Saturday, April 24, 2010

Substance over Form in Taxation: The Recent English Approach


We have at several times on this blog discussed issues around the legality of tax avoidance. In debates around avoidance/evasion distinction, reference is often made to the classic English cases - Duke of Westminster, Ramsay, Furniss, Macniven and others. In this background, it might be useful to consider the latest approach of the English Courts to tax planning activities. The latest case on the point appears to be Commissioners for HM Revenue & Customs v. Tower MCashback LLP. This case however relies on the statement of the law on the point in the judgment of Arden LJ in John Astall v. HM Revenue & Customs, [2009] EWCA Civ 1010. Justice Arden analysed the recent case law carefully, and discussed in detail the recent judicial approach.

It was stressed in the judgment that the question is to be answered not by beginning with pre-conceived ideas about the legitimacy or illegitimacy of tax avoidance, but rather by beginning with the rules of statutory interpretation. “The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found.

The Court then explained cases such as Inland Revenue v. Burmah Oil Co Ltd., 1982 SC (HL) 114, Furniss v. Dawson [1984] AC 474, and Carreras Group Ltd v. Stamp Commissioner, [2004] STC 1377. Broadly speaking, in these cases, it had been held that tax-saving steps inserted into a transaction without any other commercial purpose do not prevent the composite transaction from falling within a charge to tax. In the words of the Court (which I quote extensively as the Court offers a very useful summary of the leading decisions), “...in the Burmah case, a series of circular payments which left the taxpayer company in exactly the same financial position as before was not regarded as giving rise to a "loss" within the meaning of the legislation. In Furniss, the transfer of shares to a subsidiary as part of a planned scheme immediately to transfer them to an outside purchaser was regarded as a taxable disposition to the outside purchaser rather than an exempt transfer to a group company. In Carreras the transfer of shares in exchange for a debenture with a view to its redemption a fortnight later was not regarded as an exempt transfer in exchange for the debenture but rather as an exchange for money. In each case the court looked at the overall effect of the composite transactions by which the taxpayer company in Burmah suffered no loss, the shares in Furniss passed into the hands of the outside purchaser and the vendors in Carreras received cash. On the true construction of the relevant provisions of the statute, the elements inserted into the transactions without any commercial purpose were treated as having no significance...” Importantly, the Court then went on to clarify, “Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far.” 

Thus, merely because in Furniss a certain form was disregarded does not mean that Furniss is authority for a general substance-over-form view. In sum, the question is not so much about whether Courts should adopt a substance-over-form approach or a form-over-substance approach – the real question to ask is what approach the particular statutory provision at issue requires. And this is to be answered not by reference to judicial anti-avoidance techniques, but by reference to the rules of statutory interpretation.

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