte Davis Frankel & Mead ([2000] STC 595) also concerned the Board’s powers to delegate its functions. An investigator concluded that a notice under s. 20(3) should be issued to a firm of solicitors who had acted for the taxpayer under investigation. Under s. 20B(3), an inspector cannot issue a s. 20(3) notice to a solicitor. It may only be issued, if at all, by the Board. The investigator referred the matter to the director of the Special Compliance Office, who had been an inspector of taxes for 24 years and to whom the Board had delegated the relevant powers. He issued the s. 20(3) notice. Moses J held that nothing in s. 20B(3) restricted the Board’s powers to delegate and that there was no prohibition on delegation to someone who also happened to be an inspector.
In R v Inland Revenue Commissioners, ex parte Banque Internationale à Luxembourg SA ([2000] STC 708), five s. 20(3) notices were issued on the bank. It challenged them on several grounds. One was that the notices interfered with the bank’s and the taxpayers’ rights to privacy under art. 8 of the European Convention on Human Rights. The case was heard and decided in June 2000, before the Human Rights Act 1998 came into force in England and Wales. Lightman J held that, whilst no doubt there was some interference with the rights protected by art. 8(1), that interference was justified in accordance with the requirements of art. 8(2). The notices were issued according to law, in pursuit of a legitimate aim and necessary in a democratic society for protecting the taxation system and revenue. Lightman J also observed that the inspector and the commission were required to take into account fully the bank’s and the taxpayers’ rights under art. 8(1) in exercising their discretionary powers to serve the notices.
Like Ulster Bank and Banque Internationale à Luxembourg, the decision in R v Inland Revenue Commissioners, ex parte Lorimer ([2000] STC 751) involved a s. 20(3) notice issued to a bank. However, it differed in that the judicial review application was brought by the taxpayer to whom the notice related, not the bank. That taxpayer was a solicitor. He argued that the documents in the hands of the banks related to the affairs of his clients and were covered by legal professional privilege. Burton J found himself bound by the decision of the Court of Appeal in R v Inland Revenue Commissioners, ex parte Taylor (No.2) ([1990] STC 751) and held that privilege was not preserved where a notice related to a lawyer in his capacity as taxpayer.
In R v A Special Commissioner, ex parte Morgan Grenfell & Co Ltd ([2000] STC 965), Buxton LJ and Penry Davey J had to decide whether legal professional privilege was also ousted by a notice served on the taxpayer himself under s. 20(1). Buxton LJ recognized that, as a fundamental rule, legal privilege could only be overridden by express statutory language or by necessary implication. He went on to find that the test of necessary implication was satisfied and that legal professional privilege could not be used to resist an application for disclosure under s. 20(1). The court also rejected the applicant’s argument that the Commissioner had jurisdiction to order an oral hearing before granting consent to the issue of a notice under s. 20(7). The taxpayer’s appeal against this decision is soon to be heard by the Court of Appeal.
In terms of having a far-reaching impact on taxpayers and their advisers, the decision in Morgan Grenfell, if confirmed on appeal, would undoubtedly be the most significant of the five considered above. Legal professional privilege has traditionally enabled members of the public to disclose all potentially relevant facts and hypotheses to their legal advisers. They have not had to balance, on the one hand, the need to disclose enough to get proper advice and, on the other, the need to keep back anything that they think (rightly or wrongly) may prejudice them if it were disclosed to an authority such as the Revenue. Now, it seems that the Revenue can demand to see correspondence between a client and his solicitor, the solicitor’s attendance note, instructions to counsel, counsel’s opinion, and notes of conferences. Frequently, legal advice taken for tax purposes will include some discussion of the arguments that could be raised against the taxpayer’s stance. This may be of interest to the Revenue. Whilst such documents may not be strictly relevant, it is notoriously difficult to challenge a notice on those grounds.
In practice this decision may result in the lay client putting pressure on tax professionals to advise on controversial transactions orally rather than in writing. However, the adviser should be wary of adopting this practice, as illustrated in Mr Cunningham’s case (R v Charlton [1996] STC 1418). Alternatively, the taxpayer might possibly take steps to put documents out of his control. Simply giving them to the legal adviser is not enough, nor even removing them from the jurisdiction.
Ramsay
The most recent Ramsay decision is Griffin (HMIT) v Citibank Investments Ltd [2000] STC 1010 (Patten J). The taxpayer wished to invest money to produce a capital return. It chose to do this by purchasing two options (one call and one put) with the same exercise date, the combined effect of which would be to produce a guaranteed return when exercised (an ‘equity box’). Each option, considered separately, was a ‘qualifying option’ within s. 143 of the Taxation of Chargeable Gains Act 1992 and accordingly would be taxed as capital and, pursuant to s. 128 of the Income and Corporation Taxes Act 1988, not as Schedule D income. The Revenue contended for an income treatment on the basis that there was a single composite transaction, within the Ramsay doctrine, which was a loan at interest and not an option. The Special Commissioners had found in favour of the taxpayer.
The judge dismissed the Revenue’s appeal. He reiterated the four conditions set out by Lord Brightman in Furniss v Dawson that must be met before a series of transaction could be taxed as a ‘composite transaction’: (1) that the series must be pre-ordained to produce a given result (2) that there was no purpose other than tax mitigation (3) that there was no practical likelihood that the events would not take place as planned and (4) that the events did take place. On the facts as found by the Special Commissioners, conditions (2) and (3) were not satisfied in this case.
Counsel for the Revenue accepted this but argued that there was a residual principle that the court could apply in any event to tax the equity box as a composite transaction. The judge dismissed this as a matter of principle and authority. The authority was Furniss v Dawson itself. The principle was that the Ramsay approach was a judicial attempt to deal with tax avoidance schemes without infringing the fundamental principle laid down by the House of Lords in the Duke of Westminster’s case. In other words, Ramsay and Furniss v Dawson do not give the Court freedom to go behind legal transactions, merely to ignore self-cancelling or artificially inserted ones. If there are no self-cancelling or inserted steps, the Ramsay doctrine has no application. In this case, for example, one could not use Ramsay as authority for the proposition that the Court should ignore only certain terms of the options, such as those providing for independent exercise, whilst respecting other aspects of the contracts.
The authors understand that the judge gave permission for a ‘leap-frog’ appeal by the Revenue to the House of Lords and that this is being pursued. Subject to this (and to any legislative changes), the case indicates a court-sanctioned route for those seeking a capital treatment for a fixed return on an investment. More generally, it also supports the argument that the Ramsay approach must be strictly confined.
The House of Lords is also considering the scope of the Ramsay doctrine in the Westmoreland Investments case. If the House of Lords upholds the Court of Appeal’s decision ([1998] STC 1131) this would be another significant result for the taxpayer.
In contrast to the approach taken in Griffin, the courts have been prepared to use Ramsay to defeat NIC/PAYE avoidance schemes, despite the difficulties of applying it in the context of the collection mechanism.
Under the schemes, the employees were rewarded with unusual benefits in kind. The intention of the schemes was to take advantage of the NIC regulations which, subject to certain exceptions, exclude from a person’s earnings any such ‘payment in kind’. The DSS and the Revenue have argued that in appropriate cases the Ramsay principle could apply so that what was ostensibly a payment in kind was taxable as if a payment of cash.
In DTE Financial Services v Wilson [1999] STC 1061 employees were provided with bonuses by way of reversionary interests in offshore trusts (RIOTs), in order to avoid NICs. The point actually argued was whether the employer had to account for bonuses under the PAYE provisions on the basis that they were effectively payments in cash. On day one Goodvale Limited settled £40,300 on an offshore trust company called Moorgate Trustee Company Limited. On day four, Moorgate appointed the entire capital of the settlement in favour of Goodvale with effect from day eight. On day five, Goodvale assigned this reversionary interest to DTE for £40,600. On day six, DTE assigned the interest to one of its employees. Two days later the interest fell in and the employee received £40,000 from the settlement.
The Revenue argued that, applying the Ramsay principle, the payment by DTE of the RIOT on day five could be re-characterised as a payment of taxable income for the purposes of ICTA 1988, s. 203. Hart J. decided that it was impossible for the Revenue ‘at one and the same time to accept that all of the transactions were genuine, ignore the purchase of the reversionary interest on the ground that it was a mere inserted step, but then recharacterise the consideration paid in respect of that purchase as a payment made to the employee (albeit indirectly)’. The judge went on, however, to find that, applying Ramsay, there was a ‘payment by an intermediary’ within ICTA 1988, s. 203B when the employee received the money from the trustees of the settlement and that the employer had to account for PAYE for that reason (although this was not a route suggested by the Revenue before the hearing).
In NMB Holdings v Secretary of State for Social Security (14 July 2000, unreported), NMB provided certain employees with platinum sponge. The employees sold the platinum sponge back to the company from which NMB had bought it. The Secretary of State argued that this was a ‘payment of earnings’ for the purposes of SSCBA 1992, s. 6 and so subject to NIC. Langley J agreed, finding each of Lord Brightman’s requirements satisfied. Accordingly, the Ramsay principle entitled the Secretary of State to identify a payment of earnings in cash within the meaning of the relevant provisions.
The only NIC avoidance scheme which has so far survived the scrutiny of the courts was one in which a Ramsay point was not taken – Tullett and Tokyo Forex international Ltd v Secretary of State for Social Security 28 May 2000 (unreported: Collins J). DTE’s appeal is, however, shortly to be heard by the Court of Appeal.
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January 2001 by
