[HOUSE OF LORDS]

AND

AND

Revenue - Capital gains tax - Tax avoidance - Scheme - Artificial loss equal to chargeable gain - Whether scheme to be considered as whole - Whether scheme to be disregarded as artificial and fiscally ineffective

Revenue - Capital gains tax - Tax avoidance - Taxpayer company lending money to company in which it held shares - Creation of artificial capital losses on share transactions - Taxpayer company selling debt to third party at profit - Whether loan "debt on a security" - Whether profit on sale of loan chargeable gain - Whether chargeable gain on sale of land reduced by artificial capital losses - Finance Act 1965 (c. 25), Sch. 7, paras. 5 (3), 11(1)

Revenue - Capital gains tax - Tax avoidance - Purchase by taxpayer of reversionary interest in settlement - Taxpayer beneficiary of reversionary interest under second settlement - Trustees having special power of appointment under first settlement to appoint trust fund to be held on trusts of second settlement - Trustees appointing part of trust fund to second settlement - Sale by taxpayer of reversionary interest in settlement at loss - Sale by taxpayer of reversionary interest in second settlement - Finance Act 1965, Sch. 7, para. 13 (1)

In the first of these two appeals the taxpayer company farmed land in Lincolnshire. In 1973 it sold the freehold of the farm and in so doing realised a chargeable gain of £187,977 (before deduction of any allowable losses). For the sole purpose of reducing the amount of the capital gains tax payable, the taxpayer company entered into a scheme known as "the capital loss scheme" that was designed to create artificial capital losses on share transactions to set off against chargeable gains. The scheme, which was admitted to have no commercial justification, involved the taxpayer company in February 1973 purchasing 68 shares in C. Ltd., a newly formed investment company, on terms as to a premium of £2,719 per share, £5 only being payable on application and the balance on call. At the same time the taxpayer company entered into a loan agreement whereby it made two loans of £218,750 each (L1 and L2) to C. Ltd. for terms of 30 and 31 years respectively. Each loan carried interest at the rate of 11 per cent. annually. The following month, under the terms of a loan agreement, the rate of interest on L1 was reduced to zero, and that on L2 increased to 22 per cent. On the

same day C. Ltd. called on the taxpayer company to pay the balance of £184,654 due in respect of the 68 shares. L2 was then sold on certain conditions by the taxpayer company to M. Ltd., a finance company, at its then approximate market value of £393,750. The purpose of the scheme was to ensure that the profit to the taxpayer company on the sale of that loan should be exempted from giving rise to a chargeable gain by virtue of the provisions of paragraph 11 of Schedule 7 to the Finance Act 1965. ¹ Further loan and share transactions took place between the parties and in due course, following a decision that C. Ltd. should be wound up, L1 became repayable to the taxpayer company at par and L2 (that had in the meantime been assigned by M. Ltd. to an investment company that was wholly owned by C. Ltd.) repayable at a price of £394,673. In consequence of those transactions the value of the shares of C. Ltd. were drastically reduced and an artificial capital loss thereby accrued to the taxpayer company.

For the accounting period ended May 1973, the taxpayer company was assessed to corporation tax in respect of chargeable gains of £176,552 arising on the sale of the farm. On its appeal against assessment the special commissioners found that the loans were "loan stock or similar security" of C. Ltd. within paragraph 5 (3) (b) and that as L2 was a "debt on a security" within paragraph 11 of Schedule 7 a chargeable gain accrued on the disposal of L2 by the taxpayer company.

An appeal by the taxpayer company was allowed by Goulding J. who held that L2 did not fall within the meaning of a "debt on a security" in paragraph 11 of Schedule 7 with the result that no chargeable gain accrued on its disposal. On appeal by the Crown the Court of Appeal allowed the appeal.

In the second appeal the scheme was of quite a different nature and sought to take advantage of paragraph 13 (1) of Schedule 7 to the Finance Act 1965. The scheme involved the use of a settlement made in Gibraltar in March 1973, and administered by a trustee in Gibraltar, another settlement made in Jersey in March 1975, and administered by a trustee in Jersey and six associated companies, TH., G., and four others. In March 1975 the taxpayer bought for £543,600 from P. a reversionary interest under the Gibraltar settlement. The trust fund held on the trusts of that settlement consisted of £600,000 cash owing to the trustee. Under clause 5 (2) of the Gibraltar settlement the trustees thereof had power to advance any part of the capital of the trust fund held on the trusts of the settlement to the trustees of any other settlement under which the person for the time being entitled

1 Finance Act 1965, Sch. 7, para. 11 (1): "Where a person incurs a debt to another ... no chargeable gain shall accrue to that (that is the original) creditor ... on a disposal of the debt, except in the case of the debt on a security (as defined in paragraph 5 of this Schedule).

Para. 5: "(3) For the purpose of this paragraph ... (b) 'security' includes any loan stock or similar security whether of the Government of the United Kingdom or of any other government or of any public or local authority in the United Kingdom or elsewhere, or of any company, and whether secured or unsecured."

Para. 13 (1): "No chargeable gain shall accrue on the disposal of an interest created by or arising under a settlement (including, in particular, an annuity or life interest, and the reversion to an annuity or life interest) by the person for whose benefit the interest was created by the terms of the settlement or by any other person except one who acquired, or derives his title from one who acquired the interest for a consideration in money or money's worth, other than consideration consisting of another interest under the settlement."

to the Gibraltar reversion had an indefeasible reversionary interest falling into possession not later than the vesting date (March 19, 1976) under the Gibraltar settlement. On the exercise of such power the trustees were obliged under clause 5 (3) of the Gibraltar settlement to make an advance to the income beneficiary under the Gibraltar settlement to compensate him for the loss of income. The taxpayer had a reversionary interest under the Jersey settlement dated March 21, 1975. That reversionary interest was indefeasible and was to fall into possession on a date which was not later than the vesting date under the Gibraltar settlement. The trust fund settled on the trusts of the Jersey settlement consisted of £100 cash. On March 27, 1975, the trustees of the Gibraltar settlement appointed £315,000, out of the capital of the trust fund held on the trusts thereof to the trustees of the Jersey settlement to be held on the trusts of that settlement. At the same time they appointed £29,610 out of such capital to G. as the income beneficiary under the Gibraltar settlement. On April 3, 1975, the taxpayer sold the Gibraltar reversion to G. for £231,130. The trust fund held on the trusts of such settlement then consisted of £255,390 cash. On the same day the taxpayer sold his reversionary interest under the Jersey settlement to TH. for £312,100. The trust fund held on the trusts of the Jersey settlement then consisted of £315,100 cash. In connection with the above scheme the taxpayer paid to TH. a procuration fee of £3,500 and interest of £6,115 on money lent by TH. to the taxpayer.

The taxpayer claimed in computing his liability to capital gains tax for the year 1974-1975 to deduct from chargeable gains of £355,094, which admittedly accrued to him for that year, a loss of £312,470, namely, the purchase for £543,600 and sale for £231,130 of the Gibraltar reversion, reducing the assessment to £42,624. The general commissioners upheld the claim. On appeal by the Crown, Slade J. reversed that decision, and the Court of Appeal dismissed an appeal by the taxpayer.

On appeals by both taxpayers, the Crown raised in the House of Lords the issue whether in respect of schemes of the nature of those in the present appeals they should simply be disregarded as being artificial and fiscally ineffective:-

Held, dismissing both appeals, (1) that, although the separate steps of a scheme were "genuine" and had to be accepted under the doctrine of Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, the court could, on the basis of the findings of the general or special commissioners and of its own analysis in law, consider the scheme as a whole and was not confined to a step by step examination of it (post, pp. 325D-E, 337C-E, 338H - 339B, G, 340D-E).

(2) That capital gains tax was a tax on gains (or gains less losses) and not on arithmetical differences and to say that a loss (or gain) which appeared to arise at one stage in an indivisible process, and which was intended to be and was cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation was not such a loss (or gain) as the legislation was dealing with was well and indeed essentially within the judicial process, and that if the taxpayer entered into a transaction that did not appreciably affect his beneficial interest except to reduce his tax, the law would disregard it (post, pp. 326D-327A,337C-F, 339G, 340D-E).

(3) That on the facts of the first appeal it would be quite wrong and a faulty analysis to pick out, and stop at, the one step in the combination which produced the loss, that being entirely dependent upon, and merely a reflection of the gain, and that the true view was, regarding the scheme as a whole, to find that there was neither gain nor loss; that in any event, on the assumption that it was permissible to separate from the scheme as a whole the step of the sale of L2, in the circumstances L2 was a "debt on a security" within the exception contained in paragraph 11 of Schedule 7 with the result that a chargeable gain accrued to the taxpayer on its disposal (post, pp. 328F, 334G - 335F, 339G, 340D-E).

(4) That on the facts of the second appeal it would be quite wrong and a faulty analysis to segregate from what was an integrated and interdependent series of operations one step, namely, the sale of the Gibraltar reversion on April 3, 1975, and to attach fiscal consequences to that step regardless of the other steps and operations with which it was integrated; that the only conclusion, which was consistent with the intentions of the parties and with the documents regarded as interdependent, was to find that apart from a sum not exceeding £370 there was neither gain nor loss; that in any event, even if the sale of the Gibraltar reversion on April 3, 1975, was regarded in isolation, in the circumstances it did not give rise to an allowable loss (post, pp. 332D - 333B, 335H - 336H, 339G, 340D-E).

Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, H.L.(E.); Floor v. Davis [1980] A.C. 695, H.L.(E.); Inland Revenue Commissioners v. Plummer [1980] A.C. 896, H.L.(E.) and Chinn v. Hochstrasser [1981] A.C. 533, H.L.(E.) considered.

Per Lord Wilberforce, Lord Russell of Killowen, Lord Roskill and Lord Bridge of Harwich. 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" and 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 (post, pp. 324B-C, 339G, 340D-E).

Decisions of the Court of Appeal in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1979] 1 W.L.R. 974; [1979] 3 All E.R. 213 and Eilbeck v. Rawling [1980] 2 All E.R. 12 affirmed.

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

Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners, 1977 S.C. 265; [1978] A.C. 885; [1978] 2 W.L.R. 648; [1978] 1 All E.R. 962; 1978 S.C. (H.L.) 72, H.L.(Sc.).

Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229.

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

Cleveleys Investment Trust Co. v. Inland Revenue Commissioners (1971) 47 T.C. 300; 1971 S.C. 233.

Federal Commissioner of Taxation v. Westraders Pty. Ltd. (1980) 30 A.L.R. 353.

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.).

Gilbert v. Commissioner of Internal Revenue (1957) 248 F. 2d 399.

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

Inland Revenue Commissioners v. Plummer [1980] A.C. 896; [1979] 3 W.L.R. 689; [1979] 3 All E.R. 775. H.L.(E.).

Inland Revenue Commissioners v. Wesleyan and General Assurance Society [1946] 2 All E.R. 749; 30 T.C. 11, C.A.

Knetsch v. United States (1960) 364 U.S. 361.

MacRae v. Commissioner of Internal Revenue (1961) 34 T.C. 20.

Mangin v. Inland Revenue Commissioner [1971] A.C. 739; [1971] 2 W.L.R. 39; [1971] 1 All E.R. 179, P.C.

Rubin v. United States of America (1962) 304 F. 2d 766.

Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786; [1967] 2 W.L.R. 1020; [1967] 1 All E.R. 518, C.A.

The following additional cases were cited in argument:

Agricultural Mortgage Corporation Ltd. v. Inland Revenue Commissioners [1978] Ch. 72; [1978] 2 W.L.R. 230; [1978] 1 All E.R. 248, C.A.

Ashton v. Inland Revenue Commissioner [1975] 1 W.L.R. 1615; [1975] 3 All E.R. 225, P.C.

Attorney-General v. Avelino Aramayo & Co. [1925] 1 K.B. 86, C.A.

Crowe v. Appleby [1976] 1 W.L.R. 885; [1976] 2 All E.R. 914, C.A.

de la Bere's Marriage Settlement Trusts, In re [1941] Ch. 443; [1941] 2 All E.R. 533.

Disderi & Co., In re (1870) L.R. 11 Eq. 242.

General Motors Corporation v. United States (1978) 41 AFTR 2d 1132.

Goldstein v. Commissioner of Internal Revenue (1966) 364 F. 2d 734.

Gray v. Lewis (1873) L.R. 8 Ch.App. 1035, C.A.

Greenberg v. Inland Revenue Commissioners [1971] Ch. 286; [1970] 2 W.L.R. 362; [1970] 1 All E.R. 526, C.A.; [1972] A.C. 109; [1971] 3 W.L.R. 386; [1971] 3 All E.R. 136; 47 T.C. 240, H.L.(E.).

Gregory v. Helvering (1935) 55 S.Ct 266.

Hart v. Briscoe [1979] Ch. 1; [1978] 2 W.L.R. 832; [1978] 1 All E.R. 791.

Inland Revenue Commissioners v. Bates [1968] A.C. 483; [1967] 2 W.L.R. 60; [1967] 1 All E.R. 84; 44 T.C. 225, H.L.(E.).

Inland Revenue Commissioners v. Church Commissioners for England [1977] A.C. 329; [1976] 3 W.L.R. 214; [1976] 2 All E.R. 1037; 50 T.C. 516, H.L.(E.).

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

Lupton v. F.A. & A.B. Ltd. [1972] A.C. 634; [1971] 3 W.L.R. 670; [1971] 3 All E.R. 948; 47 T.C. 580, H.L.(E.).

Newton v. Commissioner of Taxation of the Commonwealth of Australia [1958] A.C. 450; [1958] 3 W.L.R. 195; [1958] 2 All E.R. 759, P.C.

Peate v. Commissioner of Taxation [1967] 1 A.C. 308; [1966] 3 W.L.R. 246; [1966] 2 All E.R. 766, P.C.

Rank Xerox Ltd. v. Lane [1981] A.C. 629; [1979] 3 W.L.R. 594; [1979] 3 All E.R. 657, H.L.(E.).

Ransom v. Higgs [1974] 1 W.L.R. 1594; [1974] 3 All E.R. 949; 50 T.C. 1, H.L.(E.).

Roome v. Edwards [1980] Ch. 425; [1980] 2 W.L.R. 156; [1980] 1 All E.R. 850, C.A.

Seramco Ltd. Superannuation Fund Trustees v. Income Tax Commissioner [1977] A.C. 287; [1976] 2 W.L.R. 986; [1976] 2 All E.R. 28. P.C.

Soul v. Inland Revenue Commissioners (Practice Note) [1963] 1 W.L.R. 112; [1963] 1 All E.R. 68: 40 T.C. 506, C.A.

APPEALS from the Court of Appeal.

W. T. RAMSAY LTD. v. INLAND REVENUE COMMISSIONERS

The first appeal was an appeal by the appellants, W. T. Ramsay Ltd., from an order dated May 24, 1979, of the Court of Appeal (Lord Scarman, Ormrod and Templeman L.JJ.) allowing an appeal by the respondents, the Inland Revenue Commissioners, from an order dated March 2, 1978, of Goulding J., allowing an appeal by way of case stated under section 56 of the Taxes Management Act 1970, from a decision of the Commissioners for the Special Purposes of the Income Tax Acts.

The issue in the courts below turned wholly on the true construction of the words "the debt on a security" in paragraph 11 (1) of Schedule 7 to the Finance Act 1965 (now re-enacted as section 134 (1) of the Capital Gains Tax Act 1979). The question was whether a certain loan was "the debt on a security" for the above purposes. If it was, then a chargeable gain (on which corporation tax was payable) accrued to the appellants on its disposal. In the House of Lords the respondents raised the issue whether the tax avoidance scheme acquired and used by the appellants should simply be disregarded as artificial and fiscally ineffective.

The facts are set out in the case stated [1979] 1 W.L.R. 974, 975-978 and in the opinion of Lord Wilberforce.

EILBECK (INSPECTOR OF TAXES) v. RAWLING

The second appeal was an appeal by the appellant, Denis Martin Edward Rawling, from an order dated February 4, 1980, of the Court of Appeal (Buckley, Templeman and Donaldson L.JJ.) dismissing an appeal from an order dated July 17, 1978, of Slade J. who had allowed an appeal by the respondents, the Commissioners of Inland Revenue, from a determination of the Commissioners for the General Purposes of the Income Tax for the division of North Birmingham in favour of the appellant and restoring an assessment to capital gains tax as originally made by the respondent on the appellant for the year of assessment 1974-75.

The issue in this appeal related to whether the appellant could take advantage of paragraph 13 (1) of Schedule 7 to the Finance Act 1975 which exempts from capital gains tax any gain made on the disposal of, inter alia, a reversionary interest under a settlement by the person for whose benefit the interest was created or by any other person apart from one who acquired the interest for consideration in money. In the House of Lords the respondents in respect of this appeal raised the same issue as in the first appeal relating to the artificiality of the scheme in question.

The facts are set out in the opinion of Lord Wilberforce.

D. C. Potter Q.C. and David Milne for the appellants, W. T. Ramsay Ltd. In the courts below the present proceedings were decided on a narrow issue. But in their printed case before this House, there is an attempt by the Crown to change entirely the approach of the courts towards tax avoidance schemes. This House should not, at this late stage, permit any such new points of law to be argued or to remit the matter to the special commissioners in order that they should state any further question of law.

The short question is that the appellant company having realised a very substantial chargeable gain (that is capital gain) and being faced with paying corporation tax on that gain contemplated making an allowable loss in the same accounting period. The allowable loss to be created was in the region of £170,000.

For the relevant statutory provisions see the Income and Corporation Taxes Act 1970, sections 238 (1), (3), (4) and 265 (1), (2); the Finance Act 1965, sections 19 (1), 20 (4), 22 (1), (9), 23 (1), (2), Schedule 6, para. 4 (1) (a), Schedule 7, paras. 2 (1), (8), 5 (1), (2), (3) (a), (b), 10 (1), 11 (1), (2), 12, 13 (1).

The Finance Act 1965, Schedule 7, para. 11 (1) provides that a gain made by the original creditor on the disposal of a debt, whether in sterling or some other currency, is not a chargeable gain (and not therefore liable to tax) unless it is "the debt on a security (as defined in paragraph 5 of this Schedule)." The phrase "the debt on a security" is not defined in paragraph 5, but "security" is stated by paragraph 5 (3) (b) to include "any loan stock or similar security whether of the Government of the United Kingdom or of any other government, or of any public or local authority in the United Kingdom or elsewhere, or of any company, and whether secured or unsecured."

The only question of law raised by the case stated is whether L2 fell within the description of "the debt on a security" as so defined, so that a chargeable gain accrued to the appellants on the disposing of L2. In general, in the body of the Finance Act 1965, the expression "securities" occurs in the context of "shares or securities": see, for example, sections 34 (3), 37 (2) (c), 43 (3) (d) and 44 (3) (b) (i). But see sections 27 (3) and 45 (1). Although it was contrived that the figures involved were genuine figures, there was a very real loss on the shares.

Without defining the phrase "the debt on a security" it is possible to set certain limits to its possible meaning; in that respect, the following factors are relevant: (i) it is irrelevant whether the debt is secured in the sense of being backed by a charge or hypothec or guarantee. (ii) It is not enough to bring a debt within the phrase, that it constitutes loan capital or an investment, as opposed to a short-term or a trading debt. This is clear from Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885, 891G where the debt figured in the balance sheet under the heading "Capital Employed - Loan" and where the submission of counsel for the appellants therein (p. 888C) was not accepted by this House. (iii) The phrase "the debt on a security" supposes that there is something termed a security which is not itself the debt but a something on which the debt exists. That can be taken as a reference to a document issued by the debtor to the creditor,

intended to be a document of title in the event of the creditor dealing with the debt. (iv) The view expressed above is confirmed by a perusal of the Finance Act 1965, Schedule 7, para. 5 (3) (b), which states that "'security' includes any loan stock or similar security. ..." Loan stock is a familiar business concept, and there is a class of sufficiently similar expressions, such as loan notes, debentures, consols, which together create a class of valuable paper, of the kind traditionally dealt in on stock exchanges, where the debtor maintains a register of holders, or issues "bearer" certificates whereby the holder in due course has a good title. (v) The context of paragraph 5 is the "conversion of securities." As a matter of legal analysis, where a person subscribes for shares, and pays for the subscription by set-off of moneys owed to him by the company, the transaction is the same, whatever the nature of the money owed to him. In business, however, that legal analysis does not hold good. There is not a "conversion" merely because any debt is used to subscribe for shares; there must be something more, in that the creditor surrenders one document of title, such as a stock certificate, for another document of title, such as a share certificate. That is truly a conversion, and what was intended by Lord Wilberforce in the Aberdeen Construction case [1978] A.C. 885, 895G, in using the phrase "... and if necessary converted into shares or other securities." (vi) It is wrong to differentiate between those debts on which the original creditor might realise either a gain or a loss, and those debts on which the original creditor might realise a loss but cannot realise a gain. That distinction commended itself to the Court of Appeal [1979] 1 W.L.R. 974, 982E, 986H-987A. That distinction falls down when one considers the case of a debt in some currency other than sterling; there the original creditor, irrespective of whether it is a debt on a security, could make a gain or a loss. (vii) A debt may be evidenced in writing, even though the writing is not a document issued by the debtor to the creditor and constituting a document of title. But evidence in writing of a debt does not of itself constitute a security. In the present case, the evidence that existed, namely, the statutory declaration, was evidence of the contract to make a loan, but not the loan itself, and was not issued by the debtor, and could not be regarded as a document of title. Having regard to the above factors, the revenue are unable to point to any document that is a "security"; in particular, the statutory declaration is not a "security", and the debt L2 is not "the debt on a security." Not all securities have debts, for example, 2½ per cent. consols, are perpetual annuities secured on the Consolidated Fund. These debts are just debts - they are loans. There is nothing there to answer the word "security." The word "security" has a City connotation and what is envisaged by paragraph 5 (3) (b) are securities in the nature of shares or akin to government stock which can be converted into comparable stock. The provision has a very narrow ambit. Thus in Cleveleys Investment Trust Co. v. Inland Revenue Commissioners (1971) 47 T.C. 300, 315, Lord Migdale said, "I think that the words 'the debt on a security' refer to an obligation to pay or repay embodied in a share or stock certificate issued by a government, local authority or company which is evidence of the ownership of the

share or stock and so of the right to receive payment." Lord Cameron in the same case (pp. 317G and 318D) restricted the phrase "security" to those securities which were or could be the subject of conversion. These statements are a correct statement of the law.

The facts of the present case are not materially distinguishable from those of Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885. Lord Wilberforce, while finding it impossible to discover any principle on which to state a discrimen, clearly rejected any distinction between debts being "loan capital" and other debts, but suggested as the only basis of distinction that between a pure unsecured debt on the one hand, and the debt which had either marketable character or "at least such characteristics as enable it to be dealt in and if necessary converted into shares or other securities" (p. 895F). Lord Russell of Killowen at p. 903D-E restricted the concept of "security" to loan stock or similar security, loan stock suggesting "an obligation created by a company of an amount of issue through subscribers for the stock, having ordinary terms for repayment with or without premium and for interest." Thus the test given by Lord Wilberforce is that of the City and of a portfolio and Lord Russell of Killowen's test is to the same effect.

If in the present case the appellants had realised a loss on the debt L2, the like arguments and the like decision would properly follow as in the Aberdeen Construction Group case, namely, that the debt L2 did not answer the description "the debt on a security." The same result must follow, notwithstanding that a gain rather than a loss was realised on L2, and that the realisation took place as part of an artificial tax avoidance scheme.

The word "security" has the connotation of something that is subscribed for, issued, redeemed and which can be converted into stock. The words subscription, issue, redemption and conversion only make sense in relation to the relevant provisions here if they are given their City meaning. Loan stock can be assigned in part but a debt cannot: see section 136 of the Law of Property Act 1925.

Goulding J. decided the appeal in this case correctly and for the correct reasons. As to the judgment of the Court of Appeal [1979] 1 W.L.R. 974, the judgment of Templeman L.J., pp. 984F-985A, confuses legal concepts with commercial dealings, for the language of the statutory provision is the language of the City. It is an error to consider that the statutory declaration represented a marketable security. There was nothing in the present case that a business man would recognise as a subscription, or as an issue, or as having any similarity to loan stock. Indeed, in the present case, the only relevant document, namely the statutory declaration, is even further from being a "security" and the letter of undertaking that the debtor company signed and the creditor received in Cleveleys Investment Trust Co. v. Inland Revenue Commissioners, 47 T.C. 300, 303. [Reference was also made to Agricultural Mortgage Corporation Ltd. v. Inland Revenue Commissioners [1978] Ch. 72, 90, 96, 97, 105D-H, 107F.]

Peter Millett Q.C. and Brian Davenport Q.C. for the respondents, the Commissioners of Inland Revenue. On the question whether L2 is a

debt within paragraph 11 (1) of Schedule 7 to the Finance Act 1965; (1) the Crown adopt the test propounded by Lord Wilberforce in the Aberdeen Construction Group case [1978] A.C. 885. (2) There is nothing remotely comparable between L2 and the debt in Cleveleys Investment Trust Co. case, 47 T.C. 300, or the Aberdeen Construction Group Ltd. case [1978] A.C. 885. Those were repayable at any time by the debtor. Neither had a market value or any similarity to L2. The feature of L2 that the Crown seizes upon is that it was not repayable at the will of the debtor. (3) The legislation uses the word "debt" and not "loan." There is a distinction between these two concepts. The vast majority of debts are not loans. The appellants equate loans with debts.

As to whether L2 was a debt on a security, since the language of the statute is obscure, the House is invited to examine the legislative policy of the Act, that is, to adopt a purposive construction of the relevant provisions. The scheme of the Act is that all assets including debts are made subject to capital gains: see section 22. Writing off a bad debt is a disposal: see section 23 (4). Having swept all debts into the Act, Parliament exempted gains on their disposal, except in the case of a debt on a security. Why did Parliament find it necessary to make this exception? The answer is obvious: bad debts were not to give rise to allowable losses under the new legislation; they were still to be dealt with under the pre-1965 legislation. It was intended to restrict the range of allowable losses. In the hands of an ordinary creditor an ordinary debt is incapable of realisation at a profit. It may result in a loss but not in a profit. In order to restrict the range of allowable losses, Parliament excluded gains on the disposal of a debt except in the two cases mentioned in paragraph 11 (1) of Schedule 7.

The two exclusions in paragraph 11 (1) are (a) where the disponer was not the original creditor and (b) where the debt is the debt on a security. In these two cases, a disposal may give rise to a chargeable gain or an allowable loss. The reason is obvious: (a) the moment the debt is dealt with by the original creditor, it becomes an asset with a market value capable of yielding a profit or loss and it is appropriate for it to come within the capital gains legislation; (b) the same notion must underly the exception of the debt on a security: it is more than a debt - it is in the nature of an asset.

The expression "debt on a security" (a) is not a synonym for security for a debt; (b) it is a single composite phrase; (c) the word "security" is defined in paragraph 5 (3); (d) but since it is inclusively defined, it is not exhaustive; (e) it is less of a definition than a description in paragraph 5 (3) (b). The characteristics of such debts is that they are marketable. The word "security" is used throughout paragraph 5 to mean the chose in action and not the document which evidences the chose in action. The presence or absence of a document or certificate is not decisive. It is said that the whole of paragraph 5 is couched in the language of the City, dealing with portfolio investments, but it is plain that the whole of paragraph 5 applies to private companies, private investments and one-man companies.

As to the characteristics of a debt that has the characteristics of an investment: it should yield an income; it should have the possibility of

appreciation; it should be reasonably long-term; it should be marketable and convertible. Most debts do not have the above characteristics. The debtor is free to repay at any time. But the long-term fixed interest debt is very different. The ordinary debt repayable at any time has no marketable value greater than its face value.

As to convertibility, whether this is an essential characteristic depends on whether it is legitimate to refer to the whole of paragraph 5 (3). Here L2 could have been surrendered and loan stock or preference shares substituted. L2 has all the essential characteristics of the relevant type of debt - loan stock. The loan creditor was not entitled to call it in for 31 years. The debtor was not entitled to redeem earlier at face value. If he did, he had to pay the market value if it was more than the face value. The debt was on terms that set out the creditor's rights, both as a going concern, and also on a liquidation. The debt was marketable - plainly it was assignable. Further, it was charged to Slater Walker. Stockbrokers could and did put a market value on it. L2 had the requisite characteristics and as the special commissioners held, it was far from being a simple debt. A certificate of title cannot be a prerequisite. If that were necessary, Parliament would have so required. There is no reason why Parliament should have drawn the line here. It is a characteristic of an ordinary debt on a security. If it is present, that is explicable; if it is absent, then inquiries should be made for the reason for its absence.

No member of this House in the Aberdeen Construction Group case [1978] A.C. 885 stated that it was a requirement of a debt on a security that the debt should be supported by a document. Further, a share certificate or loan certificate is not a document of title - it is only evidence of title. The statutory declaration did evidence the loan. It is said that there was not a register in which to enter the transaction. But it is not necessary where there is only one creditor. Reliance was placed on the fact that part of the debt could not be assigned. This is true: see section 137 of the Law of Property Act 1925. But part of a debt can be assigned in equity.

As to the foreign currency debt argument relied on by the appellants, it is to be remembered that in 1965 the pound was fixed in value. Any gain by a creditor was made on the currency transaction and not on the loan. If A lends B, an American, $100 and B repays it one year later, B repays $100 no more nor less. A then converts the dollars into sterling. Any profit made on the conversion is due to the currency transaction and that alone.

Potter Q.C. in reply. As to the mischief aimed at here, contrast Schedule 7, paragraph 17 (3), and section 24 (7) and section 45 of the Finance Act 1965. One must look at the mischief primarily in paragraph 5 (3) of Schedule 7, for it is only referential in paragraph 11 (1).

It is necessary to dissect the expression "debt on a security," for only "security" is defined: see Cleveleys Investment Trust Co. v. Inland Revenue Commissioners, 47 T.C. 300, and Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners, 1977 S.C. 265. The present case comes within the discrimen of Lord Wilberforce and Lord Russell

of Killowen in the Aberdeen Construction Group case. The appellants rely on the Crown's argument [1978] A.C. 885, 889A et seq., which was adopted by the House. The Crown drew a distinction between an ordinary debt and a debt in the nature of an investment. But this is to reverse the decision of this House in the Aberdeen Construction Group case.

Charles Beattie Q.C. and Hilda Wilson for the appellant Rawling. The transaction in the present case is covered by the Finance Act 1977, section 43, and section 26 of the Capital Gains Tax Act 1979 (a consolidation Act). The appellant seeks to take advantage of paragraph 13 (1) of Schedule 7 to the Finance Act 1965.

The argument for the taxpayer can be put summarily as follows: the sum of £543,600 paid to Pendle was consideration given on behalf of the taxpayer wholly and exclusively for the acquisition of the relevant asset, consisting of the reversion under the Gibraltar settlement. This sum represented the market value of the reversionary interest, and there could be no grounds for suggesting that it was paid for anything else whatever, except that reversionary interest. To suggest otherwise would be to confuse consideration with motive.

In answer to the approach adopted by Templeman L.J. in his judgment in the present case, reliance is placed on the opening observations of Lord Wilberforce in his opinion in Inland Revenue Commissioners v. Plummer [1980] A.C. 896, 907, in which it is stated that the House is entitled and required to look at the relevant plan as a whole. It does not entitle the House to disregard the legal form and nature of the transactions carried out.

For capital gains tax purposes, whether property held on the trusts of a settlement which, in exercise of a special power conferred by the settlement is appointed to be held on the trusts of another settlement becomes comprised in the other settlement, depends on the circumstances; if the appointed property becomes vested in the trustees of the other settlement and all the trusts, powers and provisions of the original settlement are irrevocably gone as respects the appointed property, their place being taken by the trusts, powers and provisions of the other settlement, the appointed property becomes comprised in the other settlement for capital gains tax purposes. Accordingly, once the appointment of March 27, 1975, was made the £315,000 became comprised in the Jersey settlement for capital gains tax purposes.

The Gibraltar reversion was a reversionary interest in the trust fund held on the trusts of the Gibraltar settlement as such trust fund was from time to time constituted and the Jersey reversion was a reversionary interest in the trust fund held on the trusts of the Jersey settlement as such trust fund was from time to time constituted. When the £315,000 was appointed to be held on the trusts of the Jersey Settlement it ceased to be comprised in the trust fund held on the trusts of the Gibraltar settlement and became part of the trust fund held on the trusts of the Jersey settlement. Accordingly, on the making of the appointment, the Gibraltar reversion ceased to extend to the £315,000 and such sum became property in which the Jersey reversion subsisted. In the circumstances, what arose was a new interest. The appellant did not buy the

interest which was appointed and, therefore, he is not within the "exception to the exception" in paragraph 13 of Schedule 7.

Wilson followed.

Peter Millett Q.C. and Brian Davenport Q.C. for the respondent inspector of taxes. There are two grounds for dismissing the present appeal: (i) the reasons given by the Court of Appeal and (ii) the ground on which Slade J. based his judgment.

The first question is to consider whether when the appellant sold to Goldiwill he sold all or only part of what he had bought. On the facts it is plain that he sold only part and the next question, therefore, is whether what was left behind in the Gibraltar settlement was the remainder of what he had bought. The appellant bought a reversionary interest in the trust fund subject to the trusts of the Gibraltar settlement. He bought a reversionary interest in £600,000 or what represented those sums defeasible on the trustees exercising their power of appointment. What he sold to Goldiwill was a reversionary interest in the unappointed part of the £600,000 namely, £315,000. What was transferred to the Jersey settlement was the remainder of the fund in which his purchased reversionary interest subsisted. The key to the question is the doctrine of appropriation. Payment out of a settlement necessarily involves an appropriation; see Crowe v. Appleby [1976] 1 W.L.R. 885, 902F. See also Withers on Reversions, 2nd ed. (1933), pp. 22, 24, 26. For the consequences of an appropriation: see Roome v. Edwards [1980] Ch. 425, 439, per Buckley L.J. The question in the present case is: immediately before the appropriation was made was the £315,000 part of the trust fund in which the reversionary interest subsisted? The answer is plainly in the affirmative. Accordingly, what he sold to Goldiwill was a reversionary interest in part of the trust fund. Since he sold part only of what he bought, the purchase price must be apportioned. The fallacy in the appellant's argument is in treating a beneficiary under a settlement in the same way as a shareholder in a company. If a company disposes of some of its assets this diminishes, or may diminish, the value of the shares. But there is no disposal of the shares. A beneficiary under a settlement has a beneficial interest in the trust assets. If trust assets are disposed of, there is a disposal of assets in which his interest subsists.

As to the judgment of Slade J., this depends on the construction of Schedule 6, paragraph 4 (1) (a) to the Finance Act 1965. Slade J. came to the conclusion that the £543,600 which the appellant paid to Pendle was not paid wholly or exclusively for the acquisition of the Gibraltar reversion. He regarded the appellant's obligation to buy the Gibraltar reversion from Pendle for £543,600 with money borrowed from Thun and thus enable Thun to earn "interest" of £6,115 as part of the consideration given by the appellant to Thun in return for Thun's obligation to implement the scheme. This was clearly right. The appellant would never have paid £543,600 of borrowed money simply to obtain Pendle's reversion, which he did not want and for which he had no use. He paid that sum for Pendle's reversion coupled with Thun's undertaking to procure that the remaining steps in the scheme would be implemented, under which he was certain to dispose of the reversion without loss, and hope to obtain a tax deduction. The Court of Appeal unanimously

rejected this conclusion and held that the sum of £543,600 was paid as consideration for the reversion and nothing else. This flies in the face of the finding of the general commissioners that "the consideration for the purchase of the scheme was £9,985 (made up of £3,500 procuration fee, £6,115 described as 'interest,' and an odd £370 cash)." On the face of the documents, the £6,115 was interest on the loan from Thun, and the £370 was the difference between the amount of the loan and the total of the proceeds of the two sales. The finding of the general commissioners was, therefore, a specific finding that two of the payments made in the course of the scheme were not, or were not exclusively, paid for what they purported to be, but were, or were also, paid as part of the consideration payable by the appellant for the scheme. It is a necessary consequence of this finding, particularly when the nature of the £370 is borne in mind (it was merely a balancing item), that all scheme payments made by the appellant were also, in part at least, paid as consideration for the contractual obligations undertaken by Thun.

Beattie Q.C. in reply. The vesting date of the Jersey settlement was May 6, 1975, and the closing date of the Gibraltar settlement was March 19, 1976. If the appellant had sold his reversionary interest in £255,390 he would have made a disposal of part of the reversionary interest, the consideration being apportioned accordingly. If he had done that, the appellant would have made a very small gain or a very small loss. The trustees would have apportioned the remaining £344,610 of which £315,000 would have been apportioned to the Jersey Trust and £19,000 to Goldiwill. At that point, the appellant could say that the unsold part of the Gibraltar settlement has become valueless and hence that the remainder of the consideration paid by him, £312,217, would represent an allowable loss. The statements in Crowe v. Appleby [1976] 1 W.L.R. 885 and in Withers on Reversions, 2nd ed., pp. 22, 24, 26, are not disputed. In re de la Bere's Marriage Settlement Trusts [1941] Ch. 443 bears a curious resemblance to the present case. The reversionary interests there were identical under the settlement with those under the power of appointment.

A separate issue was raised by the Crown in both appeals, namely, whether the courts should countenance tax avoidance schemes.

Peter Millett Q.C. and Brian Davenport Q.C. for the Crown. These are by no means the first tax avoidance schemes to come before this House, but they are the first of such schemes which were designed from the first to be self-cancelling. Each was devised to bring the taxpayer back after an elaborate journey lasting a few days to the point from which he had started out.

The present schemes have a single purpose and effect; to create an allowable loss in the course of a transaction in which neither gain nor loss is made. It is of the essence of each scheme that the taxpayer ends up in the same position from which he has started. The only difference is that at the end of the journey he is out of pocket in respect of the fees payable for the scheme and he has a bundle of documents to present to the revenue. It cannot have been in Parliament's contemplation that such disposals as are in question here were to give rise to allowable losses.

Diplock L.J. in Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786, 802, defined the word "sham" as follows: "it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create." It is conceded that the present schemes are not shams in that narrow sense. They are, however, "paper transactions" without any objective economic reality. They are incapable of having fiscal consequences.

The principle for which the Crown contends may be formulated as follows: in the Finance Act 1965, Parliament imposed a tax on chargeable gains and gave relief for allowable losses, in each case accruing upon a "disposal." This is an ordinary English word, and (except where expressly extended) must be given its ordinary meaning. Where the taxpayer enters into a pre-conceived series of interdependent transactions deliberately contrived to be self-cancelling, that is to say, to return him substantially to the position he enjoyed at the outset, and incapable of having any appreciable effect on his financial position, no single transaction in the series can be isolated on its own as a disposal for the purposes of the statute.

The transaction which the taxpayers in the Ramsay case claim resulted in an allowable loss possessed the following features: (a) it was only one of several transactions entered into by the appellants as part of a single, pre-arranged scheme which regarded separately created gains and losses, but regarded together produced, and were from the outset designed to produce, neither gain nor loss: (b) it was a transaction into which the taxpayer would not have contemplated entering if it stood alone and without the other transactions with which it was interdependent, since by itself it was deliberately fashioned to result in financial loss; (c) the scheme of which the transaction formed part was marketed by a company (Dovercliff) whose principal activity consisted in operating the scheme, which was available to any United Kingdom taxpayer who might care to purchase it, the sum involved being adjusted to suit the requirements of the particular taxpayer; (d) the scheme was purchased by the taxpayers as a whole and entered into by them in the confident expectation that all the transactions comprising the scheme would be duly completed as envisaged at the outset; (e) the scheme was designed by Dovercliff and entered into by the taxpayers for the sole purpose of manufacturing an artificial but allowable loss, matched by a corresponding but exempt capital gain, in the hope of obtaining a tax deduction thereby; (f) the scheme was artificial and without objective economic reality, since it returned (and was from the outset designed to return) all parties within a few days to the position from which they started, the taxpayer having obtained nothing except the hoped-for tax deduction, and having parted with nothing except the fees paid for the scheme itself; (g) essentially the scheme required nothing to be done but the signing of scheme documents, the making of book entries, and the payment of fees: although real money was borrowed and circulated, it was

advanced on terms that it would be used only for the purposes of the scheme and returned on its completion, with appropriate safeguards to ensure that the lender was not at risk, all money payments within the scheme (apart from the payment of fees) being circular.

The transaction in the Eilbeck case which the taxpayer claims resulted in an allowable loss possessed the following features: (a) it was only one of several transactions entered into by the taxpayer as part of a single, pre-arranged scheme which regarded separately created gains and losses, but regarded together produced, and were from the outset designed to produce, neither gain nor loss; (b) it was a transaction into which the taxpayer would not have contemplated entering if it stood alone and without the other transactions with which it was interdependent; since by itself it was deliberately fashioned to result in financial loss; (c) the scheme of which the transaction formed part was marketed by a company (Thun) and was an "off-the-peg" scheme which was available to any United Kingdom taxpayer who might care to purchase it, the sums involved being adjusted to suit the requirements of the particular taxpayer; (d) the scheme was purchased by the taxpayer as a whole, and by its agreement with the taxpayer, Thun undertook to obtain the co-operation of its associates Pendle and Goldiwill and to procure (as it was in a position to do) the implementation of all the steps which the scheme comprised; (e) the scheme was designed by Thun and entered into by the taxpayer for the sole purpose of manufacturing an artificial but allowable loss, matched by a corresponding but exempt capital gain, in the hope of obtaining a tax deduction thereby; (f) the scheme was artificial and without objective economic reality, since it returned (and was from the outset designed to return) all parties within a few days to the position from which they started, the taxpayer having obtained nothing except the hoped-for tax deduction, and having parted with nothing except the fees paid for the scheme itself; (g) the artificiality of the scheme is emphasised by two considerations: (i) the Gibraltar trustee was not in truth a free agent in relation to the exercise of the power of appointment under the Gibraltar settlement, since he was bound to act upon the directions of the taxpayer, Thun, and Thun's associate Goldiwill, (ii) the Jersey trustee cannot have given any proper consideration to the interests of the charitable objects of the discretionary trusts of income under the Jersey settlement when it advanced the closing date under that settlement from March 21, 1975, to March 19, 1976 (h) the scheme required nothing to be done but the signing of scheme documents, the making of book entries, and the payment of fees. No money changed hands, although it has been presumed (without any evidence or finding to this effect) that appropriate book entries were made by Thun. All the money needed for the scheme was supposedly provided by Thun by means of book entries, but there is no evidence that Thun had the means to support such entries. No money was in truth needed, since all money movements within the scheme (apart from the payment of fees) was circular.

The questions that arise are whether in relation to these schemes (i) the Court is bound to treat the individual steps in such a composite transaction

action each in isolation with its own fiscal consequences, and (ii) whether it is 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. Both questions should be answered in the negative. The House is invited to give a ruling and guidance on these questions for an enormous number of schemes of this nature are now coming before the commissioners.

On the first question the House has repeatedly held that a scheme must be looked at as a whole: Inland Revenue Commissioners v. Plummer [1980] A.C. 896, 907-908, per Lord Wilberforce, 925, per Lord Fraser of Tullybelton; Chinn v. Hochstrasser [1981] A.C. 533, 547E, per Lord Wilberforce, 550C per Lord Russell of Killowen.

On the second question it has been said that whether a transaction is a sham is a question of fact for the commissioners: see Inland Revenue Commissioners v. Garvin [1980] S.T.C. 295, 299, per Buckley L.J. But if the commissioners have found the primary facts, then it is a question of law whether on those facts as found the transaction in question has any fiscal consequences. In consequence of Buckley L.J.'s observations in Garvin the revenue have put forward in every case that the scheme in question was a sham. This has led to protracted hearings before the commissioners because every case is different on its facts and therefore, the opportunity for a test case does not arise.

Real money is not necessary to facilitate a scheme. The Eilbeckcase may be taken as an example. Money was there deposited in a current or deposit account. The investment provisions in the settlement were something of a sham in that the money was never meant to be invested. The money was deposited with Thun, and was available to be lent to another settlor to settle, and for the new trustees to redeposit with Thun, and so on. It would have been perfectly possible for 20 schemes to have been brought into being with this £600,000. It could all be done by book entries. The fact that money is used makes no difference to the fiscal consequences. Given that there is a self-cancelling transaction with no independent economic effect, there is no need for real money in order to implement a scheme.

Gray v. Lewis (1873) L.R. 8 Ch.App. 1035, shows that the courts are quite able to ignore circular transactions even when real money is involved: see per Mellish L.J., at p. 1053. See also In re Disderi & Co. (1870) L.R. 11 Eq. 242, and Greenberg v. Inland Revenue Commissioners [1971] Ch. 286, 316, per Russell L.J.; [1972] A.C. 109, 144, 145, per Lord Morris of Borth-y-Gest, 151, per Lord Simon of Glaisdale. Templeman J. in rejecting the scheme in Black Nominees Ltd. v. Nicol (1975) 50 T.C. 229, relied on the above cases.

The Crown concede that the subject is to be taxed by Parliament and not by the courts; that he is to be taxed on the basis of what he has done, and not on the basis of what he might have done; and that he is to be taxed in accordance with the legal consequences of his act, and not in accordance with some supposed "substance of the transaction"; Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. None of these necessary concessions requires the House to hold

that a taxpayer is able to create a tax deduction by entering into schemes such as the present. Considerations of public policy and the manifest intention of Parliament alike require a finding to the contrary. It is the province of the courts to distinguish between those transactions which have reality and substance and those which have none, and between those transactions which are capable of having fiscal consequences and those which are not.

As to the cases relied on by the taxpayers in these appeals, Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1 does not derogate from the Crown's argument in the present case. In Floor v. Davis [1978] Ch. 295, there was unquestionably a sale of the shares in that case: it was not a circular or "paper" transaction. The Crown also argued in the Court of Appeal that there was a direct disposal of the shares by the taxpayer to KDI. The Crown relied on and won on a technical argument in this House [1980] A.C. 695, and the wider argument was not canvassed. In Inland Revenue Commissioners v. Plummer [1980] A.C. 896, the majority of this House held that the scheme in question was not circular and was valid. That case is distinguishable from the present case on those findings.

The Crown adopt the approach of Templeman L.J. in Eilbeck which is given a defensible and logical basis by the American cases. In matters of taxation, it is not normally possible to derive assistance from cases decided in other jurisdictions, since they are likely to turn upon particular provisions of the local tax code. In the United States, however, the Federal Courts have been concerned to formulate general principles of law to enable a distinction to be drawn between "real" and "sham" transactions, and they have done so without relying upon the wording of the relevant tax legislation or upon any doctrines which would be rejected as contrary to established principles in the United Kingdom.

There can be no doubt that the Federal Courts would dismiss the transactions in the present case as a "sham." They would do so on the simple ground that they were without any objective economic reality, being designed from the outset to return all parties within a few days to the position from which they started; see Gilbert v. Commissioner of Internal Revenue (1957) 248 F. 2d 399; Knetsch v. United States (1960) 364 U.S. 361; Rubin v. United States of America [1962] 304 F. 2d 766; Goldstein v. Commissioner of Internal Revenue (1966) 364 F. 2d 734 and General Motors Corporation v. United States (1978) 41 AFTR 2d 1132. The House is invited to adopt the approach of Judge Learned Hand in Gilbert v. Commissioner of Internal Revenue, 248 F. 2d 399, 411, which explains the basis on which these cases proceed.

Brian Davenport Q.C. following. As to whether it is open to the Crown to raise the wider submission before this House, it was certainly adverted to in both cases before the Commissioners and reserved for argument on appeal. All that the statute requires the case stated to contain is to set forth the facts and the determination of the Commissioners: section 56 of the Taxes Management Act 1970. In Attorney-General v. Avelino Aramayo & Co. [1925] 1 K.B. 86, 109, Atkin L.J. stated that if the facts are not sufficiently found and if a point of law is not raised below the court may refuse to hear it and the parties by their conduct may

preclude themselves from the point being taken, but if apart from that, the point of law is apparent upon the case as stated, and no further facts have to be found, then the court can give effect to the law.

D. C. Potter Q.C. and David Milne for the taxpayer company. The Crown's proposition is so revolutionary in United Kingdom fiscal law that it can only be put into effect by legislation. It is not disputed that the court is entitled to consider the context and scheme of a taxing statute as a whole: Mangin v. Inland Revenue Commissioner [1971] A.C. 739, 746, per Lord Donovan which was approved in Rank Xerox Ltd. v. Lane [1981] A.C. 629. The Crown are reading into Part 3 of the Finance Act 1965 principles of law, but capital gains tax is purely a creature of statute, even more than the income tax. The Crown are now contending that there is an intendment in a United Kingdom taxing statute. This is true in the United States but not in the United Kingdom or New Zealand or Australia. The proper approach to the construction of a taxing statute has been established for over a century. Reliance is placed on the statute of Lord Simon of Glaisdale in Ransom v. Higgs [1974] 1 W.L.R. 1594, 1616: "Our own fiscal system ... attempts to deal with tax avoidance schemes specifically as they come to notice."

However desirable it may be that the rules of construction should be changed they should not be changed at this stage but left to Parliament. Parliament had enacted legislation on the supposition that its provisions were to be interpreted literally. Inland Revenue Commissioners v. Church Commissioners for England [1977] A.C. 329, 340B, 342E, shows the correct approach to a rule of what the law ought to be but which is contrary to established authority. If an artificial scheme works and is put forward for wholly tax avoidance motives, it is not to b regarded particularly benevolently but, nevertheless, it is to be construed literally. The correct approach is to find the principles of law from the authorities, from jurisprudence, that is the writings of learned authors, and any deficiencies from comparable legal systems or even the civil law.

The Crown's principle is circular. It is to generalise the facts of the present cases and then call that generalisation a principle and apply the details of the present cases to it.

As to the principle put forward by the Crown at the conclusion of their argument, the first two sentences are not disputed. But in the third sentence, the word "interdependent" has many meanings as has also the phrase "self-cancelling." Moreover, real companies are formed and real loans are made under the present scheme. If Parliament had intended "disposal" to have the meaning for which the Crown contends, Parliament surely would have enacted some such provision as "any disposal which is infected with tax avoidance." The intention of Parliament in a fiscal statute is difficult to discern. If the Crown be right, surely the correct principle must be that the intendment of a statute is that Parliament did not intend injustice to either the revenue or the taxpayer. The correct jurisprudential approach is to be found in Inland Revenue Commissioners v. Bates [1968] A.C. 483, where the very opposite of tax avoidance was involved. Nevertheless, on the established interpretation of the provision in question considerable injustice was done to the taxpayer. It shows that a literal interpretation of the provision

had to be followed even though there was substantial injustice to the taxpayer.

It is to be emphasised that if this House were to relax the rules of statutory interpretation it would make otiose whole areas of anti-tax avoidance legislation. The fact that something is formalistic does not mean that it is ineffective in law, for example, the giving of the Royal Assent. Accordingly, the fact that the steps in a scheme are, and have to be, performed in a particular order does not prevent it having legal consequences. If the Crown's principle be right, then Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885, must have been wrongly decided, for how can a loss include a gain?

The seven-year covenant is a prime example of a tax avoidance scheme. The Duke of Westminster case [1936] A.C. 1, is a most blatant example of tax avoidance. The sale of government stock ex dividend or cum dividend is another area where tax avoidance is practised. Another example is the "bed and breakfast" share transaction. The most blatant example of all of tax avoidance is dividend stripping. This was stopped by section 28 of the Finance Act 1960 (now s. 460 of the Income and Corporation Taxes Act 1970). The Crown is now inviting the House to propound a new principle which would have prevented an enormous amount of dividend stripping transactions in the 1950s. There are plenty of examples of anti-avoidance provisions in the Income and Corporation Taxes Act 1970: see sections 30, 81-84, 155, 170, 278-281, 454-457, 460, 469-471, 476, 478, 483, 485-488, 491, 492, 496. See also section 31 of the Finance Act 1978.

Gray v. Lewis, L.R. 8 Ch.App. 1035, and In re Disderi & Co., L.R. 11 Eq. 242, were cases of sham transactions and frauds. Where a transaction or scheme is a sham or a fraud this does not prevent the courts, in a tax context, from discovering the truth: see Greenberg v. Inland Revenue Commissioners [1971] Ch. 286, 316, per Russell L.J. which was approved in this House [1972] A.C. 109, 144C, 152H - 153A. Lupton v. F. A. & A. B. Ltd. [1972] A.C. 634 was a case of the common law being applied to destroy a tax avoidance device. But it was done by holding that the activity in question was not a trade as that expression was used in the income tax legislation. In the Duke of Westminster case [1936] A.C. 1, it was held that what had to be considered was what did the parties do. The courts do not distinguish between form and substance, save where a real substance is cloaked in a bogus form.

As to the concepts of object and motive, the object of a document of the kind to be found in these appeals is to be found on its face. If it is not, it is either a fraud or a mortgage. As to motive, the question is the reason why the person wishes to hold documents of this nature. In Floor v. Davis [1978] Ch. 295, the members of the Court of Appeal were applying the doctrine of the Duke of Westminster case [1936] A.C. 1. It was not the application of a doctrine of substance. Sir John Penny-cuick's approach [1978] Ch. 295, 307G-H is the classic approach to matters of this nature and is correct.

Inland Revenue Commissioners v. Plummer [1980] A.C. 896 in all material respect is not distinguishable from the present case. Lord

Diplock's approach, at p. 924, is wrong. It abandons the literal interpretation and it is contrary to Inland Revenue Commissioners v. Bates [1968] A.C. 483. Further, as to the facts in Plummer, it was, contra the Crown, a circular transaction. It was done purely for tax reasons. That case can only be distinguished from the present on the issue of tax avoidance by straining language. In Federal Commissioner of Taxation v. Westraders Pty. Ltd. (1980) 30 A.L.R. 353 Barwick C.J. adopted the English approach to statutory construction as did the majority in the case. The minority adopted the American approach.

The Crown in referring to the underlying reality as an aid to construction are reiterating the discredited antithesis of form and substance. The true approach is that one looks at what was done and then, however formalistic or founded on tax avoidance the transaction might be, one applies the statutory provisions to the facts. The American cases are all matters of statutory construction. Gregory v. Helvering (1935) 55 S.Ct. 266 dealt with a reorganisation. As to Gilbert v. Commissioner of Internal Revenue, 248 F. 2d 399, the judicial interpretation in that case goes far beyond anything to be found in the English authorities. In Knetsch v. United States, 364 U.S. 361, the word "interest" was interpreted according to the liberal and not the literal canon of construction. It shows that the canons of construction adopted by the courts of the United States in relation to fiscal statutes is very different from those hitherto adopted in the United Kingdom. Rubin v. United States of America, 304 F. 2d 766, and Goldstein v. Commissioner of Internal Revenue, 364 F. 2d 734, are both examples of the adoption of the liberal interpretation. In the United States, the court can look through the corporate veil, certainly in fiscal cases, and the principle of Salomon v. Salomon has no application.

Charles Beattie Q.C. and Hilda Wilson for the taxpayer Rawling. Mr. Potter Q.C.'s argument on the wider issue in Ramsay is adopted in its entirety.

Section 61 of the Hong Kong Inland Revenue Ordinance (C.112) shows how readily the legislature can deal with the problem of tax avoidance if the legislature so wishes. Newton v. Commissioner of Taxation of the Commonwealth of Australia [1958] A.C. 450; Peate v. Commissioner of Taxation [1967] 1 A.C. 308 and Ashton v. Inland Revenue Commissioner [1975] 1 W.L.R. 1615 are illustrative of how Commonwealth countries have enacted specific provisions to deal with the problem before this House. See also Seramco Ltd. Superannuation Fund Trustees v. Income Tax Commissioner [1977] A.C. 287. The Crown desire this House to propound the principle for which they contend with retrospective effect enabling the Crown to open cases back to 1974-75. If the House were to find for the Crown on the wider submission, it would be a most helpful innovation if the House could declare that a declaration of a new principle only applied prospectively, that is, for the House to adopt a principle akin to the United States doctrine of prospective overruling. The Crown are attempting here to overrule the Duke of Westminster case [1936] A.C. 1 in one of its aspects although they contend that they are only distinguishing it. The

Duke of Westminster case governs every case except the sham transaction in the sense that that word is used by Diplock L.J. in Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786, 802C. The Crown is not without remedy to ascertain the true nature of a transaction. Soul v. Inland Revenue Commissioners (Practice Note) [1963] 1 W.L.R. 112 is authority for the proposition that the Inland Revenue have power to obtain the attendance of a witness by subpoena duces tecum. Further, section 51 of the Taxes Management Act 1970 empowers the commissioners to obtain relevant documents relating to the proceedings. See also section 20 thereof.

Millett Q.C. in reply. The Crown do not suggest that the House should adopt the widest principle of "the multiple step transaction" adumbrated in the United States of America. The doctrine which the Crown invite the House to adopt is narrow and is confined to self-cancelling transactions, in which an allowable loss is manufactured by an artificial transaction with no effect except to generate the claim. As to the argument that the Crown is inviting the courts to usurp the functions of Parliament, the Crown would willingly adopt the observations of Barwick C.J. in Federal Commissioner of Taxation v. Westraders Pty. Ltd. (1980) 30 A.L.R. 353, 354-355.

As regards the argument put forward on the various anti-tax avoidance provisions, it is still the function of the court to determine the consequences of the transactions in question. As to Ransom v. Higgs [1974] 1 W.L.R. 1594, and any suggestion that the Crown's argument amounts to subverting the law, there are two sides to that question for it is also the duty of the courts to prevent the law from coming into disrepute.

Their Lordships took time for consideration.

March 12. LORD WILBERFORCE. The first of these appeals is an appeal by W. T. Ramsay Ltd., a farming company. In its accounting period ending May 31, 1973, it made a "chargeable gain" for the purposes of corporation tax by a sale-leaseback transaction. This gain it desired to counteract, so as to avoid the tax, by establishing an allowable loss. The method chosen was to purchase from a company specialising in such matters a ready-made scheme. The general nature of this was to create out of a neutral situation two assets one of which would decrease in value for the benefit of the other. The decreasing asset would be sold, so as to create the desired loss; the increasing asset would be sold, yielding a gain which it was hoped would be exempt from tax.

In the courts below, attention was concentrated upon the question whether the gain just referred to was in truth exempt from tax or not. The Court of Appeal [1979] 1 W.L.R. 974, reversing the decision of Goulding J. [1978] 1 W.L.R. 1313 decided that it was not. In this House, the Crown, while supporting this decision of the Court of Appeal, mounted a fundamental attack upon the whole of the scheme acquired and used by the appellant. It contended that it should simply be disregarded as artificial and fiscally ineffective.

Immediately after this appeal there was heard another taxpayer's appeal - Eilbeck v. Rawling. This involved a scheme of a different character altogether, but one also designed to create a loss allowable for purposes of capital gains tax, together with a non-taxable gain, by a scheme acquired for this purpose. Similarly, this case was decided, against the taxpayer, in the Court of Appeal [1980] 2 All E.R. 12 upon consideration of a particular aspect of the scheme: and similarly, the Crown in this House advanced a fundamental argument against the scheme as a whole.

I propose to consider first the fundamental issue, which raises arguments common to both cases. This is obviously of great importance both in principle and in scope. I shall then consider the particular, and quite separate arguments relevant to each of the two appeals.

I will first state the general features of the schemes which are relevant to the wider argument.

In each case we have a taxpayer who has realised an ascertained and quantified gain: in Ramsay £187,977, in Rawling £355,094. He is then advised to consult specialists willing to provide, for a fee, a preconceived and ready made plan designed to produce an equivalent allowable loss. The taxpayer merely has to state the figure involved, i.e. the amount of the gain he desires to counteract, and the necessary particulars are inserted into the scheme.

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.

There are other significant features which are normally found in schemes of this character. First, it is the clear and stated intention that once started each scheme shall proceed through the various steps to the end - they are not intended to be arrested half-way: see Chinn v. Hochstrasser [1981] A.C. 533. This intention may be expressed either as a firm contractual obligation (it was so in Rawling) or as in Ramsay as an expectation without contractual force.

Secondly, although sums of money, sometimes considerable, are supposed to be involved in individual transactions, the taxpayer does not have to put his hand in his pocket: see Inland Revenue Commissioners v. Plummer [1980] A.C. 896 and Chinn v. Hochstrasser. The money is provided by means of a loan from a finance house which is firmly secured by a charge on any asset the taxpayer may appear to have, and which is automatically repaid at the end of the operation. In some cases one may doubt whether, in any real sense, any money existed at all. It seems very

doubtful whether any real money was involved in Rawling: but facts as to this matter are for the commissioners to find. I will assume that in some sense money did pass as expressed in respect of each transaction in each of the instant cases. Finally, in each of the present cases it is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax.

In these circumstances, your Lordships are invited to take, with regard to schemes of the character I have described, what may appear to be a new approach. We are asked, in fact, to treat them as fiscally, a nullity, not producing either a gain or a loss. Mr. Potter Q.C. described this as revolutionary, so I think it opportune to restate some familiar principles and some of the leading decisions so as to show the position we are now in.

1. A subject is only to be taxed upon clear words, not upon "intendment" or upon the "equity" of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are "clear words" is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: see Inland Revenue Commissioners v. Wesleyan and General Assurance Society (1946) 30 T.C.11, 16 per Lord Greene M.R. and Mangin v. Inland Revenue Commissioner [1971] A.C. 739, 746, per Lord Donovan. The relevant Act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains less allowable losses, arising from disposals.

2. A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. It must be considered according to its legal effect.

3. It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham. In this context to say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that. I shall return to this point.

Each of these three principles would be fully respected by the decision we are invited to make. Something more must be said as to the next principle.

4. Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1. 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.

I will now refer to some recent cases which show the limitations of the Westminster doctrine and illustrate the present situation in the law.

1. Floor v. Davis [1978] Ch. 295; [1980] A.C. 695. 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.

2. Inland Revenue Commissioners v. Plummer [1980] A.C. 896. This was a prearranged scheme, claimed by the revenue to be "circular" - in the sense that its aim and effect was to pass a capital sum round through various hands back to its starting point. There was a finding by the special commissioners that the transaction was a bona fide commercial

transaction, but in this House their Lordships agreed that it was legitimate to have regard to all the arrangements as a whole. The majority upheld the taxpayer's ease on the ground that there was commercial reality in them: as I described them at p. 909F, they amounted to "a covenant, for a capital sum, to make annual payments, coupled with security arrangements for the payments" and I attempted to analyse the nature of the bargain with its advantages and risks to either side.

The case is no authority that the court may not in other eases and with different findings of fact reach a conclusion that, viewed as a whole, a composite transaction may produce an effect which brings it within a fiscal provision.

3. Chinn v. Hochstrasser [1981] A.C. 533. This again was a prearranged scheme, described by the special commissioners as a single scheme. There was no express finding that the parties concerned were obliged to carry through each successive step: but the commissioners found that there was never any possibility that the appellant taxpayers and another party would not proceed from one critical stage to another. I reached the conclusion, on this finding and on the documents, that the machinery, once started, would follow out its instructions without further initiative and the same point was made graphically by Lord Russell of Killowen, at p. 550. This ease shows, in my opinion, that although separate steps were "genuine" and had to be accepted under the Westminsterdoctrine, the court could, on the basis of the findings made and of its own analysis in law, consider the scheme as a whole and was not confined to a step by step examination.

To hold, in relation to such schemes as those with which we are concerned, that the court is not confined to a single step approach, is thus a logical development from existing authorities, and a generalisation of particular decisions.

Before I come to examination of the particular scheme in these eases, there is one argument of a general character which needs serious consideration. For the taxpayers it was said that to accept the revenue's wide contention involved a rejection of accepted and established canons and that, if so general an attack upon schemes for tax avoidance as the revenue suggest is to be validated, that is a matter for Parliament. The function of the courts is to apply strictly and correctly the legislation which Parliament has enacted: if the taxpayer escapes the charge, it is for Parliament, if it disapproves of the result, to close the gap. General principles against tax avoidance are, it was claimed, for Parliament to lay down. We were referred, at our request, in this connection to the various enactments by which Parliament has from time to time tried to counter tax avoidance by some general prescription. The most extensive of these is Income and Corporation Taxes Act 1970, sections 460 et seq. We were referred also to well known sections in Australia and New Zealand (Australia, Income Tax Assessment Act 1936-51, section 260; New Zealand, Income Tax Act 1976, section 99, replacing earlier legislation). Further it was pointed out that the capital gains tax legislation (starting with the Finance Act 1965) does not contain any provision corresponding to section 460. The intention should be deduced therefore, it was said, to leave capital

gains tax to be dealt with by "hole and plug" methods: that such schemes as the present could be so dealt with has been confirmed by later legislation as to "value shifting": Capital Gains Tax Act 1979, section 25 et seq. These arguments merit serious consideration. In substance they appealed to Barwick C.J. in the recent case of Federal Commissioner of Taxation v. Westraders Pty. Ltd. (1980) 30 A.L.R. 353, 354-355.

I have a full respect for the principles which have been stated but I do not consider that they should exclude the approach for which the Crown contends. That does not introduce a new principle: it would be to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. 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.

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.

We were referred, on this point, to a number of cases in the United States of America in which the courts have denied efficacy to schemes or transactions designed only to avoid tax and lacking otherwise in economic or commercial reality. I venture to quote two key passages, not as authority, but as examples, expressed in vigorous and apt language, of a process of thought which seem to me not inappropriate for the courts in this country to follow. In Knetsch v. United States (1960) 364 U.S. 361, 366, the Supreme Court found that a transaction was a sham because it:

"did not appreciably affect the [taxpayer's] beneficial interest ... there was nothing of substance to be realised by [him] from this transaction beyond a tax deduction ... the ... difference [between the two sums was in reality] the fee for providing the facade of 'loans'".

In Gilbert v. Commissioner of Internal Revenue (1957) 248 F. 2d 399, Judge Learned Hand (dissenting on the facts) said, at p. 411:

"The Income Tax Act imposes liabilities upon taxpayers based upon their financial transactions ... If, however, the taxpayer enters

into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; ..."

It is probable that the United States courts do not draw the line precisely where we with our different system, allowing less legislative power to the courts than they claim to exercise, would draw it, but the decisions do at least confirm me in the belief that it would be an excess of judicial abstinence to withdraw from the field now before us.

I will now try to apply these principles to the cases before us.

W. T. Ramsay Ltd. v. Inland Revenue Commissioners

This scheme, though intricate in detail, is simple in essentials. Stripped of the complications of company formation and acquisition, it consisted of the creation of two assets in the form of loans, called L1 and L2, each of £218,750. These were made by the taxpayer, by written offer and oral acceptance, on February 23, 1973, to one of the intra-scheme companies - Caithmead Ltd. The terms are important and must be set out. They were:

(a) L1 was repayable after 30 years at par and L2 was repayable after 31 years at par, in each case with the proviso that Caithmead could (but on terms) make earlier repayment if it so desired and would be obliged to do so if it went into liquidation.

(b) If either loan were repaid before its maturity date, then it had to be repaid at par or at its market value upon the assumption that it would remain outstanding until its maturity date - whichever was the higher.

(c) Both loans were to carry interest at 11 per cent. per annum payable quarterly on March 1, June 1, September 1 and December 1 in each year, the first such payment to be on March 1, 1973.

(d) The appellant was to have the right, exercisable once and once only, and then only if it was still the beneficial owner of both L1 and L2, to decrease the interest rate on one of the loans and to increase correspondingly the interest rates on the other.

A few days later, on March 2, 1973, the appellant, under (d) above, increased the rate of interest on L2 to 22 per cent., and decreased that on L1 to zero. The same day the appellant then sold L2 (which had naturally increased in value) for £391,481. This produced a "gain" of £172,731 which the appellant contends is not a chargeable gain for corporation tax purposes (as to this see below). L2 was later transferred to a wholly owned subsidiary of Caithmead and extinguished by the liquidation of that subsidiary. On March 9, 1973, Caithmead itself went into liquidation, on which L1 was repayable, and was repaid to the appellant. The shares in Caithmead, however, for which the appellant had paid £185,034, became of little value and the appellant sold them to an outside company for £9,387. So the appellant made a "loss" of £175,647. It may be added, as regards finance, that the necessary money to enable the appellant to make the loans was provided by a finance house on terms which ensured that it would be repaid out of the loans when discharged. The taxpayer provided no finance.

Of this scheme, relevantly to the preceding discussion, the following can be said:

1. As the tax consultants' letter explicitly states "the scheme is a pure tax avoidance scheme and has no commercial justification in so far as there is no prospect of T [the prospective taxpayer] making a profit; indeed he is certain to make a loss representing the cost of undertaking the scheme."

2. As stated by the tax consultants' letter, and accepted by the special commissioners, every transaction would be genuinely carried through and in fact be exactly what it purported to be.

3. It was reasonable to assume that all steps would, in practice, be carried out, but there was no binding arrangement that they should. The nature of the scheme was such that once set in motion it would proceed through all its stages to completion.

4. The transactions regarded together, and as intended, were from the outset designed to produce neither gain nor loss: in a phrase which has become current, they were self cancelling. The "loss" sustained by the appellant, through the reduction in value of its shares in Caithmead, was dependent upon the "gain" it had procured by selling L2. The one could not occur without the other. To borrow from Rubin v. United States of America (1962) 304 F. 2d. 766 approving the Tax Court in MacRae v. Commissioner of Internal Revenue (1961) 34 T.C. 20, 26, this loss was the mirror image of the gain. The appellant would not have entered upon the scheme if this had not been so.

5. The scheme was not designed, as a whole, to produce any result for the appellant or anyone else, except the payment of certain fees for the scheme. Within a period of a few days, it was designed to and did return the appellant except as above to the position from which it started.

6. The money needed for the various transactions was advanced by a finance house on terms which ensured that it was used for the purposes of the scheme and would be returned on completion, having moved in a circle.

On these facts it would be quite wrong, and a faulty analysis, to pick out, and stop at, the one step in the combination which produced the loss, that being entirely dependent upon, and merely, a reflection of the gain. The true view, regarding the scheme as a whole, is to find that there was neither gain nor loss, and I so conclude.

Although this disposes of the appeal, I think it right to express an opinion upon the particular point which formed the basis of the decisions below. This is whether the gain made on March 9, 1973, by the sale of L2 was a chargeable gain. The assumption here, of course, is that it is permissible to separate this particular step from the whole.

The appellant claims that the gain is not chargeable on the ground that the asset sold was a debt within the meaning of the Finance Act 1965, Schedule 7, paragraph 11. In that case, since the appellant was the original creditor, the disposal would not give rise to a chargeable gain. The Crown on the other hand contends that it was a debt on a security, within the meaning of the same paragraph, and of paragraph 5 (3) (b) of the same Schedule. In that case the exemption in favour of debts would not apply.

The distinction between a debt, and a debt on a security, and the criteria of the difference, have already been the subject of a consideration in the Court of Session in Cleveleys Investment Trust Co. v. Inland Revenue Commissioners (1971) 47 T.C. 300; Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners, 1977 S.C. 265, and in this House in the latter case [1978] A.C. 885. I think it no overstatement to say that many learned judges have found it baffling, both on the statutory wording and as to the underlying policy. I suggested, at pp. 894-895, some of the difficulties of paragraph 11 and of the definition in paragraph 5 (3) (b) of the same Schedule in Aberdeen Construction and I need not recapitulate them. Such positive indications as have been detected are vague and uncertain. It can be seen, however, in my opinion, that the legislature is endeavouring to distinguish between mere debts, which normally (though there are exceptions), do not increase but may decrease in value, and debts with added characteristics such as may enable them to be realised, or dealt with at a profit. But this distinction must still be given effect to through the words used.

Of these, some help is gained from a contrast to be drawn between debts simpliciter, which may arise from trading and a multitude of other situations, commercial or private, and loans, certainly a narrower class, and one which presupposes some kind of contractual structure. In Aberdeen Construction I drew the distinction, at p. 895, between

"a pure unsecured debt as between the original borrower and lender on the one hand and a debt (which may be unsecured) which has, if not a marketable character at least such characteristics as enable it to be dealt in and if necessary converted into shares or other securities.

To this I would now make one addition and one qualification. Although I think that, in this case, the manner in which L2 was constituted, viz., by written offer, orally accepted together with evidence of the acceptance by statutory declaration, was enough to satisfy a strict interpretation of "security," I am not convinced that a debt, to qualify as a debt on a security, must necessarily be constituted or evidenced by a document. The existence of a document may be an indicative factor, but absence of one is not fatal. I would agree with the observations, at pp. 466H-467A, of my noble and learned friend, Lord Fraser of Tullybelton, in relation, in particular, to Cleveleys' case, 47 T.C. 300. Secondly, on reflection, I doubt the usefulness of a test enabling the debt to be converted into shares or other securities. The definition in paragraph 5 (3) (b) is, it is true, expressed to be given for the purposes of paragraph 3 which is dealing with conversion: but I suspect that it was false logic to suppose that, because of this, "securities" are to be so limited, and in any event I doubt whether the test supposed, if a necessary one, is useful, for even a simple debt can, by a suitable contract, be converted into shares or other securities.

With all this lack of certainty as to the statutory words, I do not feel any doubt that in this case the debt was a debt on a security. I have already stated its terms. It was created by contract whose terms were recorded in writing; it was designed, from the beginning, to be capable of

being sold, and, indeed, to be sold at a profit. It was repayable after 31 years, or on the liquidation of Caithmead. If repaid before the maturity date, it had to be repaid at par or market value which ever was the higher. It carried a fixed, though (once) variable rate of interest.

There was much argument whether with these qualities it could be described as "loan stock" within the meaning of paragraph 5 (3) (b) of Schedule 7. I do not find it necessary to decide this. The paragraph includes within "security" any "similar security" to loan stock: in my opinion these words cover the facts. This was a contractual loan, with a structure of permanence such as fitted it to be dealt in and to have a market value. That it had a market value, in fact, was stated on March 1, 1973, by Messrs. Hoare and Co. Govett Ltd., stockbrokers. They then confirmed that an 80 per cent. premium would be a fair commercial price having regard to the prevailing levels of long term interest rates. I have no doubt that, on these facts, the loan L2 was a debt on a security and therefore an asset which, if disposed of, could give rise to a chargeable gain.

I would dismiss this appeal.

Eilbeck (Inspector of Taxes) v. Rawling

The scheme here was quite different from any of the others which I have discussed. It sought to take advantage of paragraph 13 (1) of Schedule 7 to the Finance Act 1965: this exempts from capital gains tax any gain made on the disposal of, inter alia, a reversionary interest under a settlement by the person for whose benefit the interest was created or by any other person other than one who acquired the interest for consideration in money. The scheme was, briefly, to split a reversion into two parts so that one would be disposed of at a profit but would fall under the exemption and the other would be disposed of at a loss but could be covered by the exception. Thus there would be an allowable loss but a nonchargeable gain.

The scheme involved the use of a settlement set up in Gibraltar, another settlement set up in Jersey, and six Jersey companies - namely, to use their short titles, Thun, Goldiwill, Pendle, Tortola, Allamanda and Solandra, which were part of the same organisation, under the same management and operating from the same address: the Gibraltar settlement was made in 1973 by one Isola of a sum of £100. When the appellant came into the scheme in 1975 the fund consisted of £600,000, all of which was said to be deposited in Jersey with Thun. The trusts were to pay the income to one Josephine Isola until March 19, 1976. Subject thereto the fund was to be held in trust for the settlor, Isola, his heirs and assignees. There was a power in clause 5 of the settlement to advance any part of the capital of the trust fund to the reversioner or to the trustees of any other settlement. But it was a necessary condition, in the latter case, that the reversioner should be indefeasibly entitled to a corresponding interest under such other settlement falling into possession not later than the vesting day (March 19, 1976) under the Gibraltar settlement. On the exercise of any such power a compensating advance had to be made to the income beneficiary.

On March 20, 1975, the settlor's reversionary interest was assigned to Pendle. On March 24, 1975, Thun agreed to lend the appellant £543,600 to enable him to buy the Gibraltar settlement reversion and agreed with the appellant that Tortola would, if required within six months, introduce to the appellant a purchaser for the reversion. Pendle then agreed to sell and the appellant to buy the reversion for £543,600 and this sale was completed. So the appellant (conformably with paragraph 13 (1)) had acquired a reversion for consideration in money. The appellant directed Thun to pay the £543,600 to Pendle: he also charged his reversionary interests under the Gibraltar settlement and under the Jersey settlement, next mentioned, to Thun to secure the loan of £543,600.

The Jersey settlement was executed, as found by the general commissioners, as part of the scheme. It was dated March 21, 1975, and made by the appellant's brother for £100 with power to accept additions. The trustee was Allamanda. The trustee was to apply the income for charitable or other purposes until the "closing date" and subject thereto for the appellant absolutely. The closing date was fixed on March 24, 1975, as a date not later than March 19, 1976 - the vesting date under the Gibraltar settlement (the exact date seems not to be proved).

On March 25, 1975, the appellant requested the Gibraltar trustee to advance £315,000 to the Jersey settlement, to be held as capital of that settlement. On March 27, 1975, the Gibraltar trustee appointed £315,000 accordingly, and also appointed £29,610 to compensate the income beneficiary, which had become Goldiwill. These appointments were given effect to by Thun transferring money in Jersey to Allamanda, the Jersey trustee, and Goldiwill. So the appellant was now a person for whose benefit a reversion had been created under the Jersey settlement: see again paragraph 13 (1). There was left £255,390 unappointed in the Gibraltar settlement.

On April 1, 1975, the appellant requested Thun to cause Tortola to nominate a purchaser of his interest under the Gibraltar settlement and on April 3 Tortola nominated Goldiwill. Also on April 3 the appellant agreed to sell his reversion under the Gibraltar settlement to Goldiwill for £231,130: the agreement recited that the trust fund then consisted of £255,390. The appellant assigned his reversion accordingly. This is the transaction supposed to create the loss. Also on April 3, 1975, the appellant agreed to sell his reversion under the Jersey settlement to Thun for £312,100. The agreement recited that the trust fund then consisted of £315,100. Payment of these various transactions was effected by appropriations by Thun. The price for the two reversions (£231,130 and £312,100) making £543,230 due to the taxpayer was set off against the loan of £543,600 made by Thun, leaving a balance due to Thun of £370. The appellant paid this and Thun released its charges. The only money which passed from the appellant was the £370, £3,500 procuration fee, and £6,115 interest.

Of this scheme the following can be said:

1. The scheme was a pure tax avoidance scheme, designed by Thun and entered into by the appellant for the sole purpose of manufacturing a loss matched by a corresponding but exempt capital gain. It was

marketed by Thun as a scheme available to any taxpayer who might purchase it, the sums involved being adapted to the purchaser's requirements.

2. Every individual transaction was, as found by the general commissioners, carried through and was exactly what it purported to be.

3. It was held by the judge and not disputed by the Court of Appeal that by its agreement with the appellant, Thun agreed to procure the implementation of all the steps comprised in the scheme and was in a position to obtain the co-operation of the associated companies Pendle and Goldiwill.

4. The scheme was designed to return all parties within a few days to the position from which they started, and to produce for the appellant neither gain nor loss, apart from the expenses of the scheme, the gain and the loss being "self-cancelling." The loss could not be incurred without the gain, because it depended upon the reversion under the Gibraltar settlement being diminished by the appointed sum of £315,000 which produced the gain. The appellant would not have entered into the scheme unless this had been the case.

5. The scheme required nothing to be done by the appellant except the signing of the scheme documents, and the payment of fees. The necessary money was not provided by the appellant but was "provided" by Thun on terms which ensured that it would not pass out of its control, and would be returned on completion having moved if at all in a circle.

On these facts, it would be quite wrong, and a faulty analysis, to segregate, from what was an integrated and interdependent series of operations, one step, viz. the sale of the Gibraltar reversion on April 3, 1975, and to attach fiscal consequences to that step regardless of the other steps and operations with which it was integrated. The only conclusion, one which is alone consistent with the intentions of the parties, and with the documents regarded as interdependent, is to find that, apart from a sum not exceeding £370, there was neither gain nor loss and I so conclude.

Although this disposes of the appeal I think it right to deal with the particular point which, apart from the judgment of Templeman L.J., formed the basis of the decisions below. This is whether the sale of the reversion under the Gibraltar settlement on April 3, 1975, gave rise to an allowable loss if regarded in isolation. I regard this, with all deference, as a simple matter. What was sold on April 3, 1975, was the appellant's reversionary interest in £255,390: for this the appellant received £231,130 certified by Solandra to be the market price. Not only was this the fact - the trust fund at that time was of that amount - but the agreement for sale specifically so stated. I recited that the vendor, the appellant, was beneficially entitled to the sole interest in reversion under the Gibraltar settlement, "being a settlement whereof the trust fund presently consist (sic) of £255,390." What he had bought, on the other hand, for £543,600 was a reversionary interest in £600,000, subject to the trustee's power to advance any part to him or to a settlement in which he had an equivalent reversionary interest. After the advance of £315,000 was made (effectively to the appellant so that to this extent he had got back part of his money),

all he had to sell was the reversionary interest in the remainder: this he sold for its market price. Alternatively, if the £315,000 is to be considered as in some sense still held under the Gibraltar settlement, the sale on April 3, 1975, to Goldiwill for £231,130 did not include it. On no view can he say that he sold what he had bought: on no view can he demonstrate any loss. I think that substantially this view of the matter was taken by Buckley L.J. and Donaldson L.J., and I agree with their judgments.

I would dismiss this appeal.

LORD FRASER OF TULLYBELTON. My Lords, each of these appeals raises one separate question of its own and one wider question common to both. I shall consider the separate questions first.

Ramsay

The appellant is a farming company. During its accounting period ended May 31, 1973, it sold the freehold of its farm, and made a gain of £187,977 which was chargeable for corporation tax purposes, on the same principles as it would have been charged to capital gains tax in the case of an individual.

Having taken expert advice, the appellant entered into a scheme to create a capital loss which could be set off against that chargeable gain. The essence of the scheme was that the appellant acquired two assets, one of which increased in value at the expense of the other, and both which were then disposed of. The asset which decreased in value consisted of shares in a company called Caithmead Ltd., and the loss on that asset was intended to be allowable for corporation tax purposes, and therefore available to be set off against the gain on the farm. If that part of the scheme is considered by itself, it worked as intended and produced an allowable loss. The asset which increased in value was a loan to Caithmead Ltd. It was one of two loans, and was referred to as L2, and it was intended to be exempt from corporation tax on chargeable gains. The question in this appeal is whether that intention has been successfully realised.

The answer depends entirely on whether L2 was "the debt on a security" in the sense of the Finance Act 1965, Schedule 7, paragraph 11 (1). If it was, the gain on its disposal was chargeable. If it was not, the gain is not chargeable. The very unusual terms on which L2 was made by the appellant to Caithmead Ltd., have been described by my noble and learned friend Lord Wilberforce and I need not repeat them.

The expression "the debt on a security" is not one which is familiar to either lawyers or, I think, business men. Its meaning has been considered in two cases to which we were referred. In Cleveleys Investment Trust Co. v. Inland Revenue Commissioners, 1971 S.C. 233, Lord Cameron pointed out at p. 244 that whatever else it may mean it "is not a synonym for a secured debt," and that is generally agreed. Lord Migdale, at p. 243, thought that it meant "an obligation to pay or repay embodied in a share or stock certificate ..." Lord Migdale's view was accepted by all the learned judges of the First Division in Aberdeen

Construction Group Ltd. v. Inland Revenue Commissioners, 1977 S.C. 265, but when the Aberdeen case reached this House, the existence of a certificate was not treated as the distinguishing feature of the debt on a security. Lord Wilberforce at [1978] A.C. 885, 895, expressed the view that the distinction was

"between a pure unsecured debt as between the original borrower and lender on the one hand and a debt (which may be unsecured) which has, if not a marketable character at least such characteristics as enable it to be dealt in and if necessary converted into shares or other securities."

Lord Russell of Killowen at p. 903 said that loan stock

"suggests to my mind an obligation created by a company of an amount for issue to subscribers for the stock, having ordinarily terms for repayment with or without premium and for interest."

No disapproval of the observations in the Court of Session was expressed, and I expressed general agreement with them. The authors of the scheme in this appeal may have had these observations in mind when they devised the scheme, as they went to some trouble to avoid having any certificate or voucher of the debt, and relied instead on a statutory declaration setting out the terms and conditions of the loan.

Further consideration has satisfied me that the existence of a document or certificate cannot be the distinguishing feature between the two classes of debt. If Parliament had intended it to be so, that could easily have been stated in plain terms and there would have been no purpose in using the strange phrase "the debt on a security" in paragraph 11 (1) of Schedule 7, or in referring to the "definition" of security in paragraph 5. The distinction in paragraph 11 (1) is, I think, between a simple unsecured debt and a debt of the nature of an investment, which can be dealt in and purchased with a view to being held as an investment. The reason for the provision that no chargeable gain should accrue on disposal of a simple debt by the original creditor must have been to restrict allowable losses (computed in the same way as gains - Finance Act 1965, section 23, which was the relevant statute in 1973) because the disposal of a simple debt by the original creditor or his legatee will very seldom result in a gain. No doubt it is possible to think of cases where a gain may result, but they are exceptional. On the other hand it is all too common for debts to be disposed of by the original creditor at a loss, and if such losses were allowed for capital gains tax it would be easy to avoid tax by writing off bad debts - for example those owed by impecunious relatives. But debts on a security, being of the nature of investments, are just as likely to be disposed of by the original creditor at a gain as they are at a loss, and they are subject to the ordinary rule.

The features of the debt L2 in the present case which in my opinion take it out of the class of simple debts into the class of debts on a security are these. First and foremost, the debtor was not bound to repay it for 31 years. Such a long fixed term is unusual for a debt, but it is typical of a loan stock (a term which I use hereafter to include similar

securities). Secondly, the debtor was entitled to repay it sooner, and bound to repay it on liquidation, but in either of these cases only at the higher of face value or market value, market value being calculated on the assumption that it would remain outstanding for the full period of 31 years. Conditions of that sort are very unusual when attached to a debt, but are characteristic of a loan stock. Thirdly, it bore interest and thus produced income to the creditor, as an investment such as loan stock normally does but as debts normally do not. For example, the debt owed by a subsidiary company to its parent company in the Aberdeen case did not carry interest. It is to be observed that paragraph 11 (1) refers not to loan but to "debt" and thus includes ordinary trade debts which rarely carry interest. Fourthly, being a long term interest-bearing debt, it possessed the characteristic of marketability. Indeed, L2 was created only in order to be sold at a profit and it was so sold. It could have been sold and assigned in part like loan stock, although an action to enforce payment might have required the concurrence of the original creditor.

If L2 had been surrendered and its proceeds used to pay for shares, it could in a loose sense be said to have been "converted" into shares or a new loan. But it was no more, and no less, convertible than a simple debt, and I do not consider that convertibility is a distinguishing factor of a loan on a security.

Counsel for the appellant said that a loan stock had to be capable of being "issued" and "subscribed for" and that L2 did not satisfy these requirements. But I agree with Templeman L.J. that L2 was in fact issued and subscribed for although the process were simple because only one lender was involved.

For these reasons I agree with the Court of Appeal that L2 fell within the description of a debt on a security and that the appellant's gain on disposal of it was chargeable. I would dismiss this appeal on that ground.

Rawling

This is another scheme designed to eliminate or reduce a capital gain. In this case the gain arose from sales of shares and amounted to about £355,000. Again, the details of the scheme have been explained by my noble and learned friend Lord Wilberforce, and I refer only to its essential elements. On March 24, 1975, the appellant acquired for £543,600 an asset, consisting of the reversionary interest under a settlement made in Gibraltar and administered by a trustee in Gibraltar. The appellant claims that on April 3, 1975, he sold the same asset for £231,130 thereby making a loss of £312,470. The reason why the sale price was so much lower than the cost price of what is said to be the same asset only 10 days earlier was that the trustee, in the exercise of a power under clause 5 (2) of the settlement, had appointed £315,000 out of the capital trust fund to the trustees of another settlement. The other settlement had been made in Jersey and was administered by a trustee in Jersey. (The geographical location of these trusts is entirely irrelevant to the question raised in this appeal, which would be the same if both trusts had been in England.) The appellant maintains that the reduction in the amount of the Gibraltar

trust fund, and hence in the value of his reversionary interest in it, did not affect the continuing identity of the fund or of his interest. He says that his interest was in the assets of the fund, as they existed from time to time, and that it remains the same interest notwithstanding a change in the individual assets or in their value.

My Lords, I do not accept that contention. No doubt it would have been correct if the fall in value of the Gibraltar trust fund had been brought about merely by a fall in the value of its component assets, for instance, if the total value of the trust investments had fallen, or even if some of the investments had been altogether lost. But the position if entirely different in this case where the trust fund was divided into two parts, of which one was handed over to the Jersey trustee and the other was retained by the Gibraltar trustee. The retained fund was not the whole fund in which the appellant had bought an interest. It was only part of the fund and the reversionary interest in the retained part was only part of the reversionary interest which the appellant had bought. If the fund had been invested in stocks and shares, or other assets, it would have been necessary to apportion the assets to one or other part of the fund. This would have been more obvious if the retained fund had been sold before the appointment in favour of the Jersey settlement had been made; in that case the sale would expressly have been of part only of the total fund. It follows therefore that the appellant's claim to have sustained a loss measured by the difference between the cost of the whole reversionary interest and the price realised for part of it must fail.

That is enough to negative the appellant's claim as put forward, but I would go further and would adopt the analysis by Buckley L.J. [1980] 2 All E.R. 12, 18, of the true position. In the circumstances of this case, where the appointment by the Gibraltar trustee was made under a special power, I agree with Buckley and Donaldson L.JJ. that the appellant's reversionary interest in the appointed fund is properly to be regarded as part of his interest in the Gibraltar fund. Buckley L.J. (but not Donaldson L.J.) assumed that the "closing date" appointed by the trustee of the Jersey settlement was the same as the "vesting day" under the Gibraltar settlement - that is March 19, 1976. There is no finding to that effect and we were told that the "closing date" probably was May 6, 1975. But the identity of dates was not essential to the reasoning on which Buckley L.J. proceeded. The position was that, after the appointment, the appointed fund was held by the Jersey trustee for purposes which, although in some respects different from those of the Gibraltar settlement (the tenant for life being different and the closing date probably being different), were within the limits laid down in the Gibraltar settlement. In particular the reversioner was the same and the closing date was not later than the vesting date in the Gibraltar settlement. If the differences had not been within the permitted limits the appointment would of course not have been intra vires the Gibraltar trustee. Accordingly the true price realised on disposal of the appellant's interest was in my opinion the sum of the price of the retained fund in Gibraltar (£231,130) and of the appointed fund in Jersey (£312,100), amounting to £543,230. His loss was therefore about £370.

For this reason I would dismiss this appeal.

Wider question - Was there a disposal in either of these cases?

The Inland Revenue maintain that they are entitled to succeed in both these appeals on the wider ground that in neither case should the disposal of the loss-making asset be considered separately from the scheme of which it formed part. On behalf of the taxpayer in each case reliance was placed on the finding by the special commissioners that the various steps in the scheme were not shams. The meaning of the word "sham" was considered by Diplock L.J. in Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786, 802, where he said that:

"it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."

Thus an agreement which is really a hire purchase agreement but which masquerades as a lease would be a sham. Although none of the steps in these cases was a sham in that sense, 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. This question must, of course, be considered on the assumption that the taxpayer would have been entitled to succeed on the separate point in each case.

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: see Inland Revenue Commissioners v. Plummer [1980] A.C. 896, 908 and Chinn v. Hochstrasser [1981] A.C. 533. The essential feature of both schemes was that, when they were completely carried out, they did not result in any actual loss to the taxpayer. The apparently magic result of creating a tax loss that would not be a real loss was to be brought about by arranging that the scheme included a loss which was allowable for tax purposes and a matching gain which was not chargeable. In Ramsay the loss arose on the disposal of the appellant's shares in Caithmead Ltd. In Rawling it arose on the disposal of the appellant's reversionary interest in the retained part of the Gibraltar settlement. 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. In Rawling the intention was made explicit as the supplier of the scheme, a company called Thun Holdings Ltd., bound itself contractually, if the scheme was once embarked upon, to carry through all the steps. There is, therefore, no reasons why the court should stop short at one particular step. In

Ramsay the supplying company, Dovercliff Ltd., did not undertake any contractual obligation to carry the scheme through, but there was a clear understanding between the taxpayer and Dovercliff that the whole scheme would be carried through; that was why the taxpayer had purchased the scheme. The absence of contractual obligation does not in my opinion make any material difference.

The taxpayer in both cases bought a complete scheme for which he paid a fee. Thereafter he was not required to produce any more money, although large sums of money were credited and debited to him in the course of the complicated transactions required to carry out the scheme. The money was lent to the taxpayer at the beginning of the scheme, by Thun in the Rawling case and by a finance company, Slater Walker, in the Ramsay case, and was repaid to the lender at the end. The taxpayer never at any stage had the money in his hands nor was he ever free to dispose of it otherwise than in accordance with the scheme. His interest in the assets, the shares and loans in the Ramsay case and the trust funds in the Rawling case, were charged in favour of the lenders by way of security, so that he was never in a position to require the price of any asset that was sold to be paid to him. Throughout the whole series of transactions the money was kept within a closed circuit from which it could not escape.

In Rawling there was not even any need for real money to be involved at all. On March 24, 1975, Thun agreed to lend the taxpayer £543,600 to enable him to purchase the reversionary interest in the Gibraltar settlement. On the same day the taxpayer agreed to purchase, and Pendle (a subsidiary company of Thun) agreed to sell the reversionary interest to him and assign it to him, and the taxpayer directed Thun to pay the £543,600 to Pendle. The taxpayer never handled the money, and presumably the payment to Pendle was effected by an entry in the books of Thun, though it was not proved that such an entry was made. When the taxpayer sold his reversionary interest in the Gibraltar settlement to another subsidiary of Thun, it was already charged to Thun in security and the purchase price was paid by the subsidiary to Thun, again presumably by an entry in Thun's books. His reversionary interest in the Jersey settlement was sold direct to Thun and the balance of Thun's original loan to the taxpayer was extinguished. There was apparently no evidence before the special commissioners that Thun actually possessed the sum of £543,600 which they lent to the taxpayer to set the scheme in motion, not to mention any further sums that they may have lent to other taxpayers for other similar schemes which may have been operating at the same time, and it might well have been open to the special commissioners to find that the loan, and all that followed upon it, was a sham. But they have not done so. In Ramsay "real" money in the form of a loan from Slater Walker was used so that a finding of sham in that respect would not have been possible.

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. 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. In that case the taxpayer wished to dispose of shares in a company to an American company called KDI at a price which would have produced a large chargeable gain. In order to avoid the liability to capital gains tax he adopted a scheme which involved the incorporation of another company, FNW, to which he transferred his shares in order that they could subsequently be transferred by FNW to KDI. Eveleigh L.J. said [1978] Ch. 295, 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. 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."

In my opinion the reasoning in that passage is equally applicable to the present appeals.

Accordingly I would refuse both appeals on the additional ground that the relevant asset in each case was not disposed of in the sense required by the statutes.

LORD RUSSELL OF KILLOWEN. My Lords, I find myself in full agreement with what has fallen from My Lords Wilberforce and Fraser of Tullybelton both on the features peculiar to these cases and on the general principles enunciated by them. I cannot hope for and will not attempt any improvements.

I am however unable to resist the temptation to a brief comment on the Rawling case. That comment is that I wholly fail to comprehend the contention that the taxpayer sustained a loss (unless it be £370). The

moneys advanced into the Jersey settlement, out of the Gibraltar settlement funds in which the taxpayer had acquired an absolute reversionary interest, conferred upon the taxpayer an absolute reversionary interest in the advanced funds which could not fall into possession later than it would have done under the Gibraltar settlement. The power of advancement was so framed that no other outcome was possible. Thus the taxpayer remained absolutely entitled in reversion to the funds. When the taxpayer sold his interest in the remaining unadvanced fund he sold only part of his reversionary interest. If the sequence of events had been sale of his reversionary interest in £255,390 to Goldiwill, followed by advancement of the remaining £315,000 into the Jersey settlement, nobody could begin to suggest that there was a loss made on the sale to Goldiwill. This to my mind demonstrates the absurdity of the suggestion that a loss was incurred by the taxpayer by a reverse of that sequence. There was a further power under the Gibraltar settlement to advance directly into the taxpayer's pocket, and it was found necessary to the taxpayer's claim of a loss that, if that had happened, there would nevertheless have been the loss asserted on the disposal of his reversionary interest in the remainder to Goldiwill. That cannot possibly be right.

LORD ROSKILL. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Wilberforce and Lord Fraser of Tullybelton in these two appeals. I agree entirely with what my noble and learned friends have said and for the reasons they give I would dismiss both appeals.

LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Wilberforce. I am in complete and respectful agreement with it and cannot usefully add anything to it: accordingly I, too, would dismiss both these appeals.

Solicitors: Slowes; J. Memery & Co.; Solicitor of Inland Revenue.

J. A. G.