The Supreme Court has refused HMRC’s application for permission to appeal against the Court of Appeal’s decision in HMRC v Mayes [2011] EWCA CIV 407, a case involving tax arrangements marketed as “Ships 2″.  In April 2011, the Court of Appeal had upheld the High Court’s decision to allow the taxpayer’s claim for an income tax deduction under section 549 Income and Corporation Taxes Act 1988 (ICTA) for losses arising in relation to second-hand life insurance polices.

The structure

The transactions under consideration were implemented in seven pre-ordained steps and in particular steps 3 and 4 were self cancelling and involved the payments of premiums followed by the partial surrender of a number of life policies.  Following implementation of the scheme Mr Mayes claimed a deduction of £1.8 million against his taxable income for 2003/2004 and a capital loss on the basis that he paid much more for the assignment of the bonds at step 6 than he received for their surrender at step 7.

HMRC relied on a Ramsay argument focusing on steps 3 and 4 and argued that they were not separate transactions, but a single composite transaction that was wholly self cancelling without any commercial purpose.  As a result, applying a purposive construction of the legislation in accordance with Ramsey,  there was no chargeable event within the meaning of the provisions in ICTA and thus no corresponding relief.

Victory for the taxpayer

The key points to emerge from  the Court of Appeal’s decision are:

  • the Ramsay principle is a general principle of purposive and contextual construction applicable to all legislation.  It does not lay down a special doctrine of revenue law striking down tax avoidance schemes on the grounds that they are artificial composite transactions;
  • the relevant provisions in ICTA were themselves artificial and highly complex and did not lend themselves to a purposive construction;
  • when properly construed, the relevant provisions did not focus on an end result such as a loss;
  • steps 3 and 4 of the structure were genuine legal events with real legal effects and could not be ignored just because they were self-cancelling and commercially unreal.

Refreshing honesty

The Court of Appeal were quite clear that they did not like the structure – Toulson LJ described the result as unattractive for other taxpayers and the rest of society.  However, their Lordships were not prepared to use Ramsay as a cure-all for overcomplicated and artificial legislation.  That was the job of Parliament and only Parliament could simplify the legislation into a more workable form.

This judgment is to be welcomed for its intellectual honesty.  It is not the role of the judiciary to strike down tax avoidance structures simply because HMRC finds them offensive and is under pressure from the Exchequer to increase the tax yield.  The real difficulty lies with the legislation itself.  Despite the introduction of tax simplification, the body of tax legislation has increased significantly in recent years and this is a development much to be regretted.  In my view, Parliament needs to address the volume and complexity of tax legislation as a matter of some urgency.  A simpler tax code would better serve taxpayers and HMRC alike!