The current scene analysed by Robert Venables QC, published in the July 2001 issue of Tax Adviser. Tax avoidance is always a topical subject. This summer, it is even more so. The decision of the House of Lords in
MacNiven (HMIT) v Westmoreland Investments Ltd [2001] UKHL6;[2001] STC 237 is important in broadly restricting the scope of the Ramsay doctrine, even if it may arguably have extended it in some ways. It marks both the end of an era and the beginning of a new one. It will run and run.
In Halifax plc v C&E Commrs, His Honour, Stephen Oliver QC, President of the VAT and Duties Tribunal, on 1 March 2001, invented a value added tax anti-avoidance rule which could have far-reaching repercussions. In the same case, Customs contended that there is an 'abuse of rights' doctrine which counteracts tax avoidance in the case of an EC tax, such as value added tax or duties of customs and excise. While the tribunal did not feel the need to comment on it, it is being pressed in other pending cases. My own view is that the decision is shot through with legal heresy and the sooner it is denounced by the courts, the better. My views were adumbrated in an address at the Cambridge Conference this spring and are set out in a fully reasoned article "When is a Supply not a Supply?" in Vol. 4, Issue 3 of The EC Tax Journal, published by Key Haven Publications. The same issue also contains an article "The Law Ends Where Abuse Begins" by Jonathan Peacock QC, Counsel for Customs in Halifax, which expresses rather different views.
The Court of Appeal has held in R (on the application of Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2001] STC 497 that a legal professional privilege is no defence to a taxpayer on whom a Taxes Management Act 1970, s20 notice is served requiring disclosure of documents.
Criminal prosecutions for cheating the Revenue continue and convictions are secured in cases where one seriously wonders whether any more than honest tax avoidance was involved.
In his Chartered Tax Advisers' Address on 14 May, His Honour Judge Stephen Oliver QC graphically explained how roughtly tax advisers should expect to be treated by the revenue authorities both before and during proceedings before his tribunal. At the end of this article, I append some advice to tax avoiders and their advisers.
Westmoreland
The decision of the House of Lords, and especially the speech of Lord Hoffman, is an attempt to rationalise Ramsay and give it constitutional respectability. There is heavy emphasis on Ramsay as a principle of statutory construction. This should keep it within metes and bounds and prevent further extension along the lines the Revenue have been unsuccessfully seeking in, and since, Craven v White. At the same time the decision raises as many questions as it answers.
Lord Hoffman has drawn a distinction between 'commercial concepts' and 'juristic concepts'. Ramsay applies only to the latter. It is not clear that it will always be easy to draw. The undefined term 'disposal' in the capital gains tax legislation is clearly a 'commercial term', whereas 'transfer of value' in the Inheritance Tax legislation is clearly a juristic concept. Lord Hoffman has told us that the expression 'conveyance on sale' in stamp duty is a juristic concept. That suggest that there may not be too many commercial concepts. 'Sale' is both a commercial and a legal concept. While 'conveyance' is a legal concept, it is a very wide and general one. The fact that one is interpreting a composite concept such as 'conveyance on sale' which is not part of 'commercial language' will tend to move it over into the category of juristic concepts.
Even though 'conveyance on sale' is a juristic concept, it is not entirely clear that Ramsay has no application to stamp duty and that Ingram v IR Commrs [1985] STC 835 has been overruled.
Lord Hoffman's philosophical observations, at paras 40 and 41, on relative 'reality' are extremely helpful. I wish, for example, I had been able to cite them to the Judge in NMB Holdings Ltd v Secretary of State for Social Security, reported only in The Times, 10 October 2000, in which remuneration had been paid in platinum sponge. If a foreign domiciliary owns an offshore company which owns his London home, he might well tell his friends that the home belongs to him and, if his Chartered Tax Adviser were to point out that it in fact belonged to the company, he might well reply, 'Stop being pedantic. The house is in reality mine.' Yet if the dispute was whether the house was comprised in his estate for Inheritance Tax purposes on his death, that man-in-the-Boltons concept of reality would have to give way to the legal reality, which is the only reality which matters.
Lord Hoffman traversed all the earlier leading cases on Ramsay and 'explained' them. He should not be criticised for historical inaccuracy. He was engaging in an exercise in revisionism. From now on, the cases are deemed to have decided what he says they decided. While this may look too much like 1984, it is a well-tested and even respectable judicial technique whereby lip service is paid to the doctrine of precedent.
Where does the decision leave Crave v White on predestination? In principle, it leaves Ramsay untouched. Predestination to the extent defined in Craven v White is still, it appears, a requirement of the operation of the doctrine.
In Countess Fitzwilliam, in 1993, the House of Lords laid down the requirement that, for Ramsay to operate, it must be intellectually possible realistically to treat steps as constituting a single and indivisible whole in which one or more of them was simply an element without independent effect. No one is entirely sure what this means. Although the case was cited in Westmoreland, it was not referred to in their Lordships' speeches.
In IR Commrs v Willoughby, in 1997, Lord Nolan had drawn a distinction between tax avoidance and tax mitigation. The Court of Appeal in Westmoreland had held that Ramsay applied only where there was a tax avoidance motive. Lord Hoffman was obviously unimpressed by that argument, which will be that much more difficult to run in future.
The greatest question of all is whether steps inserted to secure a tax advantage are still necessary in order for Ramsay to apply. In Furniss v Dawson and Craven v White, it was held that they were. When the Revenue tried to argue the contrary before the House of Lords in Lady Ingram v IR Commrs, at the end of 1999, they were rebuffed. It is now arguable, however, that they are not. I suggest that the difficulty is because there is a Ramsay rule and a Ramsay principle. For the Ramsay rule to apply, there must be inserted steps. The Ramsay principle, however, is wider. That requires one to interpret tax statutes purposively. That principle obviously cannot be confined to cases where there are inserted steps.
For a remarkable illustration of the modern approach, one should note the decision of the Privy Council, on appeal from New Zealand, in Commissioner of Inland Revenue v Auckland Harbour Board [2001] UKPC [1]; [2001] STC 130. The mentality is pre-Ramsay. A loss arising on the gift of a security to a connected person was held to be tax-deductible under New Zealand law. The law was interpreted 'straight' even though that deprived the legislature of tax which it would have secured had the legislation been properly drafted. The lead speech was given by Lord Hoffman, who foreshadowed his comments in Westmoreland in stating that there was no tension between the juristic and the commercial character of the transaction. The Board also included Lords Steyn and Cooke, who, after the McGuckian decision in 1997, were considered to be among the hawks on tax avoidance.
Advice for tax avoiders
Implementing the scheme
A taxpayer who engages in tax avoidance is seeking to defeat the evident intention of Parliament. He will be relying on technicality. Those who live by technicality will perish by technicality. He must therefore be able to prove on the balance of probabilities that everything was properly done. If he cannot, not only will he lose his appeal; he may also be indicted for cheating the Revenue if the Revenue think that he has only pretended that everything was properly done. So often, a great deal of time and trouble is spent on devising a tax avoidance scheme which works on the law but too little time is spent on its implementation. While this is particularly so in the offshore world, even reputable firms of lawyers and accountants in the UK can underestimate the importance of correct implementation.
I cannot sufficiently stress how important it is to get the documentation right. I myself encounter this most frequently in the drafting of trusts. Fortunately, most accountants are now aware that this is a matter calling for expertise which is beyond them. Unfortunately, they think that it is something that can be done by any solicitor and ask, say, the client's conveyancing solicitors to deal with it. They naturally have no understanding of the tax planning so that the draft is often quite unsuitable. There is no alternative to the drafting being done by someone who thoroughly understands the tax planning.
Correspondence and files notes are important too. While these should never disguise the reality, they should not mis-state it either. Everything should be written on the basis that it can be presented in court and will not then be embarrassing. One should never underestimate the importance of cosmetics before a tribunal. Good cosmetics will not mask the realilty but bad cosmetics can be highly prejudicial.
Needless to say, the scheme must be implemented properly. Each party must play its proper part. Where trustees are involved, they must make independent decisions and not simply sing to a hymn sheet written by someone else. So too must the directors of companies, especially where they are companies in a large group and the tax planning is undertaken in the interests of that group. The directors of each company must satisfy themselves that what they are doing is in the interest of that company.
Where the scheme involves non-UK resident entities, it is vital that they are and remain non-UK resident. If, say, a scheme involves a Guernsey resident company, it is hopeless for a UK Chartered Tax Adviser to write to the directors with the scenario and to instruct them what to do.
Keeping a proper record of the paperwork is important. One must be alive to the possibility that it may be alleged that a document has been back-dated. Many practitioners seem to be unaware that back-dating a document, where the date is material, constitutes in law the very serious offence of forgery.
Clearances
Sometimes, a clearance may be sought in advance from revenue authorities. One should bear in mind that such a clearance will be worthless unless the taxpayer puts all his cards on the table, directs the application to a revenue officer at an appropriate level and brings to his attention relevant points of law and fact which he might not otherwise appreciate.
Enquiries
Once a Revenue enquiry is under way, one must be very careful how one responds, in case one is accused of cheating the Revenue by a cover-up. A firm distinction must be drawn between statements of fact and legal arguments. A statement of fact is true or false and if it is made to the Revenue by someones who does not believe it to be true with intent to hinder recovery of tax by the Revenue, then he may well be committing the offence. On the other hand, propositions of law can be advanced, even though one does not have 100 per cent belief in their validity. What one must not do is falsely to assert one's belief that the proposition of law is true. There is a very fine line with which those of us who are Chancery counsel are well acquainted but which the average Chartered Tax Adviser might find it difficult to draw in practice.
One area where non-barristers often get confused about questions of fact and questions of law is the existence of a commercial motive for an arrangement which, it is hoped, may lead to the avoidance of tax. The state of a man's mind is as much a question of fact as is the state of his digestion. To pretend that the tax avoider had a commercial motive when he did not is to lie and cheat. It is quite another thing to point out that an arrangement had commercial advantages.
It must be remembered that the Revenue have extensive investigation powers which they are entitled to exercise. My own general advice is that a taxpayer should not seek to withhold documents or information from the Revenue as they will get them eventually and it will look so bad when the matter comes to court. No tax 'avoidance' scheme should ever be implemented on the basis that it will work if the Revenue don't find out everything about it. That is the way to Dartmoor. In making disclosure, a taxpayer should be very careful not to make misleading partial disclosure, for example revealing an agreement but not the side letter which varies or contradicts its terms.
Litigation
In a modern democracy like ours, most people expect the Special Commissioners for Income Tax Purposes and the Value Added Tax and Duties Tribunal to be impartial arbiters between the State and the subject on matters of tax law. They are therefore sometimes surprised when the tribunals in Bedford Row give the appearance of acting more like supernumerary tax collectors.
The speech of His Honour Stephen Oliver QC to the Institute in May clearly surprised many who do not regularly appear before him. Just because he was formerly head of a distinguished set of chambers which is not known for its hostility to tax avoidance schemes and because he himself appeared as counsel for the tax avoiders in historic cases such as Lupton and Furniss v Dawson, it would be wrong to suppose that he is now soft on tax avoidance. In fact, the dire warnings he gave to tax avoiders simply represent the reality. I believe that a speaker is allowed some measure of rhetoric and drama to keep his audience awake and to get his points over, and that His Honour did not trespass beyond the licence allowed him as such.
In theory, in English Courts, we have the adversarial system of justice. Each side in presenting its case plays as hard to win as it can within the rules. The tribunal acts as referee during the game and then adjudicates the result. It is supposed to exhibit neither fear nor favour to either side. This is particularly important where one of the litigators is an emanation of the State which pays the judge's salary. The tribunal is not supposed to take points of its own motion. It is up to the parties to determine what points they do and do not want to take. This is particularly important where one of the parties is a Revenue authority. It may have very good reasons for not taking a point which would help it win the instant appeal.
Those of us who litigate in the courts know that the reality is very different. An ounce of what lawyers call 'prejudice' is worth a ton of law. The barrister who appears for a tax avoider has one - sometimes both - hands tied behind his back. The court starts off with a prejudice and a desire to prevent the tax avoidance succeeding if it possibly can. Judges differ in the length to which they are prepared to go to ensure that the tax avoider does not win. At one end of the spectrum are judges like Lord Hoffman whose intellectual integrity is so great that they are reluctant to bend the law. At the other end are those who either never cared very much for the law as an intellectual discipline or who are on a crusade.
Tax practitioners litigate very rarely. Litigators are not born: they are made, and they are made by training and experience. The performance of an experience litigator looks easy. But that is the art which belies art. No tax practitioner should underestimate the difficulties of litigation. The appeal is that of the taxpayer. It is for the taxpayer to lead such evidence as he thinks fit in order to establish all the elements of his case. If he fails to do so, he loses, even though the relevant facts are true. Although the rules of evidence are not so stringent as they used to be and although they were never strictly applied before General or Special Commissioners, more than mere assertion on the part of the advocate is needed. And the evidence must be more than admissible: it must be probative.
My short advice to a Chartered Tax Adviser is never to conduct a case before a tribunal yourself but to employ counsel of an appropriate degree of seniority. Leading Counsel will obviously be needed only in cases where there is a fair amount of money at stake. Junior counsel can be amazingly inexpensive and very good value for the client's money.
Technical Department
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July 2001 by
