New light on the Ramsay doctrine

20 April 2011. Published by Adam Craggs, Partner

In HMRC v Mayes [2011] EWCA Civ 407,the Court of Appeal was asked to decide whether a taxpayer was entitled to corresponding deficiency relief and/or capital gains tax loss relief under a tax avoidance structure known as "Ships 2".

The idea behind the arrangements was to minimise the income tax liabilities of higher rate taxpayers and their liabilities for CGT.  Seven steps were taken to create deductible losses including a payment of initial premiums for life insurance policies, the payment of additional top up premiums by a non-resident company, and the withdrawal of the top-up by a partial surrender of the policies by that same company, which created a potential for relief without, however, triggering a charge to tax.  The taxpayer then acquired the policies and surrendered them and claimed he was entitled to make the deductions, firstly in the form of corresponding deficiency relief on the disposal of the policies under section 549 ICTA 1988 (now repealed) and secondly, by deduction in the computation of gains for CGT under section 38 TCGA 1992.

HMRC argued that the Ramsey principle applied and that the inserted seven steps were self-cancelling and should be disregarded.

The Court of Appeal held that Ramsay was not a special doctrine of revenue law targeted at tax avoidance schemes; rather it was a general principle of purposive and contextual construction of all legislation.  It was necessary to look at the overall effect of the seven step transaction and in particular, steps three and four to decide whether these answered to the legislative description of the transaction that qualified for relief.  The Court of Appeal decided that steps three and four were genuine legal events with real legal effects and the court could not, as a matter of construction, deprive those events of their fiscal effects simply because they were commercially unreal and inserted for a tax avoidance purpose in a pre-ordained programme.

This is an encouraging decision for those engaged in tax planning given HMRC's recent high success rate before the courts in cases concerning tax mitigation/avoidance structures.  It will be interesting to see whether HMRC apply for permission to appeal to the Supreme Court.

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