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HOUSE OF LORDS [1982] STC 30, [1981] TR 535, 54 Tax Cas 200, ([1984] Conv 296) HEARING-DATES: 5 NOVEMBER, 3 DECEMBER 1981 3 DECEMBER 1981 CATCHWORDS: Capital gains tax — Disposal of assets — Cost of acquisition of assets — Tax avoidance scheme involving reorganisation of share capital of wholly-owned subsidiary — Rights issue of shares at a predetermined price per share — New holding in subsidiary representing original shares — Disposal of new holding by liquidation of subsidiary — Whether consideration for new holding deductible in computing chargeable gains arising on disposal of new holding — Finance Act 1965, Sch 7, para 4. HEADNOTE: The taxpayer company was the parent company of a group of companies which, at all material times, included H Ltd, MORH and BOTL. Prior to 6 March 1969, H Ltd was dormant and its issued share capital was represented by a debt of £700,001 owing to it by the taxpayer company. On 6 March 1868 the taxpayer company sold and transferred to H Ltd £50,000,000 stock in BP for £380,625,000. The purchase price was left outstanding as a result of which the net amount owed by H Ltd to the taxpayer company (ie £379,924,999) was placed to a loan account ('the Loan Account') in H Ltd's books. On 23 April 1971, H Ltd sold and transferred to the taxpayer company the £50,000,000 stock in BP for £220,625,000, thereby reducing the balance outstanding on the Loan Account to £159,299,999. To offset the loss arising as a result of those transactions, the taxpayer company embarked on a tax avoidance scheme designed to create for corporation tax purposes an allowable capital loss. On 12 Decembre 1972, 700,000 shares in H Ltd were registered in the name of the taxpayer company and one share was registered in the name of BOTL as nominee for the taxpayer company. On the same day H Ltd resolved to obtain a loan of £159,299,999 from MORH and, on such loan becoming available, to repay to the taxpayer company the balance on the Loan Account lf £159,299,999. H Ltd then applied to MORH for the loan. On receipt of the application MORH raised a loan of the amount in question from the taxpayer company and advanced it to H Ltd which H Ltd used to repay the balance of £159,299,999 owing to the taxpayer company on the Loan Account. On 18 December the capital of H Ltd was increased from £700,001 to £1,400,002 by the creation of 700,001 new ordinary shares of £1 each and a rights issue of those new shares was made to the existing members in proportion to their existing holdings at £228 per share. In the result 700,000 new ordinary shares were issued to the taxpayer company and one new ordinary share to BOTL. As consideration for those shares, the taxpayer company paid £159,600,000 to H Ltd and BOTL paid £228 to H Ltd. H Ltd then repaid the loan of £159,299,999 which it had obtained from MORH. H Ltd was subsequently wound up and in the course of such winding up the only asset of H Ltd, namely cash in the sum of £296,728, was distributed to the taxpayer company and OBTL. The Crown claimed that in computing the chargeable gains or allowable loss arising to the taxpayer company on the disposal of its shares in H Ltd (on the liquidation of H Ltd) the taxpayer company was not entitled to deduct the sum which it had paid for the new shares. The taxpayer company appealed contending that the transactions which took place on 18 December 1972 constituted reorganisation of H Ltd's share capital within Sch 7, para 4(1); that accordingly by virtue of para 4(2)a and (3) of Sch 7, such reorganisation was to be treated as involving no disposition and no acquisition of shares in H Ltd; that by virtue of para 4(3) the cash paid by the taxpayer company and BOTL for the new shares in H Ltd fell to be treated as having been given as consideration for the original shares and that such consideration was deductible in computing an allowable loss on the disposal of the taxpayer company's entire shareholding in H Ltd. The Special Commissioners upheld the taxpayer company's claim. The Crown appealed contending that at the date of the reorganisation of the share capital of H Ltd, the taxpayer company and H Ltd were not transacting at arm's length and, accordingly, s 22(4)b of the Finance Act 1965 came into play; that on a proper construction of paras 4(2) and (3) of Sch 7, read together with s 22(4), the relevant consideration in computing the chargeable gains or allowable loss accruing to the taxpayer company, which was deductible on the disposal of its new holding in H Ltd (ie shares in H Ltd, which as the result of the reorganisation, represented the original shares in H Ltd within Sch 7, para 4(1) by liquidation of H Ltd, was not the cash paid, but the market value (if any) of the rights issue shares at the time of the reorganisation. The Court of Session rejected the Crown's contention and affirmed the determination of the Special Commissioners. On appeal the Crown further contended that having regard to the scheme as a whole the sum of £159,000,228 paid for the new shares was not true consideration given for these shares or any part of it, and no allowable loss in the sum claimed accrued to the taxpayer company. a Paragraph 4, so far as material, is set out at p 37, post b Section 22(4), so far as material, is set out at p 35 f, post Held - The tax avoidance scheme entered into by the taxpayer company, when carried through to completion involved no real loss or loss in the sense contemplated by the Finance Act 1965. The appeal would therefore be allowed (see p 33 e f; 39 b d f g, post). W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] STC 174 applied. Per curiam: The effect of Sch 7, para 4(2) is that the allotment of new shares in H Ltd to the taxpayer company is not to be treated as involving an acquisition of those shares, which form part, but not the whole, of the new holding (see p 36 e, post). NOTES: For the reorganisation of share capital, see Simon's Taxes C6.409,410,411. For the Finance Act 1965, Sch 7, para 4, see ibid Part H 1. Paragraph 4(2), (3), (4) was replaced by the Capital Gains Tax Act 1979, ss 78, 79(1)(2). CASES-REF-TO: Aberdeen Construction Group Ltd v IRC [1978] STC 127, [1978] 1 All ER 962, [1978] AC 885, [1978] 2 WLR 648, HL. Chinn v Collins (Inspector of Taxes), Chinn v Hochstrasser (Inspector of Taxer) [1981] STC 1, [1981]1 All ER 189, [1981] AC 533, [1981] 2 WLR 14, HL. IRC v Duke of Westminster [1936] AC 1, 19 TC 490, [1935] All ER Rep 259, 104 LJKB 383, 153 LT 223, HL. IRC v Plummer [1979] STC 793, [1979] 3 All ER 775, [1980] AC 896, [1977] 3 WLR 689, HL. W T Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] STC 174, [1981] 1 All ER 865, [1981] 2 WLR 449, HL. INTRODUCTION: Appeal. The Crown appealed against a decision of the First Division of the Court of Session as the Court of Exchequer in Scotland (The Lord President (Emslie), Lord Cameron and Lord Stott) dated 13 November 1980 allowing the appeal of the Burmah Oil Co Ltd ('Burmah') by way of case stated from the decision of the Commissioners for the Special Purposes of the Income Tax Acts whereby it was held that on a disposal (on liquidation) of its shareholding in one of its wholly owned subsidiary companies there accured to Burmah for corporation tax purposes an allowable capital loss within the meaning of s 23 of the Finance Act 1965. The facts are set out in the opinion of Lord Fraser. COUNSEL: The Lord Advocate (Lord Mackay of Clashern QC), Robert Carnwath and A C Hamilton for the Crown. D C Potter QC and W D Prosser QC for Burmah. JUDGMENT-READ: Their Lordships took time for consideration. 3 December. The following opinions were delivered. PANEL: LORD DIPLOCK, LORD FRASER OF TULLYBELTON, LORD SCARMAN, LORD ROSKILL AND LORD BRANDON OF OAKBROOK JUDGMENTBY-1: LORD DIPLOCK JUDGMENT-1: LORD DIPLOCK. My Lords, I agree with the reasons for allowing this appeal that will be given in the speech of my noble and learned friend Lord Fraser. Like him I can find no flaw in the construction placed by he Court of Session on the relevant provisions of the Finance Act 1965; but like him I also think that this case fails within the principle recently enunciated in the reasons for the decision of this House in W T Ramsay Ltd v IRC [1981] STC 174, [1981] 1 All ER 865, [1981], HL, to which my noble and learned friend was party. It is only in deference to the Court of Session that I venture to add a brief comment of my own, since their decision is being reversed upon a ground that was never argued before them and at the time of the hearing, which was after IRC v Plummer [1979] STC 793, [1979] 3 All ER 775, [1980] AC 896, HL but before Ramsay's case had been determined by this House, may well have not been open to the Court of Session. It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax-avoidance schemes to assume, that Ramsay's case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transaction (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps taht have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the over-ruling of any earlier decisions of this House; but it does involve recognising that Lord Tomlin's oft-quoted dictum in IRC v Duke of Westminster 19 TC 490, [1936] AC 1 at 19, 'Every man is entitled if less than it otherwise would be', tells us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way. The Duke of Westminster's case was about a simple transaction entered into between two real persons each with a mind of his own, the Duke and his gardener, even though in the nineteen-thirties and at a time of high unemployment there might be reason to expect that the mind of the gardener would manifest some degree of subservience to that of the Duke. The kinds of tax-avoidance schemes that have occupied the attention of the courts in recent years, however, involve inter-connected transactions between artificial persons, limited companies, without minds of their own but directed by a single master-mind. In Ramsay the master-mind was the deviser and vendor of the tax-avoidance scheme; in the instant case it was Burmah, the parent company of the wholly-owned subsidiary companies between which the pre-ordained series of transactions took place. Burmah was acting in accordance with advice obtained from advisers of the highest integrity who, in reliance on Lord Tomlin's dictum, did not foresee the difference in approach to tax avoidance schemes involving inter-company transactions that would have been adopted by this House by the time some nine years later when the particular scheme that they had devised in 1972 was eventually to come efore it. As will appear from the analysis of the intra-group transactions in the speech of my noble and learned friend, Lord Fraser, the only real asset involved in the whole series of transactions was Burmah's holding of BP shares. Whether if Burmah had sold these shares in 1972, the relevant tax year, to some third party it would have realised a capital loss for the purpose of corporation tax on capital gains, which I will refer to as capital gains tax and, if so, what that loss would have been we do not know; it continued to retain the shares. By two previous transactions, undertaken for good commercial reasons with its wholly-owned subsidiary, Holdings, it had transferred the shares to Holdings at market price and subsequently transferred them back again to Burmah at a time when the market price had fallen, as a result of which there were entries in the books of both parent and subsidiary companies which showed an unsecured indebrendess by Holdings to Burmah of the order of £160 million. This represented the extent of Holdings' insolvency since it had no assets out of which to pay this sum. A bad debt which is not a debt on a security is not a deductible loss for the purposes of capital gains tax; so a scheme was designed to convert this debt into a loss on realisation of Burmah's shares in Holdings on liquidation of that company. The essence of the scheme was the Burmah should subscribe £160 million for a rights issue of fresh shares in Holdings, thus putting it into a position to make a declaration of solvency and go into voluntary liquidation. The £160 million was the subject of two circles of book entries, described by my noble and learned friend, in the course of which the £160 million indebtedness of Holdings to Burmah was transmogrified into a loss of the same amount (less a minor difference) upon the realisation of Burmah's shares in Holdings upon the voluntary liquidation of the latter company. I agree with Lord Fraser that the approach to tax avoidance schemes of this character sanctioned by Ramsay entitles your Lordships to ignore the intermediate circular book entries and to look at the end result, which was that Burmah wrote off Holdings' indebtedness to it of £160 million by itself providing Holdings with the money to pay it, ostensibly in form of fresh capital. The real loss it sustained was of a debt not on a security. JUDGMENTBY-2: LORD FRASER OF TULLEYBELTON JUDGMENT-2: LORD FRASER OF TULLEYBELTON. My Lords, this is an appeal from an interlocutor of the Court of Session as the Court of Exchequer in Scotland. The appeal raises two issues. The first is one of pure construction of the statutory provisions relating to capital gains tax (or corporation tax in this case as the taxpayer is a limited company). The second issue raises a question with wider implications as to whether certain transactions which, on the face of them and according to the taxpayer's submission, resulted in an allowable capital loss, should be disregarded as artificial. The second issue was raised for the first time in the Crown's printed case for your Lordships' House; it is founded on the decision of the House in the recent case of W T Ramsay Ltd v IRC [1981] STC 174, [1981] 1 All ER 865, which was later in date than the decision of the Court of Session now under appeal. The appellants are the Commissioners of Inland Revenue. The respondent is the Burmah Oil Co Ltd ('Burmah'). Burmah was assessed to corporation tax for its accounting period ended 31 December 1972 in a sum of over £3 million. Burmah appealed to the Special Commissioners against the assessment, the question of principle being whether, for the purpose of coimputing its capital gain for corporation tax purposes, there had accrued during that accounting period a substatial allowable capital loss. The Special Commissioners allowed the respondent's appeal in principle and the figures were agreed. The Crown appealed to the Court of Session and on 13 November 1980 their appeal was refused by the First Division (The Lord President, Lord Cameron and Lord Stott). They now appeal to this House. The facts are fully set out in the case stated by the Special Commissioners for the opinion of the court, and I shall summarise them now only to the extent necessary to explain my opinion. Burmah was at all material times the parent company of several companies including OMDR Holdings Ltd ('Holdings'), Manchester Oil Refinery Holdings Ltd ('MORH'), and Burmah Oil Trading Ltd ('BOTL'). It was the beneficial owner of all the issued shares in Holdings, of which 700,000 were held in its own name, and one share was held in the name of BOTL as its nominee. Holdings' share capital of 700,001 shares was represented by a debt of that amount owed to Holdings by Burmah. Holdings never traded, and the purchase and sale transaction to be described below were the only functions it ever carried out. In March 1969 Burmah, to secure certain fiscal advantages by way of relief under s 84 of the Finance Act 1965, sold and transferred to Holdings a substantial amount of stock which it held in the British Petroleum Company Ltd ('BP'). The purchase price £380,625,000, was left outstanding as a debt due by Holdings to Burmah. After deduction of the debt of £700,001 owed by Burmah to Holdings, the amount outstanding on loan account and due by Holdings to Burmah was £379,924,999. In April 1971, for good commercial reasons, the BP stock was re-sold and transferred back by Holdings to Burmah. The market value of the BP stock had fallen since March 1969 and the price on re-sale was £220,625,000. As a result of the lower price on re-sale there remained at the completion of that transaction a large balance outstanding as a loan due by Holdings to Burmah amounting to £159,299,999. As Burmah and Holdings were members of the same group of companies, the transactions between them in March 1969 and April 1971 gave rise neither to chargeable gains nor to allowable losses (see Income and Corporation Taxes Act 1970, s 273(1)). That is the point at which the events giving rise to this appeal begin. These events took place about two years before the BP shares were sold by Burmah to the Bank of England in circumstances which later led to controversy and to separate litigation. That sale has no connection with or bearing upon the issues in this appeal. After the repurchase of the BP shares from Holdings, Burmah explored with counsel the possibility of obtaining for corporation tax purposes an allowable loss by turning to account the situation which had arisen on the repurchase. The events that followed were carried out in accordance with a prearranged scheme, approved by Burmah's directors, to achieve that end. The Special Commissioners found as a fact that the material events 'took place in the following order (the timetable, draft minutes and draft letters having been prepared in advance).' The following finding of the Special Commissioners should also be quoted: 'At the material times there was to a very great extent a common membership between the boards of Burmah, Holdings, MORH, and BOTL... The transactions... were carried out correctly as planned and were genuine transactions.' On Tuesday, 12 December 1972, a series of events took place, of which the essential ones were these. MORH obtained from Burmah a loan of £159,299,999, being the exact amount of the debt owed by Holdings to Burmah. MORH then lent that amount to Holdings which in turn and on the same day repaid its debt to Burmah. The money thus went round in a small circle and returned to its starting point on the same day. The effect so far was that instead of Burmah being a direct creditor of Holdings for the sum I have mentioned, MORH were now interposed as creditor of Holdings and debtor of Burmah for that amount. On Monday, 18 December, another series of events took place of which the essential ones were these. (I omit reference to the various meetings of directors and to an extraordinary general meeting of Holdings which were all duly held and which passed the appropriate resolutions). Holdings made a right issue of shares to its existing shareholders of 700,001 unissued ordinary shares of £1 each at £228 per share, in proportion to their existing holdings. Burmah applied for and was allotted 700,000 for which it paid £159,600,000 and BOTL applied for and was allotted one share for which it paid £228. I note in passing that the issue price of £228 per share which produced the total sum of £159,600,228 was the lowest price in complete pounds which when multiplied by 700,001 would produce more than £159,299,999. On the same day (18 December 1972), Holdings repaid to MORH the loan of £159,299,999 and MORH repaid that same amount to Burmah. That sum thus went round the same circle as the money on 12 December but in the opposite direction. The effect of these events was to eliminate the train of debts and to restore Holdings to solvency. On 19 December 1972, Holdings took the first steps towards voluntary liquidation. On 29 December its only asset, a cash sum of £296,728.50 (being the balance of £300,229 of cash subscribed for its new shares after repaying its debt to MORH, less capital duty of £3,500.50 on its increased capital) was distributed to its members. Holdings was later dissolved. The first question is whether in the circumstances described above, Burmah is entitled when computing the chargeable gain or allowable loss arising to it on the disposal of its shares in Holdings, on the liquidation of Holdings, to deduct, in addition to the cost of acquiring the original shares, the sum of £159,600,228 paid by way of subscription to the new shares. The Crown contended that it is not because the new shares were acquired otherwise than 'by a bargain made at arms length' and therefore the consideration for them must be deemed to be an amount equal to their market value, and not the sum paid in cash -- see Finance Act 1965 s 22(4). Burmah replies, in brief, that s 22(4) has no application in the circumstances of this case bacause the payment for the new shares issued on 18 December was made as part of a reorganisation of the capital of Holdings, in the sense of the Finance Act 1965 Sch 7, para 4(1), that the allotment of the new shares is not to be treated as an 'acquisition' of these shares (para 4(2) and that therefore there was no acquisition on which s 22(4) can bite. The Special Commissioners and the First Division have both decided this issue against the Crown, and I have no doubt they were right. The contention of the Crown rests entirely on s 22(4) which, so far as relevant, provides as follows: '(4) Subject to the provisions of this Part of this Act, a person's acquisition of an asset and the disposal of it to him shall for the purposes of this Part of this Act be deemed to be for a consideration equal to the market value fo the asset -- (a) where he acquires the asset otherwise than by way of a bargain made at arm's length and in particular where he acquires it by way of gift or by way of distribution from a company in respect of shares in the company...' It was an essential part of the argument for the Crown that Burmah had acquired an asset, consisting of the new shares, otherwise than at arm's length on 18 December 1972. But that argument is in my opinion fallacious.In the first place it assumes that the new shares were 'the asset' acquired otherwise than by a bargain at arm's length.But for the purposes of the capital gains tax the only relevant asset is the 'holding' consisting of the totality of ordinary shares old and new in Holdings held by Burmah. That appears from the Finance Act 1965, Sch 7, para 2(1) which provides as follows: '(1) Any number of shares of the same class held by one person in one capacity shall for the purposes of this Part of this Act be regarded as indistinguishable parts of a single asset (in this paragraph referred to as a holding) growing or diminishing on the occasions on which additional shares of the class in question are acquired, or some of the shares of the class in question are disposed of,' In the second place the contention is contrary to the provisions of para 4 of Sch 7. The general statement which I have quoted from para 2(1) is followed by provisions relating particularly to reorganisation of share capital of a company. Paragraph 4 provides (relevantly) as follows: '4. -- (1) This paragraph shall apply in relation to any reorganisation or reduction of a company's share capital; and for the purposes of this paragraph -- (a) references to a reorganisation of a company's share capital include -- (i) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of shares in the company or of any class of shares in the company; and... (b) "original shares" means shares held before and concerned in the reorganisation or reduction of capital, and "new holding" means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation or reduction of capital represent the original shares (including such, if any, of the original shares as remain).' There is no doubt that the rights issue by Holdings on 18 December 1972 was a reorganisation of its capital in the sense of that paragraph. Paragraphe 4(2) is the sub-paragraph which is of most direct importance for the present purpose. It reads as follows: '(2) Subject to the following sub-paragraphs, a reorganisation or reduction of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.' (Emphasis mine.) The effet of that sub-paragraph is that the allotment of new shares in Holdings to Burmah is not to be treated as involving an 'acquisition' of those shares, which form part, but not the whole, of the new holding. The words that I have emphasised in the quotation are in my opinion conclusive against the Crown's argument on this point, for as the allotment of new shares is not to be treated as an acquisition of any part of the new holding, s 22(4) which deals only with a person's 'acquisition' of an asset cannot apply to it. I agree therefore with the learned judges of the First Division that the contention of the Crown based upon s 22(4) fails. The explanation of how the consideration given for the new holding 'or any part of it' (such as the newly allotted shares in this case) is to be treated for capital gains tax is contained in para 4(3). The Lord President in his opinion drew attention to the absence of the word 'acquisition' from para 4(3). He said that in view of para 4(2) it would have been surprising if para 4(3) had mentioned the word 'acquisition', and he added that the absence was clearly by design.With great respect, I do not think that is right if, in saying 'by design', the learned Lord President meant to convey that it was in order to fit in with para 4(2). Paragraph 4(3) provides that if a person gives 'any consideration for his new holding or any part of it, that consideration shall... be treated as having been given for the original shares'. The latter phrase is, in my opinion, only a shorthand reference back to Sch 6, para 4(1)(a) which deals with the value of the consideration given'... wholly and exclusively for the acquisition of the asset'. (Emphasis mine.) The same must be true of the former phrase, because only if the consideration 'given for' the new shares is treated as having been given wholly and exclusively for the acquisition of the original shares can it be allowable as a deduction in the computation of capital gain under para 4(1) of Sch 6. But although I am, for that reason, unable to agree with the learned Lord President's comment on the design underlying para 4(3), that does not detract in any way from my agreement with his conclusion about the effect of para 4(2). If the matter rested there I would simply have agreed with the decision of the First Division. But it becomes necessary now to consider the new point raised in your Lordships' House as to the applicability of the principles stated by this House in the cases of Ramsay and Eilbeck (Inspector of Taxes) v Rawling reported together at [1981] STC 174, [1981] 1 All ER 865, [1981] 2 WLR 449. The general features of the schemes in those cases were described by Lord Wilberforce [1981] STC 174 at 178, [1981] 1 All ER 865 at 869) and counsel for the taxpayer Burmah stated, rightly in my opinion, that in some respects they differed considerably from the scheme in the present case.One difference is that in those cases the taxpayers had been provided with 'a preconceived and ready-made plan' whereas in the present case the plan, though preconceived, was specially tailor-made for Burmah. But that difference cannot affect the legal position. Again, in those cases it was the clear and stated intention that, once started, each scheme would proceed to completion and would not be arrested half-way. In the present case it was said that the first series of events, those occurring on 12 December 1972, could have stood on their own, and need not have been followed by the second series on 18 December. I think that is correct although it would have involved abandoning the overall scheme at the half-way stage. But it is clear that the events initiated on 18 December formed part of a single scheme and I have already quoted the finding by the Special Commissioners that they took place in the order and according to a time-table prepared in advance. They made a similar finding about the events of 12 D*ecember 1972. Counsel for Burmah submitted that there was no necessity for even those steps taken on 18 December to have all been carried out, and he referred to a minute of a meeting of a committee of directors of Burmah, held on 18 December 1972, which records the chairman as saying that 'A choice lay before the directors' of subscribing for the new shares being offered by Holdings or of dealing with 'the problem' in some other way. No doubt the directors could have chosen, even at that stage, to abandon the scheme but the reality was that the decision had already been taken to carry it through to completion, and that was unquestionably the intention of the directors in this case, just as it was the intention of all parties concerned in Ramsay and in Chinn v Collins (Inspector of Taxes) [1981] STC 1, All ER 189, [1981] AC 533. In one respect I accept that this scheme differed from those in Ramsay and Eilbeck. In both those cases the money required for the various transactions had been provided by loans, which were so arranged and secured as to raise doubts as to whether any real money existed at all. In the present case the necessary money was provided by Burmah, and its two circular journeys on 12 and 18 December undoubtedly took place as represented by entries in the bank statements.One element of unreality which existed in Ramsay and Eilbeck is therefore absent here, but its absence is not, in my opinion, of material importance. Finally, as Lord Wilberforce said in Ramsay (see [1981] STC 174 at 179, [1981] 1 All ER 865 at 870) it was 'candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax'. The same admission was made here and the same adverbs apply. But the fact that the purpose of the scheme was tax avoidance does not carry any implication that it was in any way reprehensible or other than perfectly honest and respectable. It was the duty of Burmah's directors to take such lawful steps as were open to them to minimise the impact of tax on the company's profits, and in carrying out this scheme they acted upon professional advice from reputable sources. If the advice in this regrettably intricate region of law turned out to be erroneous, they are not to be criticised on that account. That ratio of the decision in Ramsay is to be found in the speech of Lord Wilberforce ([1981] STC 174 at 182, [1981] 1 All ER 865 at 873) where he said this: '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 Commrs [1978] 1 All ER 962, [1978] AC 885, [1978] STC 127, 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, 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.' In the same case I said with reference to the cases of IRC v Plummer [1979] STC 793, [1980] AC 896, [1979] 3 All ER 775 and Chinn v Collins (Inspector of Taxes): '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.' (See [1981] STC 174 at 190, [1981] 1 All ER 865 at 881.) The question in this part of the appeal is whether the present scheme, when completely carried out, did or did not result in a loss such as the legislation is dealing with, which I may call for short, a real loss. In my opinion it did not. The problem for Burmah arose form the fact that, owing to the decline in value of the BP shares while they were held by Holdings, Holdings was left with a debt of £159,299,999 owing to Burmah after selling the BP shares back to them. That was a simple debt, not 'the debt on a security' and therefore no allowable loss could accrue to Burmah on a disposal of the debt -- see Finance Act 1965 Sch 7, para 11(1), which refers only to chargeable gains but which applies also to allowable losses -- see s 23(1). The purpose of the scheme was to convert that non-allowable loss into a loss that would be allowable as a deduction for capital gains purposes. In the course of argument much emphasis was laid by Counsel for Burmah on the harsh, even unfair, consequences of para 11(1), particularly as they depend on whether a bad debt happens to be 'the debt on a security' or not. That may be a pure accident, as the difference in the case of a wholly-owned subsidiary company is usually of no commercial importance. The possibility of hardship was noticed in the speeches in this House in the Aberdeen Construction Group case [1978] STC 127, [1978] 1 All ER 962, [1978] AC 885, but any hardship, if it exists, is, in my opinion, irrelevant. In the present case, there is little or no hardship because, after the scheme had been carried through, Burmah still owned the BP shares, and if it had disposed of them in December 1972 by selling them to a party outside its own Group, it would have made an allowable loss ascertained by reference to the original purchase price of the shares, disregarding the intervening sale to and re-purchase from Holdings. The true position was that on the BP shares it had a real, but unrealised, loss. In considering the scheme, it seems to me immaterial whether the series of events that occured on 12 December are included or not. I have already mentioned that their effect was merely to interpose MORH between Burmah and Holdings as debtor of Burmah and creditor of Holdings. These events were merely the preliminary to the main part of the scheme. They may have been a necessary preliminary so that the directors of Holdings could sign the declaration of solvency leading up to a voluntary liquidation, but the fact that they were taken cannot, so far as I can see, strengthen the argument for Burmah, and I did not understand their counsel to rely upon them.I shall, therefore, follow the example of the Lord Advocate and pay no further regard to those events. The second series of events began on 18 December 1972. On that date, Burmah paid £159,600,000 to Holdings and in return it received 700,000 new shares in Holdings. Burmah say that the money was paid in consideration for the shares, and so it was up to that stage. But there were later stages to come before the scheme was complete. Most of the money (L159,299,999) was immediately passed on by Holdings to MORH, and by MORH back to Burmah on the same day. On 19 December, Holdings took the first steps towards voluntary liquidation, and on 29 December its only asset, consisting of a cash balance of £296,728.50, was distributed to its members, that is, to Burmah either directly or through BOTL, and Holdings was wound-up. Burmah's shares in Holdings were thus destroyed. The result was that although Burmah apparently suffered the loss of almost the whole price that it had paid for the new shares, except for the cash balance returned on liquidation, it suffered no real loss because it got back all the money except the capital duty of £3,500.50 on the 700,001 new shares. Moreover, it still had BP shares which it could have realised in the open market at a loss on their original purchase price. If the argument for Burmah is right, this would be one more case in which the taxpayer had achieved the apparently magic result of creating a tax loss that was not a real loss. In my opinion they have not achieved that result because, in the same way as in Ramsay's case [1981] STC 174, [1981] 1 All ER 865, when the scheme was carried through to completion there was here no real loss and no loss in the sense contemplated by the legislation. I would allow the appeal. If your Lordships agree with my view, the Crown will have succeeded on a point that was not argued in the Court of Session, and which, even if it was technically open there, would not have been normally regarded as arguable in that court.For that reason, I would make no order for costs in this House, and I would not disturb the order for expenses in the Court of Session contained in the interlocutor of 13 November 1980. JUDGMENTBY-3: LORD SCARMAN JUDGMENT-3: LORD SCARMAN. My Lords, I also would allow the appeal. I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Diplock and Lord Fraser. I agree with the reasons they give for allowing the appeal. I wish, however, to make two comments. First, it is of the utmost importance that the business community (and others, including their advisers) should appreciate, as my noble and learned friend Lord Diplock has emphasised, that Ramsay's case marks 'a significant change in the approach adopted by this House in its judicial role' towards tax avoidance schemes. Secondly, it is now crucial when considering any such scheme to take the analysis far enough to determine where the profit, gain, or loss is really to be found. 'The true position' was, as my noble and learned friend Lord Fraser has said, that owing to the fall in value of the BP shares Burmah suffered a real, but unrealised, loss. Put in the language of capital gains taxation, there never was a disposal of the real asset, ie the BP shares, though there was, of course, a disposal (on liquidation) of the nominal assets, ie Burmah's share-holding in Holdings. JUDGMENTBY-4: LORD ROSKILL JUDGMENT-4: LORD ROSKILL. my Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Diplock and Lord Fraser. For the reasons they give I, too, would allow this appeal with the consequences which have been proposed. JUDGMENTBY-5: LORD BRANDON OF OAKBROOK JUDGMENT-5: LORD BRANDON OF OAKBROOK. My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Diplock and Lord Fraser. In agree with them and would allow the appeal, with the consequences proposed, accordingly. DISPOSITION: Appeal allowed. SOLICITORS: Allen & Overy agents for Miller Thompson Henderson & Co, Glasgow and Laing & Motherwell, Edinburgh (for Burmah); Solicitor of Inland Revenue. |