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Revenue - Capital gains tax - Tax avoidance - Scheme to defer liability to tax on sale of shares - Company incorporated to transfer shares to ultimate purchaser - Taxpayers acquiring shares in new company in exchange for their shareholdings - Whether "disposal" of shares by taxpayers direct to ultimate purchaser - Whether relieving provisions for reorganisation of share capital and company amalgamations applicable to defer liability - Finance Act 1965 (c. 25), s. 19, Sch. 7, paras. 4(2), 6(1) ¹

In 1971, the taxpayers, a father and his two sons, wished to sell their shareholdings in two small family companies, the operating

1 Finance Act 1965, s. 19: "(1) Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets."

Sch. 7, para. 4: "(2) ... a reorganisation or reduction of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired."

Para. 6: "(1) ... where a company issues shares or debentures to a person in exchange for shares in or debentures of another company, paragraph 4 above shall apply with any necessary adaptations as if the two companies were the same company and the exchange were a reorganisation of its share capital."

companies. Before the sale took place, they entered into a scheme designed to defer any liability to pay capital gains tax on the sale of their shareholdings. To that end, on 16 December 1971 an investment company, G. Ltd., was incorporated in the Isle of Man. On the same day, draft agreements were approved whereby G. Ltd. agreed to purchase from the taxpayers their shareholdings in the operating companies at a price to be satisfied by the issue of 151,500 shares of lp each at a premium of 99p per share and further agreed to sell those shareholdings on to W. Ltd. for £151,500. On 20 December 1971, the share transfer and the sale on to W. Ltd. took place; G. Ltd. thus acquired the beneficial ownership of the shares in the operating company and had control of them. The taxpayers were assessed to capital gains tax for 1971-72 on the basis that the exchange of their shares in the operating companies for shares in G. Ltd. and the sale of those shares by G. Ltd. to W. Ltd. had for fiscal purposes been a disposal by the taxpayers of their shares. Appeals by the taxpayers were allowed by the special commissioners, the assessments being quashed on the ground that paragraphs 4(2) and 6(1) of Schedule 7 to the Finance Act 1965 applied to the share exchange so that for tax purposes the shares in G. Ltd. were to be identified with the shares in the operating companies and treated as the same asset with the result that no liability to the tax would arise until the taxpayers disposed of their shares in G. Ltd. An appeal by the Crown was dismissed by Vinelott J., and his decision was affirmed by the Court of Appeal.

On appeal by the Crown: -

Held, allowing the appeal, that the correct approach to taxsaving schemes was that, where there was a pre-ordained series of transactions or single composite transaction, steps inserted that had no commercial or business purpose other than avoiding a liability to tax were to be disregarded, the end result being looked at and taxed according to the terms of the particular statute in question; that that approach was not confined to self-cancelling transactions nor to arrangements where the parties were contractually bound to take each step; and that the inserted introduction of G. Ltd. had had no business purpose, as opposed to business effect, other than the deferment of tax and was, accordingly, to be disregarded, with the result that there had been a disposal by the taxpayers in favour of W. Ltd. in consideration of a sum of money paid with the concurrence of the taxpayers to G. Ltd. and capital gains tax was payable accordingly (post, pp. 512C-D, 513E,514B-C, 516A, 526E - 527F, 528D-E).

Ramsay (W. T.) Ltd. v. Inland Revenue Commissioners [1982] A.C. 300, H.L.(E.) and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, H.L.(Sc.) applied.

Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, H.L.(E.) and Floor v. Davis [1978] Ch. 295, C.A. considered.

Per curiam. Whether there was a pre-ordained series of transactions, i.e. a single composite transaction, and whether that transaction contained steps that were inserted without any commercial or business purpose apart from a tax advantage are facts to be found by the commissioners, which may be primary facts or, more probably, inferences to be drawn from the primary facts; an appellate court should interfere with such inferences of

fact only where they are insupportable on the basis of the primary facts found (post, pp. 512C-D, 513E, 514B-C, 516A, 527F-G,528B-D).

Edwards v. Bairstow [1956] A.C. 14, H.L.(E.) applied.

Decision of the Court of Appeal, post, p. 477E; [1983] 3 W.L.R. 635; [1984] 1 All E.R. 530, reversed.

The following cases are referred to in their Lordships' opinions:

Edwards v. Bairstow [1956] A.C. 14; [1955] 3 W.L.R. 410; [1955] 3 All E.R. 48, H.L.(E.)

Eilbeck v. Rawling [1980] 2 All E.R. 12, C.A.; [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865, H.L.(E.)

Floor v. Davis [1976] 1 W.L.R. 1167; [1976] 3 All E.R. 314; [1978] Ch. 295; [1978] 3 W.L.R. 360; [1978] 2 All E.R. 1079, C.A.; [1980] A.C. 695; [1979] 2 W.L.R. 830; [1979] 2 All E.R. 677, H.L.(E.)

Helvering v. Gregory (1935) 69 F.2d 809; 293 U.S. 465

Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, H.L.(Sc.)

Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1; 19 T.C. 490, H.L.(E.)

Marriott v. Oxford and District Co-operative Society Ltd. (No. 2) [1970] 1 Q.B. 186; [1969] 3 W.L.R. 984; [1969] 3 All E.R. 1126, C.A.

Ramsay (W. T.) Ltd. v. Inland Revenue Commissioners [1979] 1 W.L.R. 974; [1979] 3 All E.R. 213, C.A.; [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865, H.L.(E.)

United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1; [1940] 4 All E.R. 20, H.L.(E.)

The following additional cases were cited in argument in the House of Lords:

Inland Revenue Commissioners v. Garvin [1980] S.T.C. 295, C.A.

Internal Revenue Commissioner v. Ashland Oil & Refining Co. (1938) 99 F.2d 588

Internal Revenue Commissioner v. Transport Trading & Terminal Corporation (1949) 176 F. (2d) 570; 338 U.S. 955

The following cases are referred to in the judgments of the Court of Appeal:

Eilbeck v. Rawling [1980] 2 All E.R. 12, C.A.; [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865, H.L.(E.)

Floor v. Davis [1978] Ch. 295; [1978] 3 W.L.R. 360; [1978] 2 All E.R. 1079, C.A.; [1980] A.C. 695; [1979] 2 W.L.R. 830; [1979] 2 All E.R. 677, H.L.(E.)

Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, H.L.(Sc.)

Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1; 19 T.C. 490, H.L.(E.)

Ramsay (W. T.) Ltd. v. Inland Revenue Commissioners [1979] 1 W.L.R. 974; [1979] 3 All E.R. 213, C.A.; [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865, H.L.(E.)

The following additional case was cited in argument in the Court of Appeal:

Chinn v. Hochstrasser [1981] A.C. 533; [1981] 2 W.L.R. 14; [1981] 1 All E.R. 189, H.L.(E.)

APPEALS from Vinelott J.

The taxpayers, George Edward Dawson and his sons, Douglas Edward Rexford Dawson and Rexford Stuart Dawson, appealed against assessments to capital gains tax for the year 1971-72 in sums of £57,000, £28,000 and £28,000 respectively made on them in respect of gains accruing on the disposals of their shareholdings in Fordham and Burton Ltd. and Kirkby Garments Ltd. Vinelott J. [1982] S.T.C. 267 on 18 December 1981 upheld determinations of the Commissioners for the Special Purposes of the Income Tax Acts quashing the assessments on the ground that the taxpayers had not incurred liability to the tax because of the provisions of paragraphs 4(2) and 6(1) of Schedule 7 to the Finance Act 1965.

The Crown appealed on the grounds that having regard (a) to the matters contained in the case stated and the documents appended thereto and (b) to the approval by the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 of the dissenting judgment of Eveleigh L.J. in Floor v. Davis [1978] Ch. 295, Vinelott J. had erred in law in holding that the taxpayers were not chargeable to capital gains tax in respect of any gain arising on a disposal of the shares in the two companies.

George Edward Dawson died subsequent to the hearing before the special commissioners, and his estate was represented by his widow, Ella Bertha Dawson (by order to carry on dated 13 July 1981).

The facts are set out in the judgment of Oliver L.J.

Peter Millett Q.C. and Robert Carnwath for the Crown.

Stephen Oliver Q.C. and William Massey for the respondents.

27 May 1983. The following judgments were handed down.

OLIVER L.J. This is an appeal by the Crown from a judgment of Vinelott J. on 18 December 1981, affirming a decision of the special commissioners who had discharged an assessment to capital gains tax made on three taxpayers, Mr. G. E. Dawson and his two sons Mr. D. E. R. Dawson and Mr. R. S. Dawson. Mr. G. E. Dawson died after the decision of the commissioners and the appeals have been carried on against his personal representatives. The facts are fully set out in the careful judgment of Vinelott J. [1982] S.T.C. 267 and it is unnecessary for present purposes to do more than summarise the salient features of the transactions which gave rise to the claim for tax. The taxpayers and the wife of Mr. G. E. Dawson were, between them, the holders of all the ordinary shares in two family companies, Fordham and Burton Ltd. and Kirkby Garments Ltd., conveniently referred to as "the operating companies." They had, in September 1971, been in negotiation for the sale of the whole of the issued capital of both companies to an outside purchaser, Wood Bastow Holdings Ltd., and had agreed on the main details of a sale but without, at that stage, any binding commitment having been entered into on either side. The negotiations had been conducted by Mr. G. E. Dawson and at the point at which agreement in principle was reached he consulted solicitors with a view to carrying matters through in the most

advantageous way. As a result of the advice received it was decided to reorganise the share capitals of the operating companies with a view to saving stamp duty on transfer and to incorporate a new investment company in the Isle of Man to acquire the reorganised share capital, which company, it was intended, would then sell the shares so acquired to Wood Bastow Holdings Ltd. On December 16, 1971, Greenjacket Investments Ltd. was incorporated in the Isle of Man with a share capital of £1,550 divided into 155,000 shares of 1p each. Local directors were appointed by the subscribers and at the first directors' meeting, on the following day, two agreements were put before the board. The first was a share exchange agreement providing for the purchase of Dawson family shares in the capital of the operating companies in its reorganised state in exchange for the issue of 151,500 shares in Greenjacket at a premium of 99p per share. That agreement was executed. It contained the usual vendors' warranties and indemnities customary in agreements for the sale of a majority interest in a company. At the same time a sale agreement providing for the sale of what would, on completion of the exchange agreement, be Greenjacket's shares in the operating companies to Wood Bastow for £151,500 was approved and it was resolved that Mr. Moroney, one of the directors, be authorised to execute it on behalf of Greenjacket if the negotiations for sale proved effective - as to which, of course, there was then no real doubt.

On 20 December meetings of the operating companies were held at which their share capitals were reorganised by converting the ordinary shares into preference shares and creating new A ordinary shares which were then issued by way of bonus on renounceable letters of allotment. At that stage the exchange agreement was completed, transfers, letters of allotment and share certificates being handed over to Mr. Moroney who attended the meeting. Telephonic communication was maintained with the remaining directors in the Isle of Man and Greenjacket thereupon allotted shares to the taxpayers in accordance with the agreement, the appropriate share certificates then being sealed. Mr. Moroney then executed the sale agreement which was immediately thereafter exchanged. It provided for the sale of all the shares in the operating companies to Wood Bastow at a total price of £155,000 of which £3,500 was payable to outside holders of preference shares who were also parties to the agreement. The sale agreement contained the same warranties and indemnities by the directors of the operating companies as had been given by the vendors to Greenjacket in the exchange agreement, the only difference being that Mr. R. S. Dawson, who was not a director, was not party to the sale agreement. That agreement was duly completed by Greenjacket's transferring its preference shares and renouncing its allotments of A ordinary shares in favour of the purchaser and the purchase price of £151,500 was duly paid to Greenjacket. Accounts of Greenjacket for the year ended 30 November, 1972, show that that money was dealt with as an investment by Greenjacket in accordance with its constitution.

This appeal therefore concerns the fiscal effect of what must, I think, be a series of transactions familiar to company lawyers and taxation advisers alike. It is, on the face of it, a perfectly straightforward and sensible series of transactions, the fiscal consequences of which are clearly

laid out in the Finance Act 1965. The controlling shareholder of a family company wishes to retire from business and to dispose of his shares. He has an understandable desire that the fruits of his endeavours shall not be taxed more highly than the law compels and he accordingly consults professional advisers in order to ascertain from them the most advantageous way of effecting what he requires. He is advised that if he is content not to receive the proceeds of the shares himself but to have them represented by shares in another company in which he holds the shares, the payment of capital gains tax can be postponed until such time as he finds it necessary or convenient to dispose of those last-mentioned shares. He acts upon that advice. He causes to be formed an investment company - in the instant case it was an off-shore company, but that can be disregarded for present purposes as an irrelevant refinement - and he exchanges his shares in the family business for shares in that company, which now becomes the parent of the family company. The parent then sells the shares in what is now its subsidiary company to an outside purchaser, it matters not whether for cash or for other consideration - for instance, shares or debentures in the purchasing company.

Applying the statutory provisions to this series of transactions produces clearly defined and easily intelligible consequences. Section 19(1) of the Finance Act 1965 provides:

"Tax shall be charged in accordance with this Act in respect of capital gains, that is to say, chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets."

So the tax is chargeable only "in accordance with" the Act, the gains are to be computed "in accordance with" the Act and, to be chargeable, those gains must be gains accruing "on the disposal of assets." Thus, when the shareholder exchanges his shares for shares in his newly formed investment company, on the face of it, he disposes of his shares and one looks to see whether, on that disposal, any gain accrues to him computed in accordance with the Act. Guidance as to that is found in section 22(9) which, for relevant purposes, provides that "the amount of the gains accruing on the disposal of assets shall be ... subject to the further provisions in Schedules 7 and 8 to this Act"; and reference to paragraphs 4 and 6 of Schedule 7 shows that this particular type of transaction is the subject matter of an exemption. Paragraph 4 contains special provisions relating to reorganisations of share capital and sub-paragraph (2) provides:

"a reorganisation or reduction of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired."

So if, on a reorganisation, you acquire new shares in place of your original shareholding and you subsequently dispose of those new shares, you have to go back to the acquisition of the original shareholding in order to ascertain the amount of any loss or gain on that disposal. Paragraph 6 (1) - subject to the qualification in sub-paragraph (2) that the issuing

company has control of the company whose shares are acquired in exchange for the issue - provides:

"where a company issues shares or debentures to a person in exchange for shares in or debentures of another company, paragraph 4 above shall apply with any necessary adaptations as if the two companies were the same company and the exchange were a reorganisation of its share capital."

Thus in the transaction described above the shares in the investment company in the hands of the shareholder are statutorily to be treated as the same asset as his original shares in the family company acquired in the same way and at the same time as those original shares were acquired. If he subsequently disposes of his new shares any gain accruing on that disposal is to be computed in the same way as if they were his original shares and the acquisition cost is treated as the acquisition cost of the original shares. On the other hand, the cost to the investment company of the acquisition of the family company shares is, on the postulate of a straight share exchange, the value of the shares acquired, so that when it comes - if it does - to dispose of those shares, the gain or loss on such disposal falls to be computed on the basis of that acquisition cost and not on the acquisition cost to the original shareholder. Thus any controlling shareholder of a family company who is contemplating retiring and disposing of the business and who is content to leave the proceeds of sale of his shares in a company controlled by him would be well advised to take the step of carrying out the sort of share exchange with which this appeal is concerned and then to look for a purchaser for the shares of what will then be the subsidiary of a holding company controlled by him. So long as a purchaser can be found within a reasonably short space of time, it is unlikely that there will have been much material increase in the value of the shares in the subsidiary, so that little, if any, tax will be payable as a result of the sale. He remains, of course, liable to pay capital gains tax if he disposes of his new shares or if the assets of the investment company are distributed to him in its liquidation but that liability is postponed until the event occurs.

In the instant case, the taxpayers followed the course just outlined but with these refinements or qualifications; that is to say, (a) that the ultimate purchaser was found and the purchase agreed in principle before any share exchange took place and (b) that the share exchange and the sale by the new investment company to the ultimate purchaser were substantially contemporaneous and were intended to be so. Nonetheless it was found by the special commissioners and is not in dispute that the transactions were perfectly genuine transactions. There was nothing sham about them in the sense that they purported to be something that they were not in fact. The commissioners found as a fact that Greenjacket, the Manx investment company, existed, that it issued its own shares in exchange for the shares in the operating companies and that in consequence of that exchange it became the holder of those shares. But they also found that what happened was what had all along been intended to happen, that as soon as the solicitors for the ultimate purchaser were satisfied that the Manx company was in a position to sell the shares in the

operating companies, the director of the Manx company, who had previously been authorised by the board to act in that event, signed the sale agreement. There was an express finding that the Manx company acquired the beneficial ownership of the shares in the operating companies and thus had control of the operating companies. It was never contractually bound to sell the shares - prior to the sale agreement - although, of course, it intended to do so and there was little or no likelihood that it would do otherwise.

The Crown do not, as I understand the argument, seek to contend that the share exchange is to be treated as otherwise than genuine and therefore to be ignored. It was, it is conceded, a valid and effective transaction which transferred title to the shares in the operating companies to Greenjacket. Nor do they contend that the sale by Greenjacket of those shares to Wood Bastow was other than a genuine sale of shares which were, at the material time, owned by Greenjacket. What they say to the taxpayers, in effect, is: "Because the share exchange and the subsequent sale were carried out in a prearranged sequence and with the preconceived intention of taking advantage of the statutory provisions which enable a share exchange to take place without tax liability and with a view to postponing the tax which would have been payable if you had elected to dispose of your original shares direct to the purchaser, you are to be treated as having done something other than that which you have in fact done, that is to say, as having - but for fiscal purposes only - disposed of your original shares direct to the purchaser."

Now the consequences of that, if correct, are sufficiently startling to make one examine with some care the basis for such a claim. Mr. Millett has been at pains to stress that he is not seeking to say that the share exchange never happened. He accepted that it was a genuine transaction, which genuinely transferred the shares to Greenjacket and which has the legal and fiscal consequences which ensue from a share exchange where the issuing company has control of the company whose shares are acquired. He accepted, too, as I understand his argument, that the sale by Greenjacket was a genuine sale beneficially and not as a nominee for anyone else. Nor did he suggest that, although there was a share exchange followed by a sale of the shares acquired, the substance of each of the two transactions was something other than what it purported to be. What he claims to do is not, to use the word used by Vinelott J., to remould the two transactions but to re-analyse them - a metaphysical process which, he argued, leads to a conclusion that the two transactions were, not in substance but in fact, a single transaction of disposal by the taxpayers on which a gain accrued to them, the gain being computed by reference to the difference between the purchase price of the shares paid to Greenjacket and the original acquisition cost of those shares by the taxpayers. Thus it follows that, unless one totally ignores the share exchange, which Mr. Millett conceded - and indeed averred - that we are not to do, the taxpayers are inevitably, in the fullness of time, to be taxed twice on the same gain. They are to be taxed here and now on a gain which they have not made, but which, on Mr. Millett's argument, accrued when the proceeds were paid to Greenjacket, a gain computed by reference to the difference between the proceeds and the acquisition cost to the taxpayers

of the operating companies' shares. One asks, in parentheses, to whom did that gain "accrue"? Greenjacket made no gain and no loss. The taxpayers' shares in Greenjacket were worth exactly the same before the sale as they were after the sale. So the only gain that one can see in the hands of the taxpayers is that, on their acquisition of the shares in Greenjacket, those shares were worth more than the original acquisition cost of the shares given in exchange - but that is a gain which paragraph 4 of Schedule 7 tells us that we must ignore. The taxpayers are then to be taxed again when they come to dispose of the shares in Greenjacket. Paragraph 4 of Schedule 7 ordains that those shares are to be treated as the same asset acquired as the original shares were acquired and it was no part of Mr. Millett's case that the disposal by the taxpayers to the purchaser of the original shares which, he claimed, has taken place, constituted also a disposal of the Greenjacket shares. The Greenjacket share exchange stands and the fiscal consequences of that exchange follow. It follows, therefore, that when the Greenjacket shares are sold their value on the sale will fall to be measured by the asset content of Greenjacket which will include the proceeds of sale of the original shares or the investments representing them. The gain on that transaction is then to be computed under Schedule 6 and paragraph 4 of Schedule 7 on the difference between that value and the acquisition cost of the original shares - a gain which, on Mr. Millett's contention, will already have been taxed when the operating companies' shares were sold to Wood Bastow Holdings Ltd.

Again, suppose a case of a similar series of transactions with a slightly extended timetable. Assume that the arrangements are such that a week is to elapse between the completion of the share exchange and the sale on to the purchaser of the operating companies' shares. Suppose that during that week some dramatic up-turn in the fortunes of the operating companies prompts a renegotiation upwards of the price. In those circumstances, clearly the intermediate company has made a gain, for the shares are now worth more than they were when it acquired them. On the sale, therefore, that company becomes liable for tax on that gain. Equally on Mr. Millett's re-analysis of the transactions they remain nonetheless a disposal by the original shareholders, for the transactions remain part of a preconceived plan and the renegotiation of the price is carried out by those same people. There are thus two disposals, on each of which a gain accrues, unless one is to treat the real gain made by the company as in some way cancelled out by the notional gain made by the original shareholder for which there is no statutory warrant. If I understand him aright, Mr. Millett's answer in these circumstances was not that the revenue have an option to tax either - for that would make tax depend upon revenue discretion - but that the revenue could tax both. And indeed that must be the inevitable consequence if one is compelled, as Mr. Millett accepted that one is, to treat the sale by the company as a genuine sale, and hence a disposal to the purchaser.

I turn then to the basis for the Crown's contentions. Vinelott J. clearly felt - as do I - oppressed by the logical difficulty inherent in accepting, on the one hand, the reality and genuineness of the transactions with which he was confronted and the legal consequences which flowed from those

transactions, and on the other the re-analysis of those transactions in such a way as to attribute to them, for fiscal purposes, a legal result which they did not have and which, indeed, they were specifically designed to avoid having. It was forcefully submitted to him that he was bound by the authority of the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 - and in particular, by the approval in that case of the dissenting judgment of Eveleigh L.J. in Floor v. Davis [1978] Ch. 295 - to reach the result for which the Crown contended, but he felt himself able to distinguish Floor's case [1980] A.C. 695. And the question on this appeal is whether he was right in doing so. That is, I think, the only question, for, speaking at any rate for myself, I would, if the matter were res integra and applying the Ramsay principle, have no hesitation in rejecting the Crown's argument in the circumstances of this case as found by the special commissioners.

The starting point of the inquiry is, I think, Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 which, if it stood unaffected by later authority, would, in my judgment, conclude the instant case against the Crown. Now it has been said by the House of Lords that the principle of that case remains a cardinal principle, at any rate when applied to a single document, but there can, I think, be no doubt that W. T. Ramsay Ltd. v. Inland Revenue Commissioners and, perhaps even more, the subsequent case of Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, have made very severe inroads on it or, perhaps it would be more accurate to say, on the ambit within which it is to be applied. Nevertheless it has not, as I think, been reduced to the status of a sacred cow to which a ritual obeisance must first be made and which can then be ignored. It remains a live principle. In that case it will be remembered that the then Duke of Westminster, for the purpose of reducing his liability to surtax, gave to some 100 of his employees deeds of covenant for varying amounts. This apparently open-handed generosity was somewhat qualified by letters addressed to the employees concerned explaining that, without actually binding them, they were expected to forgo out of their current wages sums equal to the sums covenanted to be paid to them, an arrangement apparently accepted with a docility which may seem surprising to those accustomed to a less temperate climate of industrial relations. The question was whether these were in fact payments for services to be rendered and so not deductible for the purposes of surtax, the Crown's contention being that the court should ignore the strict legal rights of the parties and have regard to what was described as "the substance of the matter." That contention was decisively rejected in Lord Tomlin's classic statement, at p. 19:

"Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax."

Lord Tomlin states the principe, at p.21:

"There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction. No such case is made or even suggested here. The deeds of covenant are admittedly bona fide and have been given their proper legal operation. They cannot be ignored or treated as operating in some different way because as a result less duty is payable than would have been the case if some other arrangement (called for the purpose of the appellant's argument 'the substance') had been made."

Now there could be no doubt that the arrangements made in that case were entirely artificial. No valid commercial reason was, or could be, suggested for the execution of the deeds save that they would create deductible expenses in the Duke's income tax return. And if one applies without qualification the principle of that case to the circumstances of the instant case there does not appear to me to be any ground at all for saying that the transactions here in question did not effect exactly that which they purported to effect and no more. Indeed to go behind the documents and to argue that because the taxpayers wanted to sell their shares and because the shares were, in fact, sold by Greenjacket to the ultimate purchaser, therefore the taxpayers must be treated for fiscal purposes as having disposed of the shares directly to the ultimate purchaser, seems on the face of it to be reviving that very appeal to "the substance of the matter" which Lord Tomlin so vehemently rejected. The Westminster case was, however, a very simple transaction involving one deed and a collateral non-contractual arrangement designed to protect the Duke from a duplicity of payments. Since then the courts have been presented with more and more sophisticated and increasingly artificial arrangements contrived to meet increasingly involved taxing legislation. It is, therefore, perhaps not altogether surprising that the House of Lords has sought to set bounds to the extent to which the Westminster principle should be applied so as to compel the court to accept at their face value and to attribute full legal effect to elaborate series of transactions artificially contrived for the sole purpose of achieving fiscal advantages. The opportunity to do so presented itself in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 and it is that case and, in particular, the observations in it of Lord Wilberforce, at p. 324, and Lord Fraser of Tullybelton, at p. 339, with regard to the earlier case of Floor v. Davis, which really formed the bedrock of Mr. Millett's submissions. He pointed out that although in the Ramsay case the Crown's argument did not go beyond suggesting the approach to tax avoidance schemes of the self-cancelling nature of the schemes with which that case was involved, the House in fact deliberately went further in its statement of general principle. Lord Wilberforce, in his speech, pointed to the common features of the particular schemes there under consideration, but he then went on, albeit in the context of schemes of the type which he had previously described, to state what he called "some familiar principles"; and it is in this context that there is to be found his reference to the Westminster case. He said, at pp. 323-324:

"This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded."

Pausing here for a moment, Mr. Millett submitted that it is implicit in Lord Wilberforce's reasoning not merely that the series or combination may be regarded, but that the series or combination must be regarded and that that is all that can be regarded. I find myself unable to accept that this can be extracted from Lord Wilberforce's speech. A series or combination of transactions may well have two objects in mind which can only be achieved in separate steps. No doubt each step must be viewed as what it is in the light of the overall combination, but I can see nothing in Lord Wilberforce's reasoning in this part of his speech to indicate that he was suggesting that the court should not consider the legal results of the steps taken if those legal results have a necessary bearing on the combination of transactions taken as a whole.

He goes on to consider the duty of the commissioners reviewing the facts and it may be convenient to set out the passage, at p. 324:

"For the commissioners considering a particular case it is wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own finding that documents or transactions are not 'shams,' from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction, or a number of independent transactions."

Mr. Millett submitted that this passage from the speech compulsively leads to the conclusion for which he contends in the instant case. The court is directed, he suggested, to discard the step-by-step approach, to treat the connected transactions as a whole and, as I understand his

argument, to assess the legal effect of the combined transactions by reference to the result achieved and entirely without reference to any legal results - even unalterable and enduring legal results - which may have arisen from individual steps forming part of the whole combination. Thus viewed, he said, the taxpayers disposed of their shares even though the statute leads to the contrary conclusion and a gain accrued, that is to say, there was paid by the purchaser a sum which exceeded the taxpayers' acquisition costs. The disposal was not, he said, the disposal to Greenjacket but the ultimate vesting of the shares in Wood Bastow Holdings effected by the transaction as a whole. To my mind, this argument begs the question. Lord Wilberforce directs the commissioners to look for "the relevant transaction." But the "relevant transaction" may be one which essentially involves the constituent steps. To put shares into a company so that they and any subsequent proceeds of their sale are held by the company necessarily involves in itself a disposal in fact - which, after all, means no more than the divesting of the asset from the original holder. Once he has divested himself he has "disposed," although the statute tells us that he is to be treated as not having done so, and the question is whether, on that disposal, a gain accrues. If the transaction, whatever it is, involves factually two dispositions, I cannot see in this part of Lord Wilberforce's speech anything which compels the commissioners to find that it is one disposition. It remains two dispositions though no doubt connected dispositions and the question is what is the legal effect of those dispositions taken together. For myself, I entirely fail to see why a combination of transactions has necessarily to be labelled as "sale of shares by A to C" rather than "vesting of shares by A in the B Co. and sale of the shares by the B Co. to C." It happens that that combination of transactions does not involve the payment of capital gains tax unless and until A sells his shares in the B Co., but if that is the combination of transactions which the parties intended to carry out, then I am unable to follow why there should be attributed to them, for fiscal purposes and only for fiscal purposes, some quite different transaction which they did not intend merely because the end result is, so far as C is concerned, but not A, the same.

Thus far, therefore, I find nothing in Ramsay which convinces me that Vinelott J. was wrong in the conclusion at which he arrived. It is the next passage which to my mind is the one which gives rise to the difficulty, for it is here that Lord Wilberforce reviews some of the earlier cases and in particular Floor v. Davis [1978] Ch. 295; [1980] A.C. 695 which is also reviewed in the speech of Lord Fraser. It will, I think, be convenient to return to that later and to continue for the moment with a consideration of whether, apart from Floor v. Davis, there is anything else in Ramsay which compels the conclusion which Mr. Millett urged upon us. As I have said, I do not find it in Lord Wilberforce's speech and I turn therefore to that of Lord Fraser. Here again there are passages directed to a consideration of what is described as the wider question. Lord Fraser said, at p. 337:

"there still remains the question whether it is right to have regard to each step separately when it was so closely associated with other steps with which it formed part of a single scheme. The argument for the

revenue in both appeals was that that question should be answered in the negative and that attention should be directed to the scheme as a whole. ... In my opinion the argument of the Inland Revenue is well founded and should be accepted. Each of the appellants purchased a complete prearranged scheme, designed to produce a loss which would match the gain previously made and which would be allowable as a deduction for corporation tax (capital gains tax) purposes. In these circumstances the court is entitled and bound to consider the scheme as a whole: ... But it is perfectly clear that neither of these disposals would have taken place except as part of the scheme, and, when they did take place, the taxpayer and all others concerned in the scheme knew and intended that they would be followed by other prearranged steps which cancelled out their effect."

I have emphasised these last words because they are, as I read Lord Fraser's speech, essential to the context in which he was expressing his opinion. He was considering the Crown's argument and if reference is made to pp. 313, 314 and 316 it will be seen what that argument was. It emphasised at the outset that what the House was concerned with was the problem of schemes which were self-cancelling. "It cannot," Mr. Millett argued, at p. 313, "have been in Parliament's contemplation that such disposals as are in question here were to give rise to allowable losses." (Emphasis supplied.) These schemes were, it was said, paper transactions without any objective economic reality and therefore incapable of having fiscal consequences. Then having described the self-cancelling and artificial nature of the two schemes, at pp. 315-316, counsel postulated the following questions: (i) is the court "bound to treat the individual stages in such a composite transaction each in isolation with its own fiscal consequences?" and (ii) is it "possible to create a deduction from tax by entering into a transaction which has no purpose or effect beyond the generation of the deduction itself?" Up to this point, therefore, it does not seem to me that Lord Fraser was looking wider than the self-cancelling type of schemes with which, and with which alone, the Crown's argument was concerned. If the matter ended there I would feel no difficulty in saying that there is nothing in Ramsay which compels me to a result which, at the moment, I find difficult to accept as a matter of logic, for I do not see how for fiscal purposes a man can be treated as having disposed of shares when, again for fiscal purposes, the law requires him to be treated as still having them. That, as it seems to me, can only be done if one ignores entirely the perfectly real transaction as a result of which he is still deemed to have them; and it is common ground that that transaction cannot simply be ignored and treated as if it had never happened. To do so would, in my judgment, be to attribute a quite different substance to the combination of transactions from that which they in fact have and to fly in the face of the facts.

Mr. Millett's most powerful - and, as he submitted, unanswerable point - arises from the later passage in Lord Fraser's speech where he approves in even stronger terms than those adopted by Lord Wilberforce, the dissenting judgment of Eveleigh L.J. in Floor v. Davis [1978] Ch. 295,

312. It was Mr. Millett's submission that these two opinions taken together and in combination with the approval of the three other members of the House overrules the judgment of the majority of the court in Floor v. Davis and compels this court, as a matter of binding authority, to hold that the taxpayer in the instant case disposed of his shares to Wood Bastow Holdings and that a taxable gain accrued on that disposal. Vinelott J. took the view that Floor v. Davis was distinguishable, but Mr. Millett contended that that is unsustainable.

Before, therefore, referring to the two passages relating to the case in the speeches of Lord Wilberforce and Lord Fraser it is necessary to look at Floor v. Davis itself for the purpose of determining what the relevant problem was in that case, what the case actually decided, and the context in which Eveleigh L.J. came to record his dissent. The essential facts in that case were, up to a point, indistinguishable from those in the instant case. The majority shareholders of a private company, IDM, wished to sell their shares. They found a purchaser in the form of an American company, KDI, and a sale in principle was agreed, but without any binding contract being entered into. They then formed a new company, FNW, which issued shares to them in exchange for their shares in IDM. FNW then sold and transferred the shares in IDM to KDI at the price previously negotiated. That was stage 1 and it was for practical purposes a precisely similar series of transactions to those which took place in the instant case. It is perhaps worth remarking that FNW was a somewhat curiously constituted company for its articles provided for both ordinary and preference shares, the ordinary carrying a right to 6/7ths and the preference a right to 1/7th of the assets on a winding up. The transfer to it of the shares in IDM was in exchange for preference shares only, so that if a winding up had taken place then, the major part of the equity would have been, as it were, in limbo. I mention this only because this capital structure formed an integral and obviously prearranged part of the second stage of the scheme which was designed to channel the major part of the proceeds of sale of the IDM shares into an off-shore company in the Cayman Islands the ownership of whose shares never appears to have been disclosed in the evidence. That was done by a series of manoeuvres which took place a month later and the details of which do not matter for present purposes but which involved the issue of ordinary shares of FNW to a nominee of the Cayman Islands company and the liquidation of FNW. The Crown claimed tax on two quite separate footings. First, it was contended that tax was chargeable in respect of stage 1. Originally this was put on the basis that FNW did not, on the share exchange, have control of IDM so that the transaction did not fall within paragraph 4 (2) of Schedule 7. But by the time the matter reached the High Court the contention was that stage 1 constituted a disposal by the shareholders of their IDM shares to KDI - that is to say, the same contention as that raised by Mr. Millett in the instant case. Secondly, it was contended that stage 2 constituted, for reasons which it is unnecessary to pursue here, a deemed disposition not of the shares in IDM but of the shares in FNW. It was on this latter ground that the Crown succeeded in this court.

As regards the first ground, the majority of the court, consisting of Sir John Pennycuick and Buckley L.J., decisively rejected the Crown's

contention and if matters had rested there that decision would undoubtedly be binding on us. The reasoning is very clearly and to me, at any rate, persuasively set out in the judgment of Buckley L.J.: [1978] Ch. 295, 314-315. He began by pointing out that the meaning of paragraphs 4 (2) and 6 (1) of Schedule 7 is not that such a disposal is not a disposal within the meaning of that term in the Act, but that, notwithstanding that it is a disposal, it shall not be taxed as such. He continues, at p. 315:

"Using the word 'disposal' in its primary and natural sense, the three shareholders did, in my opinion, dispose of their shares to FNW. In these circumstances, can the fact that they mutually intended to procure the sale of the shares by FNW to KDI deprive the sale to FNW of its character as a disposal and reduce it to the status of a merely mechanical step in a disposal of the shares by the three shareholders to KDI? It is conceded that the sale by FNW to KDI was a genuine sale. ... Again using the word 'disposal' in its primary and natural sense, it is, in my opinion, clear that by that contract FNW disposed of the shares to KDI."

The argument of counsel is not, in fact, reproduced in the report but is said to be set out in the judgment of Sir John Pennycuick at pp. 307, 308, 309 and 310 and from this judgment it appears that the Crown's case was based on the premise either that there was, at the time of the share exchange, a contractual obligation to sell the shares to FDI or that there was some equitable right to have the shares transferred to KDI which bound FNW. Both these contentions were rejected as being contrary to the commissioners' findings of fact.

Eveleigh L.J., although he agreed with the majority on the effects of stage 2, took a different view as to the effect of stage 1. It is not entirely clear from his judgment whether he accepted the Crown's submission of a subsisting equitable obligation, for he said, at p. 312:

"By virtue of the arrangement initially made between them each was under an obligation to the other to do nothing to stop the shares arriving in the hands of KDI."

I infer, however, that the critical point in his reasoning is that FNW was a company which was in fact controlled by the taxpayers. He said, at p. 313:

"I see this case as one in which the court is not required to consider each step taken in isolation. It is a question of whether or not the shares were disposed of to KDI by the taxpayer. I believe that they were. Furthermore, they were in reality at the disposal of the original shareholders until the moment they reached the hand of KDI, although the legal ownership was in FNW."

Accordingly he held that there was a disposal by the shareholders of their shares in IDM to KDI. What is not entirely clear is whether Eveleigh L.J. reached his conclusion on the footing that FNW acquired both the legal and beneficial ownership of the IDM shares. At p. 313 he said "In deciding that there was a disposal within the plain words of the statute to KDI, I in no way deny the legal effect of the transfer to FNW." If by this he meant that the transfer passed only the legal and not the equitable

title, as might seem to be suggested in other passages from the judgment, then the decision is intelligible on the footing that he was looking at stage 1 in isolation and without reference to stage 2, for on that hypothesis FNW was a mere nominee. If, however, he meant by this - as I rather think that he must have done - that he accepted the full legal consequences which would ensue from a transfer of the full beneficial as well as the legal interest, then the conclusion appears to me to be intelligible only on the hypothesis that he was having regard to stage 2. Once the full legal consequences had taken effect - consequences which, as I see it, were incompatible with his conclusion if stage 1 stood alone - they remained in being unless and until something occurred to undo them. That something cannot, I think, be found merely in the fact that the original shareholders had control of FNW, for that entails the proposition that paragraph 4 (2) of Schedule 7 applies only where the shares of the issuing company do not confer control, for which there is no warrant whatever in the statute. One has therefore to look elsewhere for something that undid the legal effect and that can be found only in stage 2 from which it is clear that the intention was throughout to do away with FNW - in other words, a self-cancelling transaction of the Ramsay type. This may, I think, be the explanation of Eveleigh L.J.'s statement, at p. 314, that he was not called on to decide whether or not the transfer to FNW was a disposal, for, as a self-cancelling transaction, it could be ignored. On the alternative hypothesis that Eveleigh L.J. was considering both that the beneficial interest passed and that his observations were to be limited to stage 1 taken as a separate transaction wholly independent of stage 2 the conclusion appears to me, with respect, to ignore both the independent legal personality of a corporation and the effect which paragraph 4 of Schedule 7 has upon what, for fiscal purposes, is "the asset." The statutory question which had to be answered was whether the taxpayer had disposed of an asset and whether a gain had accrued on that disposal and paragraph 4 (2) prescribes that the shares transferred and the shares acquired are to be treated as the same asset. No doubt it is true that the persons holding all or the majority of the shares in a company can, by pressure on the directors (if, indeed, they are not themselves directors) procure that the company deals with its property in accordance with their wishes, so that in that sense the company's property may be said to be at their disposition. But it is the company's property and it is the company which disposes, and the logic of disregarding altogether the corporate structure would be, I suppose, that every disposition by a controlled company of its property would be a disposal by its controlling shareholders. That might be a very beneficial result from the fiscal point of view, but it is not what the statute provides. Speaking for myself, therefore, I very much prefer and would, if I am free to do so, follow the reasoning of the majority of the court in a case where the question is simply and solely as to the effect of stage 1 standing by itself. Moreover, I find it difficult to believe that Eveleigh L.J. intended his opinion to be read apart from the facts of the case before the court, taken as a whole, for I cannot think that the inevitability of a double taxation on the same gain, if the transaction was taken as terminating at the end of stage 1, can have escaped him. As Mr. Millett has very fairly pointed out, the Crown there were claiming tax on one

amount of gain only, whether it accrued on the sale of the IDM shares or on the subsequent dealings of the taxpayers with their shares in FNW. The question was whether, taking the transactions as a whole, at what, if any, stage was there a disposal of assets on which a gain accrued.

Eveleigh L.J.'s judgment cannot, as I think, properly be read as divorced from the background that stage 1 was, and was all along intended to be, followed by stage 2 as a result of which the proceeds of sale became the absolute property of the taxpayers - the fact that they brought into being a Cayman Islands company as the actual recipient does not affect the matter. This must, I think, have had a material bearing on his conclusion and that this is so appears, in my judgment, from two passages in the judgment. At p. 313 he draws the analogy of a man wishing to sell his house at an undervalue to his mistress. He sells it to a company controlled by a friend having arranged with the friend to sub-sell it to the mistress at the same price. Thus he is in exactly the same position as if he had sold the house directly to his mistress, the intermediate company being merely a channel. He has the proceeds of sale. She has the house. Now this is a perfectly accurate and fair analogy if one regards the series of transactions in Floor's case as a single composite transaction which started with the taxpayers holding the IDM shares and ended with their holding the proceeds of sale received from KDI or if one regards the transfer to FNW as passing no more than the legal title. There is nothing, then, particularly startling about saying, "let us regard the transaction as a whole. The profit has accrued to the shareholders as a result of the total transaction. The intermediate steps were never intended to be anything but ephemeral and self-cancelling or to convey any beneficial interest so we can ignore them and treat the shares as having been disposed of to KDI." But it is not an accurate analogy if one treats the beneficial title as having passed to FNW and the entire transaction as having terminated at the end of stage 1, for on this hypothesis the intermediate company is not a mere channel. It provides a quite different consideration from that provided by the ultimate transferee and one which is not, in any sense, self-cancelling. The cash consideration paid to the company never comes to the hands of the original shareholders. The other passage which appears to me to support the view that Eveleigh L.J. was considering the effects of stage 1 as part of a total scheme containing both stages is right at the end of his judgment at p. 314 where he describes the transfer to FNW as "conveyancing machinery." Again, if one treats the transaction as consisting only of stage 1 and nothing but stage 1, it could not, in my judgment, properly be described as mere conveyancing machinery - which I take to mean machinery for giving effect to a conveyance of the property - except, again, upon the footing that FNW never obtained more than a legal, as opposed to a beneficial, interest. It had the quite distinct effect of creating a new and permanent asset quite separate from the proceeds of sale in the form of paid up shares which could be dealt with by the holders only in accordance with the company's constitution and the provisions of the Companies Act. On the other hand, if one looks ahead to stage 2, one finds that that asset was and was intended to be purely ephemeral and that it was indeed self-cancelling. It was brought into being and was then almost immediately made to disappear leaving, as the

taxpayers claimed, only some fiscal consequences which lingered like the grin of the Cheshire cat in Alice in Wonderland but had no connection with a living body.

I turn back, therefore, to a consideration of the two passages from the speeches of Lord Wilberforce and Lord Fraser on which Mr. Millett particularly relied, but with the caveat that both of them must be considered in the context of the decision in which they occurred. I ask, therefore, initially what was it in fact that W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 decided? As I see it, it decided three things. First, it established that there is nothing in the Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 principle which compels a consideration of individual transactions separately from a preconceived chain or series of transactions of which they form merely a part. Secondly, it established that where one finds a series of preconceived transactions which are entered on solely for fiscal purposes and are clearly interconnected and mutually dependent on one another one should look at the overall transaction to ascertain what has been and what was intended to be achieved. Thirdly, it established that if what you find on such a consideration is that nothing whatever has been achieved because the individual steps taken cancel one another out, you are entitled then to ignore the fiscal consequences which might otherwise have resulted from each of those individual steps considered in isolation. That as I see it represents the substance of the general principle deducible from the decision, although I would not wish what I have said to be treated as an exhaustive analysis.

The matter was carried one stage further, as Vinelott J. pointed out in the court below [1982] S.T.C. 267, 287, by Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, where Lord Diplock made it clear that the approach is not necessarily confined to the completely self-cancelling type of operation, but is to be applied to any preordained series of transactions into which are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. As Vinelott J. pointed out in his long and careful judgment, the transaction in that case was not totally self-cancelling in the sense that the position was exactly the same before as it was after, since Burmah shed itself of an insolvent subsidiary; but in practical terms its position was unchanged. All that had happened was that an irrecoverable bad debt was transmuted into a realised loss of money subscribed for share capital. What the House regarded was the true final result of the circular transactions taken as a whole.

In each of the appeals in Ramsay and in Burmah the question was whether the taxpayer had suffered a deductible loss and in each case the taxpayer had sought to manufacture or, in the Burmah case, to transmute the loss by an elaborate series of transactions each of which was reflected by a matching transaction, either contemporaneous or subsequent, with the object of creating the fiscal consequence of deductibility without the factual or economic position of the taxpayer being in the least affected. They were thus engaged in the construction of a sort of fiscal phantasmagoria. Looking at the transactions as a whole the real question was whether anything of the image remained when the mirrors were taken

away and it was found in each case that there was nothing. That is the background against which the speeches have to be read. In the Ramsay case Lord Wilberforce was concerned, in his consideration, to see what were the limitations on the Westminster principle and it was in this context that he considered Floor v. Davis [1978] Ch. 295; [1980] A.C. 695. He said at p. 324:

"The key transaction in this scheme was a sale of shares in a company called IDM to one company (FNW) and a resale by that company to a further company (KDI). The majority of the Court of Appeal thought it right to look at each of the sales separately and rejected an argument by the Crown that they could be considered as an integrated transaction. But Eveleigh L.J. upheld that argument. He held that the fact that each sale was genuine did not prevent him from regarding each as part of a whole, or oblige him to consider each step in isolation. Nor was he so prevented by Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. Looking at the scheme as a whole, and finding that the taxpayer and his sons-in-law had complete control of the IDM shares until they reached KDI, he was entitled to find that there was a disposal to KDI. When the case reached this House it was decided on a limited argument, and the wider point was not considered. This same approach has commended itself to Templeman L.J. and has been expressed by him in impressive reasoning in the Court of Appeal's judgment in Rawling [1980] 2 All E.R. 12, 21-23. It will be seen from what follows that these judgments, and their emerging principle, commend themselves to me."

Some light on whether this was intended to be treated as a blanket approval of the whole of Eveleigh L.J.'s judgment (and, by implication, the overruling of the majority judgment in that case so far as it related to stage 1) is, I think, to be gained from the judgment of Templeman L.J. in Eilbeck v. Rawling [1980] 2 All E.R. 12 in the Court of Appeal with which Lord Wilberforce also approved. Templeman L.J. in fact found Floor's case of no assistance because, as he put it, there was no circularity there. What he was concerned with was the application of the Westminster case to transactions which were self-cancelling and achieved nothing, and he pointed out as a distinguishing feature that the position of the employee in the Westminster case was not the same before the transaction in question as it was after. He contrasted that with the case before him where the effect of the transactions, taken as a whole, was that the taxpayer neither gained nor lost, so that his position remained exactly the same before as it did after the various steps had been gone through. Thus, it seems to me that what Lord Wilberforce is commending in this passage is not the correctness of the conclusion at which Eveleigh L.J. arrived but his approach to the problem. I find it difficult to believe that Lord Wilberforce here was intending to hold as a matter of law that the approach adopted by Eveleigh L.J. necessarily led to the conclusion that, as a matter of analysis, stage 1, taken in isolation from stage 2, produced the result that there was a disposal by the taxpayer to KDI - a matter as to which it does not appear that any argument was addressed to the House (see, for instance, p. 319 where the argument is as to the correctness of

Sir John Pennycuick's approach to the case rather than his conclusion). For myself, therefore, I find in this passage nothing more than a general approval of the approach of Eveleigh L.J., that being the "emerging principle" which commends itself.

Lord Fraser of Tullybelton, however, expressed his view of Floor's case rather more strongly. He said, at p. 339:

"The view that I take of this appeal is entirely consistent with the decision in Chinn v. Hochstrasser [1981] A.C. 533, and it could in my opinion have been the ground of decision in Floor v. Davis [1980] A.C. 695 in accordance with the dissenting opinion of Eveleigh L.J. in the Court of Appeal [1978] Ch. 295, 312, with which I respectfully agree."

Lord Fraser then briefly describes stage 1 of the scheme and, after quoting the passage from the judgment of Eveleigh L.J. referred to ante at p. 489F-G starting with the words "I see this case ...," continued the citation:

"I do not think that this conclusion is any way vitiated by Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. In that case it was sought to say that the payments under covenant were not such but were payments of wages. I do not seek to say that the transfer to FNW was not a transfer. The important feature of the present case is that the destiny of the shares was at all times under the control of the taxpayer who was arranging for them to be transferred to KDI. The transfer to FNW was but a step in that process."

Lord Fraser concluded: "In my opinion the reasoning in that passage is equally applicable to the present appeals."

Mr. Millett argued first, that this is part of the ratio of the decision and not merely obiter dictum: secondly that it impliedly overrules the majority judgment in Floor's case; and thirdly that, consequent upon the agreement with Lord Fraser's speech of Lord Russell and Lord Roskill, there is, in any case where the facts are not materially distinguishable from stage 1 in Floor's case standing alone, a decision of the House of Lords binding upon this court that the transactions, taken together, constitute a disposal to the ultimate purchaser with the inevitable double taxation result indicated above.

Now to begin with, I cannot, for my part, regard these observations of Lord Fraser, valuable and persuasive as they are, as part of the ratio of the decision. Eveleigh L.J.'s judgment is, as it appears to me, referred to merely as an example of reasoning which Lord Fraser approves and as an illustration of the limitations of the Westminster case. It is true that he says that the view which he takes of the Ramsay appeal could have been the ground of decision in Floor v. Davis [1978] Ch. 295 in accordance with the dissenting judgment, but one has, I think, to look at the facts of Floor's case as a whole and I do not read him as expressing the opinion that stage 1 taken alone, and without any element of circularity, would necessarily produce the same result as the transaction which, as in Floor's case, is in fact a circular and self-cancelling transaction. It is, moreover,

as mentioned above, not at all clear whether Eveleigh L.J. was treating anything more than the legal title as having passed to FNW because he expressly disclaimed any decision as to whether or not that transfer was a disposal - a disclaimer which, again, might seem to be only consistent with a view that it was a transfer in name only, without affecting the beneficial interest. Nor indeed is it clear how far the concurrence of Lord Russell of Killowen and Lord Roskill goes. Lord Fraser went rather further than Lord Wilberforce. Lord Roskill agreed with both without reservation. Lord Russell agreed with both on the general principles which they enunciated, but again it is open to question whether Lord Fraser's approval of Eveleigh L.J.'s reasoning was an enunciation of the general principle. It was, as it seems to me, no more than an example of its application.

In my judgment, therefore, although I accept - indeed I assert - that Ramsay [1982] A.C. 300 dictates the approach which the court should adopt to a series of closely connected transactions such as those in question in the instant case, it does not in my judgment also dictate the result of that approach on the facts of this case. I do not, of course, for one moment presume to question the correctness of Lord Fraser's view with regard to Floor's case on all the facts of that case, but it does not appear to me to be determinative of the result of an analysis, in accordance with Ramsay principles, of the transaction in the instant case having regard to the facts of this case and the commissioners' specific findings with regard to those facts.

Vinelott J. [1982] S.T.C. 267, 294-295 took the view that the instant case was in any event distinguishable from Floor's case and as I read his judgment he did so on the ground that there was this salient difference, namely, that in Floor's case the steps which were taken between the parting by the taxpayer with his shares and the receipt by him, or by his direction, of the purchase moneys were steps which did not have and were not intended to have any enduring effect on the rights and obligations of the parties after the completion of the scheme. It was thus possible to excise those steps as if they were writ in water and to treat the transaction simply as a disposal by the taxpayer to KDI. This is a distinction which Vinelott J. drew from his very close and clear analysis of Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30 and Mr. Millett criticised it as a gloss which is both unwarranted by authority and unjustified in principle. I agree that it may, on the face of it, appear to be a gloss, but in my judgment it is a necessary one, for I do not see how otherwise there is to be avoided an insuperable logical contradiction between the mandatory statutory consequences of a transaction which cannot, it is conceded, be excised or ignored and the legal consequences sought to be attributed to a different composite transaction which, it is asserted, are not to supersede but to live alongside those statutory consequences. It appears first in Vinelott J.'s analysis of the Burmah case, in the course of which he observed, at p. 287:

"Further, the court may disregard a transaction and treat it as fiscally a nullity even though there is a change in the legal position of the parties before and after the scheme is carried through if that change

can be regarded as a mere change of form with no enduring legal consequences."

This, Mr. Millett suggested, is not in any event a valid ground for distinguishing Floor v. Davis because the word "enduring" is itself a word of flexible import. A consequence may endure for one month or for six or for a year or more and in the Floor case the existence of FNW did endure for about a month. This as it seems to me is attributing to Vinelott J. a literality of expression which I do not think he can have intended. By an "enduring" consequence I take him to mean merely that the consequence is one which is intended to continue to regulate the position of the parties without any preordained intention or arrangement for its termination or cancellation. It is, I think, merely an echo of Lord Diplock's requirement in Burmah [1982] S.T.C. 30, 32 that the inserted steps should have a "commercial" purpose - using the word "commercial" in, as, I apprehend, Lord Diplock must have intended, its widest sense, for taxpayers are not all engaged in commerce. All that I read Vinelott J. as saying is that where you find that a transaction forming part of a larger transaction or a series of transactions is such that it has and is intended to have a lasting effect on the legal position of the parties with no immediate or preordained intention that it shall terminate, you cannot, when analysing the totality of the legal and practical effect of the combination as a whole, disregard that lasting effect. It is there and it is not merely ephemeral, and its legal effects remain however the transaction is analysed. It must therefore figure in the analysis as an integral and inseparable part of the whole. I find myself wholly in agreement with this. There is no suggestion in this case, as there inevitably was in Floor's case, that Greenjacket is or was intended to be merely a conduit pipe for syphoning off the purchase money elsewhere or into the hands of the taxpayer or that it was intended to be a mere temporary receptacle whose only function was the brief holding of a legal interest. There is, indeed, an express finding in this case which is not found in Floor's case - presumably because, as the matter was presented to the commissioners there, it was not in issue - that the transfer to Greenjacket passed both the legal and the beneficial title to the shares. There was no finding and no evidence of any arrangement for the dissolution of Greenjacket nor any suggestion that it was otherwise than a permanently established investment company intended to operate as such, and indeed the commissioners had before them its accounts for the year ended 30 October, 1972, showing its dealings with the proceeds of sale and the income received from their investment. In these circumstances, the case appears to me to be quite a different case from Floor's case. I respectfully agree with the analysis of Vinelott J. in his judgment. Approached in the light of the Ramsay principles, the composite transaction was in my judgment one which included as an integral feature the disposal of the shares to Greenjacket beneficially and I find it impossible, simply because that company was ultimately under the control of the disposing shareholders, to regard the moneys accruing to Greenjacket on the sale by it to Wood Bastow as a gain accruing to the taxpayers on the disposal of their shares to Wood Bastow. I would dismiss the appeals.

KERR L.J. I agree that these appeals should be dismissed for the reasons stated by Oliver L.J. It may seem naive nowadays to rely on passages from Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 decided in simpler times, nearly 50 years ago. But the classic statement of Lord Tomlin, as cited by Oliver L.J., ante p. 483G-H, appears to me to remain fully authoritative for the purpose of the present case, notwithstanding that it was made in relation to a "one step" transaction and the welcome new approach to composite transactions which has been initiated by the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300. While it is well settled that the taxpayer's motive in entering into a transaction is irrelevant, the intended nature and effect of the transaction, viewed as a whole, cannot in my view be ignored in considering the applicability of the principles laid down in Ramsay and carried somewhat further in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. The nature of the transaction in the present case was the proposed out-and-out sale of the shares in the family manufacturing companies to a third party. In ordering their affairs - to use the words of Lord Tomlin - in relation to this sale, the members of the family were entitled to do so by any legitimate methods designed to avoid or minimise capital gains tax. The method which they adopted to achieve this result was by restructuring the family finances on the basis of an investment company in the definitive way which has been described. At the end of the transaction the family held the shares in the investment company, whose value included the price paid by the third party to the investment company for the original shares. There was no more to it than that. In particular, there was no further transaction, as in Floor v. Davis [1980] A.C. 695, which effectively cancelled out the intervening steps and indirectly channelled the proceeds of the sale back to the original source. And, if and when there is a disposal of the shares in the investment company, or it is dissolved, capital gains tax will be payable, which will take account of the price received for the original shares.

In my view the various steps in this composite transaction, although intended to be carried through from beginning to end - but no further - do not fall to be ignored or to be regarded as ineffective for fiscal purposes under the principles laid down in Ramsay. In saying this, I obviously do not overlook what was said by Lord Wilberforce and, in particular, by Lord Fraser of Tullybelton in their speeches in Ramsay and Eilbeck v. Rawling (heard together in the House of Lords) about the remarks of Eveleigh L.J. in Floor v. Davis [1978] Ch. 295 in this court. However, I do not think that either of their Lordships thereby intended to state that if the facts of Floor v. Davis had been limited to stage 1 of that case, then the analyses of Sir John Pennycuick and Buckley L.J. would have been wrong, and the analysis of Eveleigh L.J. would have been right, even in the light of the new approach to composite - but self-cancelling - transactions which they were laying down in situations such as those in Ramsay and Rawling. So to interpret their remarks would involve the conclusion that they were intending to deal with an issue which did not arise on those appeals and which had not been argued before them. Thus, they did not say that they regarded the majority view in this court to have been wrong.

By expressly approving the approach of Eveleigh L.J. in their speeches in those appeals, I think that they intended to do so merely in relation to situations such as those which fell to be considered in those appeals. They were saying, as I see it, that in such situations the approach of Eveleigh L.J. is a permissible and correct basis for rejecting the "step by step" analysis in favour of an overall assessment of what the taxpayer intended to achieve, and did achieve, by a series of steps which, broadly speaking, ultimately became self-cancelling.

In the upshot, my conclusion in the present case is largely in line with the analysis of Sir John Pennycuick and Buckley L.J. of stage 1 in Floor v. Davis [1978] Ch. 295. However, their views were expressed in the context of the facts of Floor v. Davis as a whole, and before the decision of the House of Lords in Ramsay and Rawling [1982] A.C. 300. Accordingly, although my conclusion arrives at the same result, I do not regard their analysis as binding upon this court strictly as a matter of stare decisis. As it seems to me, the present case is clearly different from Floor v. Davis for the reasons which I have briefly sought to indicate, and in the ultimate analysis it falls to be decided in favour of the taxpayers independently of what was said in relation to Floor v. Davis both in this court and in the House of Lords. Accordingly I would dismiss these appeals.

I should add that, since I wrote this judgment, I have also read the judgment of Slade L.J. with which I also agree.

SLADE L.J. I agree that these appeals should be dismissed. The three taxpayers, who in 1971 held ordinary shares in Fordham and Burton Ltd. and Kirkby Garments Ltd. (the operating companies), had two principal objects in effecting the transactions of December of that year, namely: (1) to give effect to the contemplated purchase of those shares by Wood Bastow Holdings Ltd.; and (2) at the same time to avoid or defer the liability to capital gains tax on the gain which would undoubtedly have accrued to them if they had themselves sold the shares to Wood Bastow and received the purchase price. The broad plan was that liability for capital gains tax could be deferred if an investment company, Greenjacket Investments Ltd., having been incorporated in the Isle of Man and wholly owned by the Dawson family shareholders, were to acquire the shares of the operating companies at full value, issuing its own shares in satisfaction of the purchase price, and were itself then to sell the shares in the operating companies to Wood Bastow. The thinking behind the scheme was that paragraph 6 of Schedule 7 to the Finance Act 1965 would apply so as to prevent the transfers by the taxpayers of their shares in exchange for shares in the investment company from being chargeable disposals of the shares in the operating companies, while the investment company itself would not make a taxable gain, since the sale would be at a price equal to the cost of the shares in the operating companies. The hope was that the Dawson family shareholders would postpone liability for capital gains tax consequent on the disposal of their shares in the operating companies until such time as they disposed of, or were to be treated as disposing of, their shares in Greenjacket.

The scheme employed thus was in all material respects the same as that which constituted stage 1 of the scheme in Floor v. Davis [1978] Ch.

295, C.A.; [1980] A.C. 695, H.L.(E.). The facts of that case have already been summarised in the judgment of Oliver L.J. In Floor the scheme included a stage 2, not present in the instant case, which involved the winding up of the company which had been formed to purchase the shares and the distribution of most of its surplus assets to a foreign company, Donmarco. Though the case stated in Floor gives little information as to Donmarco, I think the inevitable inference is that it was, as Vinelott J. described it in his judgment in the present case, "the chosen recipient of the proceeds of the sale": [1982] S.T.C. 267, 294. The Court of Appeal, and subsequently the House of Lords, held that the scheme in Floor failed to achieve its tax-saving purpose, because stage 2 caused paragraph 15 (2) of Schedule 7 to the Finance Act 1965 to apply, so as to give rise to a deemed disposal by the taxpayer of the shares in question. The House of Lords in Floor decided the case in favour of the Crown solely on the basis that paragraph 15 (2) of Schedule 7 applied and did not find it necessary to deal with the alternative submissions which had been addressed on behalf of the Crown to the Court of Appeal. This point relating to paragraph 15 (2) has no relevance in the present case, since here the taxpayers were content to receive shares in Greenjacket rather than introduce into the scheme a stage 2. The decision of the House of Lords in Floor is therefore of little assistance in the present case. The judgments of the Court of Appeal, however, are very relevant because they dealt not only with the Crown's argument based on paragraph 15 (2), but also with an alternative, indeed primary, submission made by the Crown - namely, that the transactions which made up stage 1, looked at together, should be regarded as a disposal direct by the taxpayer to the ultimate purchaser.

Eveleigh L.J., dissenting on this point, accepted this submission. At [1978] 1 Ch. 295, 313, he regarded the case as one in which the court was "not required to consider each step taken in isolation," and considered that, when the scheme was regarded as a whole, it involved a disposal by the taxpayer to the ultimate purchaser. However, the majority of the court, Buckley L.J. and Sir John Pennycuick, rejected the Crown's contention. Sir John Pennycuick, who gave the leading judgment, considered, at p. 307, that the contention "disregards the legal effect of what were admittedly genuine transactions and really seeks to resurrect the conception of substance which was buried by the House of Lords in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1." He said, at p. 308, that it was impossible upon "the plain legal effect" of the transactions involved in stage 1 to maintain that the taxpayer and his sons-in-law had sold their shares to anyone other than FNW (the interposed company) or that KDI (the ultimate purchaser) purchased those shares from anyone other than FNW. (I pause to mention that the principle of the Duke of Westminster case, as described by Lord Wilberforce in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300, 323, is that "given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance.")

In the absence of any relevant authority subsequent to Floor, this court would, I think, have been both entitled and bound to follow the decision of the majority in that case, by rejecting the Crown's contention

that the scheme in the instant case involved a disposal of the shares in the operating companies by the three taxpayers in favour of Wood Bastow. If the passages from the judgments of Sir John Pennycuick and Buckley L.J. directed to the equivalent point in Floor's case [1978] Ch. 295, 307-308 and 314-315 were read with the substitution of references to the members of the Dawson family, the operating companies, Greenjacket and Wood Bastow for the respective references to the taxpayer and his two sons-in-law, IDM, FNW and KDI, these passages would apply almost word for word to the present case. Indeed, the present case could be said by the taxpayers to be a fortiori in their favour, since the scheme in the present case did not include stage 2 and there are specific findings by the commissioners that (a) there was no understanding between the parties that Greenjacket, on receiving a transfer of the shares, should acquire less than the full beneficial ownership of them; (b) Greenjacket did not assume any contractual obligation to sell the shares to Wood Bastow until after it had acquired them. Mr. Millett, however, has submitted on behalf of the Crown not only that the decision of the majority of the Court of Appeal in Floor, as to the relevant point, cannot stand with the subsequent decisions in Ramsay and Rawling and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, but that these decisions oblige this court to hold that the scheme in the present case involved a disposal by the taxpayers in favour of Wood Bastow, giving rise to a chargeable gain in their favour.

The particular schemes involved in Ramsay and Rawling were in each case schemes of a somewhat artificial nature designed to create a loss which the taxpayers could set off for capital gains tax purposes against a chargeable gain which had already accrued to them. The two schemes had these common features as described by Lord Wilberforce [1982] A.C. 300, 322:

"The scheme consists, as do others which have come to the notice of the courts, of a number of steps to be carried out, documents to be executed, payments to be made, according to a timetable, in each case rapid: see the attractive description by Buckley L.J. in Rawling [1980] 2 All E.R. 12, 16. In each case two assets appear, like 'particles' in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the taxpayer from supporting any real loss, and which gain is intended not to be taxable. Like the particles, these assets have a very short life. Having served their purpose they cancel each other out and disappear. At the end of the series of operations, the taxpayer's financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses, to the promoter of the scheme."

I pause to observe that these are not features of the scheme in the present case. In the courts below, in those two cases, the Crown based its claims on technical grounds which were accepted by the Court of Appeal, though Scarman L.J., who was sitting in this court in Ramsay [1979] 1 W.L.R. 974, 986, expressed the hope that the majority decision of this court in Floor v. Davis might soon be reviewed by the House of Lords, and the

opinion that it was unfortunate that Floor v. Davis had been decided in the House of Lords on another point.

In the House of Lords, for the first time in both Ramsay and Rawling, the Crown raised a much broader issue than the more technical arguments advanced in the courts below. The submission was in effect that the tax avoidance schemes acquired and used by the taxpayers should simply be disregarded as artificial and fiscally ineffective. As appears from the report of the argument, however (see [1982] A.C. 300, 321), leading counsel appearing for the Crown, Mr. Millett, made it plain that he did not suggest that the House should adopt the widest principle of the "multiple step transaction" adumbrated in the United States of America, but that the doctrine which the Crown invited the House to adopt was much narrower and confined to self-cancelling transactions, in which an allowable loss was manufactured by an artificial transaction with no effect except to generate the claim.

The taxpayers sought to counter this submission by contending that it was inconsistent with the principle of Inland Revenue Commissioners v. Duke of Westminster. Faced with this contention, the House of Lords in Ramsay (as Lord Diplock subsequently explained in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 32) adopted an approach which marked

"a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transaction (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been taxable."

The actual ratio of the decision of the House of Lords in Ramsay is, as Lord Fraser himself subsequently pointed out in the Burmah case [1982] S.T.C. 30, 37, to be found in the following passage from the speech of Lord Wilberforce, where he said [1982] A.C. 300, 326:

"The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function."

Thus, in regard to Ramsay, Lord Wilberforce concluded, at p. 328, that "The true view, regarding the scheme as a whole, is to find that there was neither gain nor loss" and, at p. 332, apart from a sum not exceeding £370, he reached the same conclusion in regard to Rawling. The rest of the House of Lords reached the same conclusion.

Accordingly, the ratio decidendi of the decision of the House of Lords in Ramsay, as subsequently explained by Lord Fraser, clearly has no

direct application to the facts of the present case. Nevertheless, as Mr. Millett emphasised on behalf of the Crown, despite the more restricted nature of the invitation given by him to their Lordships in Ramsay, they did not confine their statements of the relevant principles to self-cancelling transactions in which an allowable loss was manufactured by an artificial transaction designed simply to generate the claim. Their observations went wider than this. The speeches of Lord Wilberforce, with whom Lord Russell, Lord Roskill and Lord Bridge agreed, and of Lord Fraser, with whom Lord Russell and Lord Roskill agreed, included not only general statements as to the limitations of the Westminster principle but also specific references to the Floor case.

Lord Wilberforce in Ramsay and Rawling [1982] A.C. 300 stated the limitations of the Westminster doctrine in general terms, at pp. 323-324:

"This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax: see Chinn v. Hochstrasser [1981] A.C. 533 and Inland Revenue Commissioners v. Plummer [1980] A.C. 896.

"For the commissioners considering a particular case it is wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own finding that documents or transactions are not 'shams,' from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole. This is particularly the case where (as in Rawling) it is proved that there was an accepted obligation once a scheme is set in motion, to carry it through its successive steps. It may be so where (as in Ramsay or in Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229) there is an expectation that it will be so carried through, and no likelihood in practice that it will not. In such cases (which may vary in emphasis) the commissioners should find the facts and then decide as a matter (reviewable) of law whether what is in issue is a composite transaction, or a number of independent transactions."

By way of an illustration of a recent case which showed the limitations of the Westminster doctrine, Lord Wilberforce then proceeded to refer to

Floor as to which he expressed approval of the general approach of Eveleigh L.J. in that case, in the passage at p. 324, which has already been quoted by Oliver L.J.: see ante, p. 493B-D).

Lord Fraser in Ramsay and Rawling went a little further than Lord Wilberforce. Having clearly demonstrated that, when the schemes in each case were viewed as a whole, there had been no real loss, he continued, at pp. 338-339:

"Counsel for the taxpayer naturally pressed upon us the view that if we were to refuse to have regard to the disposals which took place in the course of these schemes, we would be departing from a long line of authorities which required the courts to regard the legal form and nature of transactions that have been carried out. My Lords, I do not believe that we would be doing any such thing. I am not suggesting that the legal form of any transaction should be disregarded in favour of its supposed substance. Nothing that I have said is in any way inconsistent with the decision in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 where there was only one transaction - the grant of an annuity - and there was no question of its having formed part of any larger scheme."

Lord Fraser, at p. 339, then proceeded to make specific reference to the Floor case in a passage which has already been quoted by Oliver L.J., ante, p. 494B, and in which he expressly said that he agreed with the dissenting judgment of Eveleigh L.J. in that case.

The principles established in Ramsay and Rawling have since been applied again by the House of Lords in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30. But that was another case where it was found on the facts that, when the tax avoidance scheme entered into by the taxpayer company was carried through to completion, "there was here no real loss and no loss in the sense contemplated by the legislature": (see at p. 39 per Lord Fraser). The speeches do not refer to the Floor decision and I do not think that the case adds much, material for present purposes, to what has already been said in Ramsay and Rawling.

I have referred at some length to the earlier authorities because I regard the application of the stare decisis rule as giving rise to by far the most difficult problems in the present case. Vinelott J., when confronted by the same problem, if I have interpreted his judgment correctly, implicitly accepted that the effect of the passages in the speeches of the House of Lords in Ramsay and Rawling, expressing approval of the judgment of Eveleigh L.J. in Floor, was to render obligatory the conclusion that in the present case there had been a disposal by the taxpayers of their shares in the operating companies to Wood Bastow. Nevertheless, he did not think that this compelled him to hold that the taxpayers had realised a gain on a disposal of their shares in the operating companies. This, as I understand it, was essentially for two reasons. First, the scheme in Floor included a stage 2, not featuring in the present case, under which the proceeds of the sale of the shares of IDM held by them immediately before the first step in the scheme was taken were paid in part to the taxpayer and his sons-in-law and as to the larger part to Donmarco. the chosen recipient of the

proceeds of the sale to KDI, which proceeds were held until its dissolution by a company which the taxpayer and his sons-in-law controlled. Secondly, in Floor v. Davis the question at issue was whether the gain which accrued to the taxpayer or, with his concurrence, to Donmarco accrued on an indirect disposal by him to KDI. However, Vinelott J. said [1982] S.T.C. 267, 295:

"In the instant appeals the question is a different one. It is whether the moneys paid to Greenjacket and received beneficially by it (less the base cost to the Dawson family shareholders of the shares in the operating companies) can be treated as a gain accruing to them as a result of a disposal (indirect) to Wood Bastow."

With great respect to Vinelott J., I do not myself find convincing these two suggested distinctions between the instant case and Floor. As to the first, I can find nothing in the judgment of Eveleigh L.J. which suggests that, in concluding that there had been a disposal to FNW, he attached any importance at all to stage 2 of the scheme, which he did not even mention. Likewise, neither Lord Wilberforce nor Lord Fraser made any reference to stage 2 in their subsequent comments on the Floor case. As to the second suggested distinction, I am inclined to think that if the correct analysis of the facts of the present case is that a disposal took place by the Dawson family shareholders to Wood Bastow, the conclusion that a gain accrued to them on such disposal is inescapable, though nice questions might arise as to the measurement of such gain.

After anxious consideration, however, I find myself unable to accept the Crown's submission that the decisions in Ramsay and Rawling, even when read with the observations of Lord Wilberforce and Lord Fraser relating to the Floor decision, do constitute an authority obliging this court to hold that, on the facts of the present case, there has been a disposal by the taxpayers in favour of Wood Bastow. Mr. Millett naturally pressed us particularly strongly with the speech of Lord Fraser, particularly having regard to his expressed agreement with the dissenting judgment of Eveleigh L.J. He submitted that, just as Lord Fraser had refused to have regard to the intermediate disposals which took place in the course of the schemes in Ramsay and Rawling, so should the majority of the court in Floor have refused to have regard to them and so should the court dealing with the instant case.

The three recent House of Lords decisions do demonstrate beyond dispute that if, as in the present case, a document or transaction is intended to have effect as merely one part of a series of transactions, the court must not regard it simply in isolation, whether the scheme in question involves a series of interdependent contracts under which the same property revolves in a circle, as in Ramsay and Rawling, or no circularity is involved, as in Floor. However, it would be one thing to say, as Lord Fraser said in regard to the circular schemes in Ramsay and Rawling, that, when each scheme was looked at as a whole, the relevant loss-making asset had never been disposed of at all, because the alleged disposals had been followed by other prearranged steps which cancelled out their effect. It would be quite another thing to say that the scheme in Floor, which involved no circularity at all even when looked at as a whole,

involved no disposal by the taxpayer and his sons-in-law in favour of FNW and no disposal by FNW in favour of KDI, but only one disposal by the taxpayer and his sons-in-law in favour of KDI - or alternatively that it involved three disposals. The implications for tax purposes of a conclusion which involved the finding of one or three, as opposed to two, disposals, on the facts of the Floor case, were not, I believe, considered by the House of Lords, because it was not necessary to consider them. Mr. Millett told us that in Ramsay and Rawling he himself addressed no argument to their Lordships on the Floor decision on behalf of the Crown, because he did not think it necessary to do so.

The references to Floor by their Lordships were clearly a convenient mode of illustrating the broader approach to tax avoidance schemes which they were concerned to establish. In all the circumstances, however, I do not read these references either as being necessary to their decision in the case before them or as being intended to bind inferior courts in future cases to the conclusion that, on the particular facts of Floor, there had been a disposal by the taxpayer and his sons-in-law in favour of the ultimate purchaser. Accordingly, I do not think that they compel a decision in favour of the Crown in the present case. This being my conclusion on this point, I have considered whether this court should regard itself as being still bound by the decision of the majority of the Court of Appeal in Floor. I am inclined to think that the answer to this question must be in the negative, since that decision was given before the subsequent guidance as to the broad approach to composite transactions forming part of one tax avoidance scheme, which is to be found in Ramsay, Rawling and Burmah.

Nevertheless, the status of the majority decision in Floor, for the purpose of the stare decisis rule, is in my opinion an academic question because, even apart from that decision, and even after applying the general principles established by those three decisions of the House of Lords, I am satisfied that the Crown's claim in the present case is ill-founded. I can state my reasons fairly shortly. Even when one regards the scheme in the present case as a whole, one is forced to the conclusion that it involved two quite distinct steps, namely, (a) a transfer by the Dawson family shareholders to Greenjacket of the full legal and beneficial ownership of the shares in the operating companies, and (b) a subsequent transfer by Greenjacket to Wood Bastow of the full legal and beneficial ownership of the shares. It is true that these two transfers were separated by only a very short interval of time, perhaps not more than a few hours. Nevertheless, we are bound by the finding of the commissioners that, for the time being, Greenjacket acquired the full beneficial ownership of the shares.

The claim of the Crown thus involves the radical proposition that, a composite transaction which embodies two steps, namely (i) a transfer by A to B of the full legal and beneficial title to property and, (ii) a subsequent transfer by B to C of the full legal and beneficial title to the same property, may in certain circumstances give rise to a disposal by A to C for capital gains tax purposes. On such facts, whether or not the two transfers form part of one composite scheme, I cannot see how there can have failed to be a disposal by A in favour of B or a disposal by B in

favour of C, or how the Crown could possibly be resisted if it sought to make A chargeable for any gain accruing to him on the first disposal and B chargeable for any gain accruing on the second disposal (subject in either case to any special exemption that might be available, for example, under paragraph 6 of Schedule 7 to the Act of 1965). I think that the Crown's claim, by necessary implication, involves the proposition that, at least in some circumstances, the two-step transaction under discussion could give rise to a third disposal of the very same property, in addition to the two already mentioned, namely, a disposal by A in favour of C. Two observations may be made in regard to this proposition. First, it involves giving to the word "disposal," which is not defined in the capital gains tax legislation, an artificial sense far wider than it can bear according to the ordinary rules of the law of property. (In the present case, for example, according to ordinary legal terminology, unquestionably the only disposal which the taxpayers made was in favour of Greenjacket and the only disposal which Wood Bastow received was from Greenjacket.) Secondly, and perhaps more importantly, the proposition seems to me to be irreconcilable with the general pattern of the capital gains tax legislation. Very broadly, under this legislation the gain accruing to a person on a disposal of an asset by way of sale falls to be measured by taking the consideration received by him and deducting from it the allowable expenditure incurred by him on the acquisition and disposal of the asset. The suggestion that one sale of an asset to C can involve both a disposal of that asset by A, who is to be treated for tax purposes as the sole legal and beneficial owner of the asset at the date of the disposal, and a disposal of the very same asset by B, who is also to be treated for tax purposes as the sole legal and beneficial owner of the asset at the date of the disposal, seems to me something which the legislation does not contemplate and for which it does not provide.

I think that Mr. Millett, when pressed with this point in argument, recognised the formidable difficulties of reconciling such a concept with the capital gains tax legislation. However, as I understood him, he submitted that one possible answer would be for fiscal purposes wholly to disregard the interposition of B in the composite transaction, and that the observations of Lord Fraser in Ramsay gave some support for this approach. However, as I have already pointed out, these observations were made in a very different context; in the present context the suggestion seems to me to raise no less great problems of its own. For example, if in the case of such a composite transaction, the Crown is entitled to treat it for fiscal purposes as if the interposition of B had never featured in it at all, is this option one that is open only to the Crown or is it an option open to both Crown and taxpayer? In either case where is the statutory authority for a right of election of this kind? If the undisputed, albeit temporary, beneficial ownership of B is to be wholly disregarded for capital gains tax purposes, is it at the same time to be disregarded for other fiscal purposes? Examples of this kind could, in my opinion, be multiplied for the purpose of illustrating that the treatment for capital gains tax purposes of the two-step transaction referred to above as involving either three disposals on the one hand or only one disposal on the other hand, for capital gains tax purposes, in my opinion gives rise to

insuperable difficulties in a case where at common law and in equity there have unquestionably been two disposals, no more and no less.

The point to which Eveleigh L.J. attached particular importance in concluding that the two-step stage 1 in Floor involved a disposal by the taxpayer and his sons-in-law in favour of the ultimate purchaser was that they had control of the intermediate company and were in a position to procure that it proceeded with the sale to the ultimate purchaser. This important feature is present in the instant case. Nevertheless, with the greatest respect to Eveleigh L.J., I can find nothing in the capital gains tax legislation which justifies the conclusion that a disposal of an asset by a company is to be equated with a disposal of the same asset by its controlling shareholders for capital gains tax purposes. Nor, in my opinion, can it make any difference in such a case that the company had originally acquired legal and beneficial ownership of the asset in question pursuant to a scheme to which the shareholders were parties, and which contemplated that the company would dispose of it soon after its acquisition.

In the present case, I have had the advantage of reading in draft the judgments of Oliver L.J. and Kerr L.J. Though, in view of the importance of the matter, I have attempted to express in my own words my reasons for agreeing with their ultimate conclusion, I respectfully agree with, and would wholly endorse, the observations of Kerr L.J. in relation to the "classic statement" of Lord Tomlin in the Duke of Westminster case.

One passage in the judgment of Vinelott J. which, among others, I found of compelling force was the following [1982] S.T.C. 267, 287-288:

"If the special commissioners' findings of fact are accepted, as I think they must be, then it must follow that even if the two steps are taken as part of a single composite transaction (notwithstanding that there was a possibility, however remote, that Wood Bastow, a wholly independent purchaser, or the outside holder of preference shares, would resile from or seek some modification to the intended sale agreement) the first step in the composite transaction was nonetheless a real step which had enduring legal consequences. At the beginning of the composite transaction the [taxpayers] owned shares of the operating companies; at the end of it they owned shares of Greenjacket and Greenjacket owned beneficially the proceeds of the sale of those shares. Those proceeds have been brought into Greenjacket's accounts, and it is liable to tax on the income derived from them. Moreover, Wood Bastow's rights under the sale agreement were rights against Greenjacket (which it accepted as being the beneficial owner of the shares formerly held by the [taxpayers]), the directors of the operating companies (who joined in the warranties and indemnities) and the outside shareholders, who joined in a sale of the entire shareholding in the operating companies to Wood Bastow. On a sale by the shareholders in the operating companies direct to Wood Bastow, Wood Bastow would have had no rights against Greenjacket but would have had rights against all the shareholders, including Mr. R. S. Dawson.

"The court cannot, as I see it, ignore those enduring consequences and either disregard the exchange agreement or treat the sale agreement as if it had been entered into by Greenjacket as nominee or

agent for the [taxpayers]. To do so would be to divorce the facts existing in the real world and to substitute for them facts assumed to exist in an unreal fiscal world. That, it seems to me, is precisely what the court is forbidden by the decision in the Westminster case to do."

Though recent decisions have shown that the Westminster principle must not be overstated or overextended, I do not think that Vinelott J. was overstating the position in the passage which I have just cited. Though this was not, in fact, the reasoning which ultimately led him to allow the taxpayers' appeal, I think that, on the findings of the special commissioners, to hold that there had taken place a disposal by the taxpayers to Wood Bastow would be to divorce the facts existing in the real world of law and commerce and to substitute for them facts assumed to exist in an unreal fiscal world. The present case is not one where the scheme was of a circular, self-cancelling nature, having as its sole purpose the saving of tax. Its object was to vest the shares in Wood Bastow by way of sale in such a way that no immediate liability for capital gains tax was incurred. The price which the taxpayers had to pay for this tax saving or deferment was that they had to be content to receive shares in Greenjacket, as opposed to cash, and that Greenjacket itself should effect the sale to Wood Bastow and receive the consideration for it. In my judgment they were perfectly entitled to arrange their affairs in this way and this court, in applying the capital gains tax legislation, would not be justified in treating them as if the composite transaction had been effected in some other manner. The only relevant disposal to which the taxpayers have been parties was a disposal of their shares in the operating companies in favour of Greenjacket; and that disposal does not fall to be treated as involving a disposal for capital gains tax purposes because of paragraphs 4 (2) and 6 of Schedule 7 to the Finance Act 1965. For these reasons, I would concur in dismissing these appeals.

Solicitors: Solicitor of Inland Revenue; Browne Jacobson & Roose, Nottingham.

[Reported by MRS. HARRIET DUTTON, Barrister-at-Law]

The Crown appealed. The appeals were consolidated by order of the House of Lords dated 6 July 1983.

Peter Millett Q.C. and Robert Carnwath for the Crown. The question is whether the principle in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 is to be confined to circular self-cancelling transactions or should be applied to transactions of the present character. In Ramsay, there was no other purpose and effect of the series of transactions than to avoid tax. That was achieved by a series of circular

and self-cancelling transactions. The Crown confined its argument to such transactions, but it is noticeable that the House did not confine its decision in the same way. That was natural. The Crown was inviting the House to adopt a radically new approach. It did not wish to put its argument higher than was absolutely necessary. The House, however, was under no such constraint. Logically, the Ramsay principle is a general principle; it is not to be confined to particular types of schemes. It is direct authority for the Crown's submissions in the present case; alternatively, logical application of it leads to the same conclusion.

It is clear from the commissioners' decision that the two steps here were planned together as a single scheme or arrangement. The taxpayers did not contemplate that the first step would take place without the second. The steps were to be carried through, and were carried through, as a single transaction.

The Crown does not invite the House to ignore or disregard the first step as though it never happened or by treating it as a sham. It did happen, it was genuine and, on the finding of the commissioners, it passed full legal and beneficial ownership of the shares to Greenjacket. Had it stood alone, it would unquestionably have been a disposal but for the exemption in paragraph 4(2) of Schedule 7 to the Act of 1965. On the findings of the commissioners, however, that first step is not the relevant transaction but only part of it. The relevant transaction is the composite transaction, consisting of two steps. It is to that transaction that the legislation is to be applied. That composite transaction constituted a disposal by the taxpayers of the shares in the operating companies to the ultimate purchaser in consideration of cash paid by the direction of the taxpayers to, and received beneficially by, Greenjacket.

The Court of Appeal were oppressed by the belief that, if the Crown's argument succeeded, there would be double taxation, for when the respondents sold their shares in Greenjacket, their base cost would under paragraph 6 of Schedule 7 to the Act of 1965 be the base cost of the operating companies. That is not, however, the case. Paragraph 6 does two things: (i) it treats the share exchange as not constituting a disposal of the original shareholding; (ii) it treats the original shareholding and the new shareholding as being the same asset with the same base cost. If the Crown's argument succeeds, paragraph 6 has no application for either purpose. Oliver L.J.'s fears that the Crown's argument would lead to double taxation rest on overlooking the premise on which they are based, viz. that the exchange of shares with Greenjacket was outside the provisions of paragraph 6.

It is not necessary for the House to overrule Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. It can easily be distinguished. The Crown is not saying that it was wrongly decided, but a myth has grown up about it that should now finally be discarded. The myth is that it decided that in tax cases the court looks at the form and not the substance. That is a misreading of Lord Tomlin's speech. If it is necessary, as a matter of logic, to do so, the Crown will invite the House to depart from that decision, but it is not the Crown's case that it is necessary. What the Westminster case decided was that the taxpayer was to be taxed by reference to what he had done, not what he might have done but did

not do. It is for the commissioners to decide what he did do, and it is a question of law what the correct analysis of it is. For the reasons given by Lord Wilberforce in the Ramsay case, there is nothing in the Westminster case that is contrary to the Crown's argument in the present case. All their Lordships said that one must analyse the transaction itself by ordinary principles and see what it was. When, however, the court ascertains what the taxpayer has done, it does not do so in blinkers. The Westminster case does not help the court to determine whether there are two interdependent transactions or two legally separate transactions.

In Ramsay, the Crown put its argument narrowly. The House could have confined itself to circular transactions but did not do so. The Ramsay case (see also [1979] 1 W.L.R. 974) overturned the majority decision of the Court of Appeal in Floor v. Davis [1978] Ch. 295 (see also [1976] 1 W.L.R. 1167). [Reference was made to Inland Revenue Commissioners v. Garvin [1980] S.T.C. 295; Eilbeck v. Rawling [1980] 2 All E.R. 12 and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 32, per Lord Diplock.]

An inference from primary facts has sometimes been said to be a question of law, sometimes a question of fact; there is some confusion in the authorities. The orthodox view seems to be the latter. Whether a conclusion was open to the commissioners on the primary facts is, of course, a question of law. The question really only arises in "grey areas." Its solution may well depend on the nature of the question. In this case, the question whether several steps formed part of a single transaction was essentially a question of fact to be reviewed on the principles in Edwards v. Bairstow [1956] A.C. 14.

What Ramsay decided was that when several transactions are preconceived and carried through as a single whole, the presence or absence of an overriding contract that they will be carried through is irrelevant to the liability to tax. There is no reason to confine that principle to circular, self-cancelling transactions. [Reference was made to Commissioner of Internal Revenue v. Ashland Oil & Refining Co. (1938) 99 F.2d 588; Helvering v. Gregory (1935) 293 U.S. 465; and Internal Revenue Commissioner v. Transport Trading & Terminal Corporation (1949) 176 F. 2d 570.]

The Court of Appeal misrepresented the Crown's argument in the present case. The Crown does not contend that the transfer to Greenjacket ought to be disregarded in the sense of treated as if it did not happen, but contends that it should be disregarded in the sense that it is not the relevant disposal. Likewise, the Crown does not contend that the taxpayers ought to be taxed as if they had transferred the shares directly in a single step to the ultimate purchaser, but contends that they ought to be taxed on the basis that they transferred them by two steps to the ultimate purchaser, those two steps being planned and implemented as the component elements of a single transaction, together constituting the relevant disposal for the purposes of the capital gains tax.

Stephen Oliver Q.C. and William Massey for the respondents. The influence of American decisions should be regarded with considerable care. There is no unanimity of approach in them. Internal Revenue Commissioners v. Transport Trading & Terminal Corporation, 176 F. 2d

570 was criticised and not followed in subsequent cases: see "Learned Hand's Contribution to the Law of Tax Avoidance" by Marvin A. Chirelstein (1968) 77 Yale Law Journal, p. 440.

There was no argument in the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 as to the significance of Eveleigh L.J.'s dissenting judgment in Floor v. Davis [1978] Ch. 295. That judgment was given, and approved in Ramsay, only in the context of circular, self-cancelling transactions and was not definitive of the approach to all composite transactions such as in issue here. Lord Wilberforce stressed that the transaction must be viewed as a whole. Both parties in this case accept that the Ramsay principle applies to the extent that this transaction must be viewed as a whole. Where they part company is as to the result. The composite transaction produced two disposals, one by the respondents and one by Greenjacket. The question that has to be decided is whether paragraph 6 of Schedule 7 to the Act of 1965 applies to the disposal by the respondents. The respondents deliberately paid the statutory price for exemption under paragraph 6 of Schedule 7 by electing to receive as a genuine consideration for the disposal of their shares not cash from Wood Bastow but shares from Greenjacket.

Floor v. Davis tests the respondents' argument and helps one to see the new approach (by comparison with Ramsay). Ramsay says that one has to look at the whole transaction and that that brings in things that might otherwise be unassociated, but it does not prescribe the same result in every case. It is a new approach, but it is only an approach, an aid to a conclusion. It is still necessary to analyse what happened on a step-by-step basis. Here, there is only one possible conclusion of fact: that there was one composite transaction effected by two disposals. The question is whether Ramsay says that one transaction must necessarily lead to one disposal, which is the Crown's case. Ramsay says that, in a scheme with mere machinery to advance the end of the scheme, that machinery must be cut out, in analysing the tax treatment, as a fiscal nullity. In Floor v. Davis, the interposition of FNW fell, as Eveleigh L.J. indicated, to be excised since it was only tax avoidance machinery with no other purpose or effect. In the present case, the interposition of Greenjacket had more than a purely fiscal purpose or result. It had long-term commercial consequences. [Reference was made to Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30.]

The way in which the Crown seeks to reassemble the transaction leads to double taxation. There is a direct disposal, the claim, of the operating companies' shares to Wood Bastow for cash. This leaves no consideration to be attributed to the acquisition of the Greenjacket shares. On the disposal of the Greenjacket shares, the same gain will be taxable. The Crown's argument involves four elements of fiction. First, it assumes the fact of a sale by the Dawsons to Wood Bastow as opposed to a sale by Greenjacket. Secondly, it assumes that Greenjacket at no stage held the operating companies' shares beneficially. Thirdly, it assumes that the taxpayers directed the cash to be paid to Greenjacket by Wood Bastow. Fourthly, the shares in Greenjacket, on the Crown's analysis, would have been issued at a discount initially and then in due course paid up with the cash proceeds of sale.

Millett Q.C. in reply. Wherever there are several steps in a transaction, the commissioners must first consider whether they are separate and independent transactions, or merely the component elements of a single, composite transaction. If the latter, they must then consider what the tax consequences of that composite transaction are.

It is not right to say that the Ramsay principle is confined to self-cancelling transactions or to transactions that have no commercial consequences. The transactions in Ramsay had no commercial purpose or effect. Those in the present case, not being self-cancelling, had a commercial effect, but they had no commercial purpose. The interposition of Greenjacket had a commercial effect, since it led to the receipt by it of the proceeds of sale, but that was no part of the taxpayers' purpose. It was merely the price that the taxpayers reluctantly had to pay in order to obtain the hoped-for tax advantages of the scheme.

Their Lordships took time for consideration.

9 February 1984.LORD FRASER OF TULLYBELTON. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Brightman, in these consolidated appeals and I entirely agree with his conclusion and his reasoning. The facts are fully stated in his speech and I do not repeat them. I wish to add only a few comments.

The importance of this case is, in my opinion, in enabling your Lordships' House to explain the effect of the decision in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 and to dispose of what are, I think, the misunderstandings about the scope of that decision which have prevailed in the Court of Appeal. In Ramsay the House had to consider an elaborate and entirely artificial scheme for avoiding liability to tax. Viewed as a whole, it was self-cancelling. In the present case the scheme was much simpler, and it was not self-cancelling; on the contrary, it had what Vinelott J. described as "enduring legal consequences." But while the cases differ in that respect, it is not a sufficient ground for distinguishing the present case from Ramsay. The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately. The principle was stated in the speech of Lord Wilberforce in Ramsay, at p. 324A-C, especially where his Lordship said:

"For the commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not 'shams,' from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine [Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1] or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole." (Emphasis added.)

It was by applying that principle that Lord Wilberforce in the next paragraph of his speech in Ramsay approved of the approach by Eveleigh L.J. to the first stage of the transaction in Floor v. Davis [1978] Ch. 295. I also attempted to apply the same principle when I expressed the opinion (Ramsay, at p. 339) that:

"it could in my opinion have been the ground of decision in Floor v. Davis [1980] A.C. 695 in accordance with the dissenting opinion of Eveleigh L.J. in the Court of Appeal [1978] Ch. 295, 312, with which I respectfully agree."

Eveleigh L.J. and Lord Wilberforce and I all referred only to the first stage of the transaction in Floor v. Davis, and we did not rely to any extent upon the existence of the second stage, as the Court of Appeal in the present case appear to have thought. The first stage, viewed by itself, was clearly more favourable to the argument for the taxpayer than the two stages taken together; if the argument for the taxpayer failed even at the first stage, that would simply be an additional reason for reaching the decision against him. As it happens, the whole transaction in the present case is very similar to the first stage in Floor v. Davis (the only material difference being that Greenjacket has more enduring functions than FNW had).

The series of two transactions in the present case was planned as a single scheme, and I am clearly of opinion that it should be viewed as a whole. The relevant transaction, if I may borrow the expression used by Lord Wilberforce [1982] A.C. 300, 324, consists of the two transactions or stages taken together. It was a disposal by the respondents of the shares in the operating company for cash to Wood Bastow.

I would allow the appeals.

LORD SCARMAN. My Lords, I would allow the appeals for the reasons given by my noble and learned friend, Lord Brightman. I add a few observations only because I am aware, and the legal profession (and others) must understand, that the law in this area is in an early stage of development. Speeches in your Lordships' House and judgments in the appellate courts of the United Kingdom are concerned more to chart a way forward between principles accepted and not to be rejected than to attempt anything so ambitious as to determine finally the limit beyond which the safe channel of acceptable tax avoidance shelves into the dangerous shallows of unacceptable tax evasion.

The law will develop from case to case. Lord Wilberforce in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300, 324 referred to "the emerging principle" of the law. What has been established with certainty by the House in Ramsay's case is that the determination of what does, and what does not, constitute unacceptable tax evasion is a subject suited to development by judicial process. The best chart that we have for the way forward appears to me, with great respect to all engaged on the map-making process, to be the words of my noble and learned friend, Lord Diplock, in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 32 which my noble and learned friend, Lord Brightman, quotes in his speech (post, p. 521B-C). These words leave space in the law for

the principle enunciated by Lord Tomlin in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19 that every man is entitled if he can to order his affairs so as to diminish the burden of tax. The limits within which this principle is to operate remain to be probed and determined judicially. Difficult though the task may be for judges, it is one which is beyond the power of the blunt instrument of legislation. Whatever a statute may provide, it has to be interpreted and applied by the courts: and ultimately it will prove to be in this area of judge-made law that our elusive journey's end will be found.

LORD ROSKILL. My Lords, I have had the opportunity of reading in draft the speeches delivered or to be delivered and in common with all your Lordships I have reached the clear conclusion that these appeals by the revenue must be allowed and that the reasoning in the courts below cannot be supported. I respectfully and entirely agree with the speeches of my noble and learned friends, Lord Fraser of Tullybelton and Lord Brightman. I only add to your Lordships' speeches out of respect for all the learned judges from whom the House is differing. Repeated perusal of their long and careful judgments has left me with the impression, which I am comforted to see is shared by my noble and learned friend, Lord Brightman, that they were seeking a route by which they might confine the decisions in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30 to cases which were similar on their facts, that is to say where the transactions under attack were what have been described in argument as "self-cancelling." Those cases apart, what the learned judges all regarded as the principles long established by Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 might continue to reign supreme and unchallenged. They sought to find support for their conclusions in the majority judgments in the Court of Appeal in Floor v. Davis [1978] Ch. 295 and were not prepared to accept that in Ramsay this House had, at least in principle if not explicitly, approved of the much discussed dissenting judgment of Eveleigh L.J. in the former case. As my noble and learned friends have pointed out, on any view the relevant statements in those majority judgments of Sir John Pennycuick and Buckley L.J. were obiter since this House subsequently decided in favour of the revenue on another point and therefore had no cause to pronounce upon the rival merits of the views expressed upon what became known as "the first issue."

The error, if I may venture to use that word, into which the courts below have fallen is that they have looked back to 1936 and not forward from 1982. They do not appear to have appreciated the true significance of the passages in the speeches in Ramsay of my noble and learned friends, Lord Wilberforce, at pp. 325-326, and Lord Fraser of Tullybelton, at p. 337, and, even more important, of the warnings in Burmah given by my noble and learned friends, Lord Diplock and Lord Scarman, at pp. 32 and 39, in the passages to which Lord Brightman refers (post, p. 521B-C) and which I will not repeat. It is perhaps worth recalling the warning given albeit in another context by Lord Atkin, who himself dissented

in the Duke of Westminster's case, in United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1, 29:

"when these ghosts of the past stand in the path of justice clanking their mediaeval chains the proper course for the judge is to pass through them undeterred."

1936, a bare half-century ago, cannot be described as part of the Middle Ages but the ghost of the Duke of Westminster and of his transaction, be it noted a single and not a composite transaction, with his gardener and with other members of his staff has haunted the administration of this branch of the law for too long. I confess that I had hoped that that ghost might have found quietude with the decisions in Ramsay and in Burmah. Unhappily it has not. Perhaps the decision of this House in these appeals will now suffice as exorcism.

I would only add, ignoring for the moment that the effect of the Duke of Westminster's case was subsequently nullified by statute, that I express no view whether, were that case to arise for decision since 1982, the duke or the revenue would emerge as the ultimate victor.

My Lords, learned counsel for the taxpayers ultimately found himself constrained to admit that the majority judgments in Floor v. Davis [1978] Ch. 295 could not stand alongside the decisions in Ramsay and Burmah. I think he was entirely right to make this concession. But he sought to distinguish the present cases from Floor v. Davis on their facts contending that in these cases Greenjacket's existence had enduring consequences whereas in Floor v. Davis Donmarco, the recipient of the ultimate proceeds of sale, did not. He also submitted that the dissenting judgment of Eveleigh L.J. was founded upon consideration of stage 2 of the transactions there in question and not only upon stage 1. My Lords, with respect, I regard both submissions as untenable. The learned Lord Justice was quite clearly treating the stage 1 transaction as involving a disposal to the ultimate purchaser which itself attracted capital gains tax. There is no relevant reference to stage 2 from beginning to end of his judgment. It was his view which found support in Ramsay and rejection of it at the present time would involve rehabilitation of the majority judgments in Floor v. Davis, which as already pointed out were not and indeed are not now capable of being supported.

My Lords, I think Oliver L.J. was also influenced by fears of double taxation were the revenue's submissions to be accepted. In my view the answer to the learned Lord Justice's fears is provided by my noble and learned friend, Lord Brightman, in his speech in accordance with the submissions of Mr. Millett Q.C. for the revenue and I have nothing further to add on this part of the case.

In conclusion, therefore, I am convinced that there was a disposal by the Dawsons to Wood Bastow in consideration of the payment to be made by Wood Bastow to Greenjacket at the behest of the Dawsons. This disposal is not exempt. Capital gains tax is payable. It is for these reasons as well as for those expressed by my noble and learned friends to whose speeches I have already referred that I would allow these appeals. I would however make no order as to costs either in this House or in the courts below.

LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Brightman, and I agree with it.

In one sense these appeals can be disposed of on a very short and simple ground. The facts of the present case are, for relevant purposes, indistinguishable from the facts of Floor v. Davis [1978] Ch. 295, C.A.; [1980] A.C. 695, H.L.(E.) limited to the transactions which in that case were referred to throughout as constituting stage 1. Floor v. Davis was in fact decided in favour of the Crown both in the Court of Appeal and in the House of Lords on a ground wholly irrelevant to the present appeal arising from the transactions involved in stage 2, and the stage 1 point was never considered when the case came before this House. Hence the conflicting opinions expressed in the Court of Appeal as to the legal effect of the stage 1 transactions were entirely obiter. The judgment of Eveleigh L.J. relating to stage 1 contains no word of reference to stage 2 and the theory that he was influenced in his conclusion as to stage 1 by any of the factors arising at stage 2 is quite untenable. Eveleigh L.J. concluded that the transactions involved in stage 1, by themselves, effected a disposal by the taxpayers of their shares to the ultimate purchasers which attracted capital gains tax. That conclusion was unanimously approved, albeit again obiter, by your Lordships' House in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300. It inevitably follows that, unless your Lordships are willing to reject that unanimous opinion of the House and reinstate the views on this point of the majority of the Court of Appeal in Floor v. Davis (Buckley L.J. and Sir John Pennycuick), whose reasoning counsel for the taxpayers in the instant case did not feel able to support, the appeal must succeed.

But in another sense the present appeal marks a further important step, as a matter of decision rather than mere dictum, in the development of the courts' increasingly critical approach to the manipulation of financial transactions to the advantage of the taxpayer. Of course, the judiciary must never lose sight of the basic premise expressed in the celebrated dictum of Lord Tomlin in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19 that:

"Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be."

Just a year earlier Judge Learned Hand, giving the judgment of the United States 2nd Circuit Court of Appeals in Helvering v. Gregory (1934) 69 F.(2d) 809, 810 had said the same thing in different words:

"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; ..."

Yet, while starting from this common principle, the federal courts of the United States and the English courts have developed, quite independently of any statutory differences, very different techniques for the scrutiny of tax avoidance schemes to test their validity.

The extent to which the speeches of the majority in the Westminister case still tend to dominate the thinking in this field of the English judiciary

is well shown by the judgments in the courts below in the instant case. In particular, the Westminster case seems still to be accepted as establishing that the only ground on which it can be legitimate to draw a distinction between the substance and the form of transactions in considering their tax consequences is that the transactions are shams, in the sense that they are not what, on their face, they purport to be. The strong dislike expressed by the majority in the Westminster case for what Lord Tomlin described, at p. 19, as "a doctrine that the court may ignore the legal position and regard what is called 'the substance of the matter,'" is not in the least surprising when one remembers that the only transaction in question was the duke's covenant in favour of his gardener and the bona fides of that transaction was never for a moment impugned.

When one moves, however, from a single transaction to a series of interdependent transactions designed to produce a given result, it is, in my opinion, perfectly legitimate to draw a distinction between the substance and the form of the composite transaction without in any way suggesting that any of the single transactions which make up the whole are other than genuine. This has been the approach of the United States federal courts enabling them to develop a doctrine whereby the tax consequences of the composite transaction are dependent on its substance, not its form. I shall not attempt to review the American authorities, nor do I propose a wholesale importation of the American doctrine in all its ramifications into English law. But I do suggest that the distinction between form and substance is one which can usefully be drawn in determining the tax consequences of composite transactions and one which will help to free the courts from the shackles which have for so long been thought to be imposed upon them by the Westminster case.

I shall attempt no exhaustive exposition of all the criteria by which, for the purpose I suggest, form and substance are to be distinguished. Once a basic doctrine of form and substance is accepted, the drawing of precise boundaries will need to be worked out on a case by case basis. But I venture to point out what a simple and readily applicable test a distinction between form and substance would have provided to arrive at the conclusions already reached in some of the cases of composite transactions decided by your Lordships' House. It would need no more than a cursory exposition of the avoidance schemes in Ramsay and Eilbeck v. Rawling [1982] A.C. 300 to lead any intelligent layman to the conclusion that neither scheme was designed to achieve any substantial effect in the real world and that the elaborate steps designed to manufacture a tax deductible loss in each case were purely formal in character. If special or general commissioners had been directed to approach either case on the basis that the tax consequences of the interlocking, interdependent and predetermined transactions were to be judged by reference to the substance, not the form, of the composite transaction, I cannot think they would have had any difficulty in arriving at the right answer.

The facts in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30 were more complicated but the effect of the decision of this House could fairly be summarised by saying that the scheme adopted by Burmah to convert a bad debt owing to it by a subsidiary company (a non-deductible loss) into a loss realised on the liquidation of that subsidiary

which would be tax-deductible was formal rather than substantial. In the words of Lord Fraser of Tullybelton, at p. 38:

"The question in this part of the appeal is whether the present scheme, when completely carried out, did or did not result in a loss such as the legislation is dealing with, which I may call, for short, a real loss. In my opinion it did not."

Lord Diplock referred, at p. 32, to:

"a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable."

This seems to me to be language expressing with perfect precision the concept of steps which are formal rather than substantial.

The distinction between form and substance in the instant case is still easier to draw. As my noble and learned friend, Lord Brightman, has pointed out, if there had been here at the outset a tripartite contract between the taxpayers, Greenjacket and Wood Bastow, the beneficial interest in the taxpayers' shares would have passed directly to Wood Bastow. The twin purpose of achieving the identical result by the elaborate and carefully timed scheme fully described in the speech of my noble and learned friend, Lord Brightman, was (i) to avoid a direct disposal of the shares to Wood Bastow and (ii) to ensure that for a scintilla temporis the beneficial interest in the shares was held by Greenjacket in order to found Greenjacket's claim to have been in control of the operating companies for the purposes of paragraph 6(2) of Schedule 7 to the Finance Act 1965. Nothing could be clearer than that these two features of the pre-ordained scheme were purely formal and had no effect on the substance of the composite transaction.

I would allow the appeals.

LORD BRIGHTMAN. My Lords, the transaction which we are called upon to consider is not a tax avoidance scheme, but a tax deferment scheme. The scheme has none of the extravagances of certain tax avoidance schemes which have recently engaged the attention of the courts, where the taxpayer who has been fortunate enough to realise a capital profit has gone out into the street and, with the aid of astute advisers, manufactured out of a string of artificial transactions a supposed loss in order to counteract the profit which he has already made. The scheme before your Lordships is a simple and honest scheme which merely seeks to defer payment of tax until the taxpayer has received into his hands the gain which he has made.

There are three consolidated appeals. The taxpayers are Mr. George Dawson, who has died since the start of the proceedings and whose estate is represented by his widow; and his sons Mr. Douglas Dawson and Mr. Rexford Dawson.

The facts are simple, and were admirably found by the special commissioners for the purpose of dealing with the only point which was then in issue. They are as follows:

1. Mr. George Dawson, together with his wife and two sons, held shares in two companies (the operating companies) which manufactured clothing. They held all the shares in one company and most of the shares in the other company. I propose to ignore this small outside shareholding. Mr. Wood was the chairman and managing director of Wood Bastow Holdings Ltd. In September 1971 Mr. Dawson and Mr. Wood agreed in principle that Wood Bastow should buy the entire shareholding in the operating companies.

2. Solicitors were instructed on each side. Further negotiations took place. In particular, the solicitors acting for Wood Bastow asked for the capital of the operating companies to be reorganised so as to include the issue of renounceable letters of allotment, in order to minimise the stamp duty payable by them on the purchase.

3. Acting on advice, the Dawsons decided not to sell directly to Wood Bastow. They "arranged first to exchange their shares for shares in an investment company to be incorporated in the Isle of Man. Any sale to the ultimate purchaser would, it was contemplated, be a sale by the Isle of Man company."

4. On 15 November 1971 a meeting took place between the solicitors. At this meeting the solicitors for Wood Bastow first became aware of the proposal to introduce an Isle of Man company. They accepted the proposal, subject to certain amendments being made to the draft documents then in course of preparation. 20 December was fixed as the date for completion.

5. On 16 December the following events occurred: (a) A company called Greenjacket Investments Ltd. was incorporated in the Isle of Man by Manx solicitors acting upon the instructions of the Dawson solicitors. The subscribers to the memorandum of association were Mr. J. E. Crellin, a member of the Manx firm of solicitors, and Mr. Moroney, who was articled to them. (b) A meeting of the subscribers took place at which they and Mr. P. G. Crellin were nominated as the first directors. (c) A first meeting of the board took place at which there were produced to the meeting (i) the agreement, which was then presumably in the form of an unexecuted engrossment or a draft, whereby Greenjacket would purchase the shares in the operating companies for the sum of £152,000 which was to be satisfied by the issue of shares in Greenjacket; I will call this "the first sale agreement"; and (ii) a draft agreement for Greenjacket to sell the shares in the operating companies to Wood Bastow for £152,000; I will call this "the second sale agreement." (d) At the same board meeting it was resolved (i) that the two sale agreements be proceeded with; (ii) that the first sale agreement be executed; it was ultimately dated 20 December and exchanged on that date; (iii) that the shares in the operating companies (with an immaterial exception) be taken in the name of Greenjacket; (iv) that Mr. Moroney be authorised to execute the second sale agreement on behalf of Greenjacket; and (v) that in anticipation thereof the transfers of the shares in the operating companies to Wood Bastow (as they would exist after later reorganisation) be executed and held in escrow, which was then done.

6. On 20 December a meeting for the completion of the sale to Wood Bastow took place as planned. It was held at the offices of Messrs.

Browne, Jacobson and Roose, the Dawson solicitors. The following activities took place: (a) Meetings of the boards of the operating companies and extraordinary general meetings of such companies were held at which resolutions were passed to reorganise the share capitals of the operating companies in the manner desired by Wood Bastow. (b) Mr. Moroney, who attended completion, produced the first sale agreement and telephoned the Isle of Man in order to ascertain that the board of Greenjacket were allotting the consideration shares in that company to the Dawsons. (c) The boards of the operating companies approved transfers of the shares therein to Greenjacket. (d) The second sale agreement was exchanged and the sale completed in consideration of the payment of the purchase money by Wood Bastow to Greenjacket. (e) The boards of the operating companies approved the transfers of the shares therein to Wood Bastow.

The board meetings of the operating companies were interrupted on three occasions; first, to enable extraordinary general meetings to be held to reorganise the share capitals; secondly, to enable the first sale agreement to be exchanged between the Dawsons and Greenjacket; and thirdly, to enable the second sale agreement to be exchanged. There are very full minutes of the board meeting of one of the operating companies and similar minutes exist in the case of the other company. These show that the whole process was planned and executed with faultless precision. The meetings began at 12.45 p.m. on 20 December, at which time the shareholdings of the operating companies were still owned by the Dawsons unaffected by any contract for sale. They ended with the shareholdings in the ownership of Wood Bastow. The minutes do not disclose when the meetings ended, but perhaps it was all over in time for lunch.

Section 19 of the Finance Act 1965 charges tax in respect of capital gains accruing to a person on the disposal of assets. There is no definition of disposal and it scarcely needs definition. Paragraph 6 of Schedule 7 provides certain exceptions in the case of company amalgamations. One exception applies to shares in a company transferred to another company which thereby acquires control, in exchange for shares in the transferee company. In such a case there is deemed to be no disposal of the former shareholding. The new shareholding and the old shareholding are to be treated as the same asset.

In the instant case Mr. George Dawson and his sons were assessed to capital gains tax in respect of the year 1971-72 in the sums of £57,000, £28,000 and £28,000. The then argument on the part of the revenue was that Greenjacket did not acquire control of the operating companies within the meaning of paragraph 6 of Schedule 7, because Greenjacket was a nominee or bare trustee for the Dawsons. If on the other hand, as the taxpayers contended, Greenjacket did acquire control of the operating companies, any charge to capital gains tax would, it was contended, be deferred until such time as the taxpayers disposed of their shareholdings in Greenjacket and thereby realised a chargeable gain. At this point the one and only question at issue was whether Greenjacket acquired control of the operating companies within the meaning of the Act. Indeed, that is in a sense the only question at issue now, but it falls to be answered in

a very different legal context from that in which it originally fell to be considered.

After a two-day hearing, including the oral evidence of four witnesses, the special commissioners held that Greenjacket had acquired control of the operating companies within the meaning of the Act. They therefore held that the first sale agreement was not a disposal by the Dawsons to Greenjacket for the purposes of capital gains tax, and the assessments were discharged. The decision was given on 21 January 1976. The stated case was signed a year later, but for some reason it was over two years before it reached the High Court. During this long wait there occurred what has been described as "a significant change in the approach adopted by this House" towards artificial tax saving schemes (Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 32, per Lord Diplock). The story of this change begins with Floor v. Davis [1978] Ch. 295; [1980] A.C. 695. In that case the taxpayer and others were share- holders in a company which I shall call IDM. They agreed in principle to sell their shares to another company which I shall call KDI. The vendors then decided to put into effect the following scheme. On 24 February 1974 they caused to be incorporated a company which I shall call FNW. On 27 February the vendors agreed to sell their IDM shares to FNW in consideration of an allotment of shares in FNW. On 28 February FNW agreed to sell the IDM shares to KDI for a cash consideration. This can conveniently be called stage 1. On 5 April a special resolution was passed to wind up FNW voluntarily. As a result of a complicated reorganisation of the capital of FNW the liquidation of FNW had the effect of passing most of its assets, which included the cash received from KDI, to Donmarco Ltd., a company registered in the Cayman Islands. This can conveniently be called stage 2. I will first summarise the decision in that case, before turning in more detail to the judgments. The Court of Appeal held (1) that the taxpayer could not be regarded as having disposed of his shareholding in IDM to KDI, Eveleigh L.J. dissenting; (2) that FNW acquired control of IDM, so that there was no disposal for capital gains tax purposes on the sale of the shares by the taxpayer to FNW; but (3) that the taxpayer had exercised control over the shares in FNW by reason whereof value had passed out of those shares into the shares in Donmarco, and in consequence the taxpayer was deemed by virtue of paragraph 15(2) of Schedule 7 to the Act of 1965 to have disposed of his shares in FNW and was taxable accordingly; this paragraph taxes transactions which involve gratuitous transfers of value derived from assets and is not in point in the instant case.

The leading judgment was delivered by Sir John Pennycuick. The first issue was whether the taxpayer made a disposal of his IDM shares to KDI. Before answering this question he identified the critical transactions as the agreement of 27 February 1969 to sell the IDM shares to FNW in consideration of the issue of FNW shares, and the sale of the IDM shares a day later by FNW to KDI. It was, he said, impossible upon the plain effect of the two sale agreements to maintain that the taxpayer had sold his shares to anyone other than FNW, or that KDI had purchased the shares from anyone other than FNW. Buckley L.J. [1978] Ch. 295, 314 similarly held:

"the transactions which together make up stage 1 of the series cannot for the present purpose properly be regarded as a disposal by the taxpayer and his sons-in-law of their shares in IDM to KDI."

It will be seen from the full report of the judgments that this conclusion was reached by both Lords Justices without any reference whatever to the existence of stage 2.

In his dissenting judgment Eveleigh L.J. took the view that the IDM shares were disposed of by the taxpayer to KDI. The ratio of his decision was as follows, at p. 312:

"It is clear that right from the beginning KDI indicated that it would purchase the shares. The only reason for avoiding a direct sale to them was the prospect of capital gains tax. In an attempt to avoid paying this, as is frankly accepted, the initial transfer to FNW took place. There was however no real possibility at any time that the shares would not reach KDI. By virtue of their control of FNW the shareholders guaranteed from the moment they parted with the legal ownership that the shares would become the property of KDI. No one could prevent this against their wishes. By virtue of the arrangement initially made between them each was under an obligation to the other to do nothing to stop the shares arriving in the hands of KDI. They controlled the destiny of the shares from beginning to end in pursuance of a continuing intention on their part that the shares should be transferred to KDI."

In reaching this conclusion, it will be observed that he also did not refer to or place any reliance whatever upon the existence of stage 2.

The taxpayer appealed to this House, and naturally opened the appeal by arguing the only point upon which he had failed in the Court of Appeal, namely, the applicability of paragraph 15 of Schedule 7. This House decided that point against him, which was sufficient to determine the appeal. Counsel for the revenue was not therefore required to address this House on the issue whether there was a disposal by the taxpayer of the IDM shares to KDI, and this House had no occasion to express a view.

The decision of this House in Floor was followed two years later by the decision in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300. In that case a farming company had realised a chargeable gain of some £188,000 on the sale of farm land in Lincolnshire upon which capital gains tax was assessed. In order to mitigate, as it was hoped, the tax that would otherwise be payable, the taxpayer embarked upon a scheme which was designed to manufacture a paper loss of £175,647 by means of a series of loan and share transactions. Features of the scheme were as follows: 1. There was no commercial justification for the scheme. There was no prospect of a profit. In fact there was bound to be a small loss in the form of the fees and similar expenses which would be payable. 2. No step in the scheme was a sham. Every step was genuinely carried through, and was exactly what it purported to be. 3. There was no binding arrangement that each planned step would be followed by the next planned step, but it was reasonable to assume that all the steps would in practice be carried out. 4. The scheme was designed to, and did, return

the taxpayer to the position which he occupied before it began, except for the payment of the expenses of the scheme. 5. The money needed for the various steps was lent by a finance house on terms which ensured that the loan came back to the finance house on completion; the taxpayer's personal outlay was confined to his expenses of the scheme.

The leading speech was that of Lord Wilberforce. He reviewed recent cases, starting with Floor v. Davis [1978] Ch. 295; [1980] A.C. 695. His comment was as follows, at p. 324:

"The key transaction in this scheme was a sale of shares in a company called IDM to one company (FNW) and a resale by that company to a further company (KDI). The majority of the Court of Appeal thought it right to look at each of the sales separately and rejected an argument by the Crown that they could be considered as an integrated transaction. But Eveleigh L.J. upheld that argument. He held that the fact that each sale was genuine did not prevent him from regarding each as part of a whole, or oblige him to consider each step in isolation. Nor was he so prevented by Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. Looking at the scheme as a whole, and finding that the taxpayer and his sons-in-law had complete control of the IDM shares until they reached KDI, he was entitled to find that there was a disposal to KDI. When the case reached this House it was decided on a limited argument, and the wider point was not considered. This same approach has commended itself to Temple-man L.J. and has been expressed by him in impressive reasoning in the Court of Appeal's judgment in Eilbeck v. Rawling [1980] 2 All E.R. 12, 21-23. It will be seen from what follows that these judgments, and their emerging principle, commend themselves to me."

The fact that the court accepted that each step in a transaction was a genuine step producing its intended legal result did not confine the court to considering each step in isolation for the purpose of assessing the fiscal results. "... viewed as a whole, a composite transaction may produce an effect which brings it within a fiscal provision." (p. 325). Lord Wilberforce added later, at p. 326:

"To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties' own intentions."

Lord Fraser of Tullybelton delivered a concurring speech, in which he expressed his agreement with the dissenting opinion of Eveleigh L.J. in Floor v. Davis [1978] Ch. 295 and with the reasoning that led to it. Lord Russell of Killowen expressed his full agreement with the speeches of Lord Wilberforce and Lord Fraser of Tullybelton as did Lord Roskill and Lord Bridge of Harwich.

Counsel for the respondents in this appeal laid emphasis on the fact, which is correct, that in Ramsay the transactions under attack were, as it

was called, "self-cancelling" - which were designed to return and did return the taxpayer to the starting position except for the payment of expenses. Both Lord Wilberforce and Lord Fraser of Tullybelton referred expressly to this characteristic. The transactions in the present appeal were not self-cancelling, because Greenjacket was brought into being for an indefinite period, and the consideration money paid by Wood Bastow, which was the foundation of the capital gain, would never reach the hands of the Dawsons, save by way of loan, unless and until Greenjacket was wound up or its capital was reduced.

Following the decision of this House in Ramsay, the revenue early in July 1981 gave notice to the respondents under R.S.C., Ord. 91, r. 4 that it would if necessary contend that the Dawsons had disposed of their shares in the operating companies to Wood Bastow and were liable to capital gains tax accordingly. The appeal came before Vinelott J. in mid-July and judgment was reserved. However, before judgment was delivered Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30 was argued and decided in this House. Vinelott J. therefore deferred giving judgment until the parties had had an opportunity to consider that case.

Burmah involved another artificial tax avoidance scheme, the details of which are irrelevant for present purposes. The importance of the case lies in its reaffirmation of the Ramsay principle. I read this passage from the speech of Lord Diplock, at p. 32:

"It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay's case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transaction (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the overruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin's oft-quoted dictum in Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19, 'Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be,' tells us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way."

The warning was repeated in the speech of Lord Scarman, at p. 39:

"First, it is of the utmost importance that the business community (and others, including their advisers) should appreciate, as my noble and learned friend, Lord Diplock, has emphasised, that Ramsay's case marks 'a significant change in the approach adopted by this House in its judicial role' towards tax avoidance schemes. Secondly, it is now crucial when considering any such scheme to take the analysis far

enough to determine where the profit, gain, or loss is really to be found."

That then was the state of judicial precedent when Vinelott J. came to give judgment in the instant case [1982] S.T.C. 267. He said that the question which he had to decide was how far the new approach justified or required the proposition for which the Crown contended, that is to say, the proposition set out in the Order 91 notice. The gist of his long and careful judgment is that the principle does not apply, and a transaction cannot be disregarded and treated as fiscally a nullity, if it has "enduring legal consequences," a phrase which he repeated several times in his judgment. He identified "the enduring legal consequences" in the instant case as (i) the fact that Greenjacket owned beneficially the proceeds of sale of the shares in the operating companies, which were brought into Greenjacket's accounts and upon the income of which Greenjacket was liable to tax, and (ii) the fact that Wood Bastow's rights under the second sale agreement were rights against Greenjacket, whereas it would have had no such rights if the sale had been by the Dawsons to Wood Bastow. The effect of his judgment was to change Lord Diplock's formulation from "a pre-ordained series of transactions ... into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax" to "a pre-ordained series of transactions ... into which there are inserted steps that have no enduring legal consequences." That would confine the Ramsay principle to so-called self-cancelling transactions.

The learned judge's re-statement of Lord Diplock's formulation enabled him, as he thought, to escape from the difficulty imposed by this House's approval of the dissenting judgment in Floor v. Davis [1978] Ch. 295. FNW was placed in liquidation and its assets distributed; consequently its existence had no enduring effect on the rights and obligations of the parties after the completion of the scheme.

On appeal the leading judgment was delivered by Oliver L.J. He was, I think, greatly influenced by what he conceived to be oppressive double taxation which would follow if the Crown were right in its submission. His fears were in my view misconceived. If the Crown's case were correct, there would be a disposal by the Dawsons to Wood Bastow on which capital gains tax would be payable. There could be no additional capital gains tax on the steps by which that disposal was achieved, namely the sale first to Greenjacket and then by Greenjacket to Wood Bastow, because it is the Crown's case that the fiscal consequences of the introduction of Greenjacket are to be disregarded. The revenue cannot, and does not claim to, have it both ways. There would of course be a charge to capital gains tax when the Dawsons realised their shares in Greenjacket, if a chargeable gain then arose. For that purpose the base cost of the Greenjacket shares allotted to the Dawsons would be the price which they paid for them, namely the value of the shares in the operating companies at the date of the transactions. That element of double taxation exists whenever a shareholder sells at a profit his shares in a company which has itself realised a capital asset at a profit. So I do not see any undesirable element of double taxation involved in the revenue's submission.

Oliver L.J. was satisfied that, applying the Ramsay principle, he was entitled to reject the revenue's contention provided that the matter was not concluded by this House's approval of the judgment of Eveleigh L.J. in Floor. The question on the appeal, he said, was whether Vinelott J. was right to distinguish Floor. His conclusion was that the judgment of Eveleigh L.J., and therefore this House's indorsement of it, could not properly be read divorced from the background that stage 1 was, and was all along intended to be, followed by stage 2, as a result of which the proceeds of sale became the absolute property of the taxpayers. (I observe in parenthesis that there seems to be no finding in Floor that the assets of FNW on its liquidation became the absolute property of the taxpayers.) The learned Lord Justice's approach to the judgment of Eveleigh L.J. and to this House's indorsement of it is in my opinion totally untenable. There is no indication whatever that Eveleigh L.J. paid the remotest attention to stage 2 at that stage of his judgment, or that the approval of this House proceeded upon the basis that the existence of stage 2 was significant or decisive.

Kerr L.J. adopted the same reasoning.

Slade L.J. accepted that there was no relevant distinction between the instant case and Floor, but nevertheless concluded that this House's approval of the dissent of Eveleigh L.J. was not intended to bind the court in future cases to the conclusion that, on facts such as were found in stage 1, there had been a disposal by the original vendor to the ultimate purchaser. The references to Floor, he said, ante, p. 505B, were "clearly a convenient mode of illustrating the broader approach to tax avoidance schemes which [their Lordships] were concerned to establish." He said that, on the facts, he could not see how there could have failed to be a disposal by the Dawsons to Greenjacket and by Greenjacket to Wood Bastow. He relied particularly on the undisputed fact that the first sale agreement passed the full legal and beneficial title to Greenjacket, and that the second sale agreement passed the full legal and beneficial title to Wood Bastow.

It is difficult to escape the impression that the High Court and the Court of Appeal were determined to confine the Ramsay principle to the sort of self-cancelling arrangement which existed in that case, and to resist any inroad into the principles of Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1.

My Lords, in my opinion the rationale of the new approach is this. In a pre-planned tax-saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. For example, equitable interests may pass when the contract for sale is signed. In many cases equity will regard that as done which is contracted to be done. Ramsay says that the fiscal result is to be no different if the several steps are pre-ordained rather than pre-contracted. For example, in the instant case tax will, on the Ramsay principle, fall to be assessed on the basis that

there was a tripartite contract between the Dawsons, Greenjacket and Wood Bastow under which the Dawsons contracted to transfer their shares in the operating companies to Greenjacket in return for an allotment of shares in Greenjacket, and under which Greenjacket simultaneously contracted to transfer the same shares to Wood Bastow for a sum in cash. Under such a tripartite contract the Dawsons would clearly have disposed of the shares in the operating companies in favour of Wood Bastow in consideration of a sum of money paid by Wood Bastow with the concurrence of the Dawsons to Greenjacket. Tax would be assessed, and the base value of the Greenjacket shares calculated, accordingly. Ramsay says that this fiscal result cannot be avoided because the preordained series of steps are to be found in an informal arrangement instead of in a binding contract. The day is not saved for the taxpayer because the arrangement is unsigned or contains the words "this is not a binding contract."

The formulation by Lord Diplock in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1982] S.T.C. 30, 33 expresses the limitations of the Ramsay principle. First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not "no business effect." If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.

In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect. If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket.

The formulation, therefore, involves two findings of fact, first, whether there was a preordained series of transactions, i.e. a single composite transaction, secondly, whether that transaction contained steps which were inserted without any commercial or business purpose apart from a tax advantage. Those are facts to be found by the commissioners. They may be primary facts or, more probably, inferences to be drawn from the primary facts. If they are inferences, they are nevertheless facts to be found by the commissioners. Such inferences of fact cannot be disturbed by the court save on Edwards v. Bairstow [1956] A.C. 14 principles.

In Marriott v. Oxford and District Co-operative Society Ltd. (No. 2) [1970] 1 Q.B. 186, Lord Denning M.R. said, at p. 192:

"the primary facts were not in dispute. The only question was what was the proper inference from them. That is a question of law with which this court can and should interfere."

Similar observations occur in other reported cases. I agree with the proposition only if it means that an appellate court, whose jurisdiction is limited to questions of law, can and should interfere with an inference of fact drawn by the fact-finding tribunal which cannot be justified by the primary facts. I do not agree with it if it is intended to mean that, if the primary facts justify alternative inferences of fact, an appellate court can substitute its own preferred inference for the inference drawn by the fact-finding tribunal. I think this is clear from the tenor of the speeches in this House in Edwards v. Bairstow. The point does not seem to have been the subject matter of explicit pronouncement in any of the reported cases, at least your Lordships have been referred to none, and both propositions have from time to time emerged in judgments as a matter of assumption rather than decision. But for my part I have no doubt that the correct approach in this type of case, where inferences have to be drawn, is for the commissioners to determine (infer) from their findings of primary fact the further fact whether there was a single composite transaction in the sense in which I have used that expression, and whether that transaction contains steps which were inserted without any commercial or business purpose apart from a tax advantage; and for the appellate court to interfere with that inference of fact only in a case where it is insupportable on the basis of the primary facts found. Accordingly I respectfully disagree with Vinelott J. in the instant case where he expressed the opposite view [1982] S.T.C. 267, 287B.

The result of correctly applying the Ramsay principle to the facts of this case is that there was a disposal by the Dawsons in favour of Wood Bastow in consideration of a sum of money paid with the concurrence of the Dawsons to Greenjacket. Capital gains tax is payable accordingly. I would therefore allow the appeals. I agree that there should be no order for costs in your Lordships' House.

Solicitors: Solicitor of Inland Revenue; Turner Kenneth Brown for Browne, Jacobson & Roose, Nottingham.

M. G.