Modern Tax Planning and ‘Ramsay.’

Modern Tax Planning and ‘Ramsay.’ 


In the world of international tax law, it is as though the judgement of WT Ramsay Ltd v IRC [1982] AC 300, (1981) 54 TC 101 was a remedy for all. Parliament, Tax Commissioners the ‘Average Man” and Individuals all walked away feeling like they won, something. However, after Forty years was this case really a friend to all three rivalling parties? 

Our current battle ground is an old arena. For lack of vision, good administration or worse, our Governments are all embarking on policies to acquire more revenue and monitor flows of wealth in ways that are no longer simply aggressive but complex and sophisticated. The battles that will be fought over the proper classification of Tax Structures and Tax Initiatives designed to benefit from long standing legal principles in the near future will be harsh. 

Where for as much taxation as there is such little revenue, Legal Tax Avoidance is now being frowned upon. A heavy emphasis on ‘Personal and Corporate Social Responsibility’  is giving Governments ‘Green Lights’  to scorch as many pools of Tax Relief and reprieve out of existence as quickly as possible.   This wave of anti avoidance is global, growing and, affects everyone, from Private Persons concerned for their finances, international business owners, to the Largest Investors, nobody will be left unscathed. 

What is the Capital Gains Tax ?

Lord Wilberforce in, 

“The capital gains tax was created to operate in the real world, not that of make-belief.” 

  • Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885

Lord Wilberforce continued; 

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.

This definition is louder than people think and is overlooked where it is pronounced in WT Ramsay Ltd v IRC [1982].  This definition, effectively shut down all Tax Schemes designed to allow Tax payers to funnel their Capital Gains through structures that artificially create equivalent losses and bring the tax payer in effectively the same position as he was in before he made any gain.  It is a precursor for now what we know obviously cannot be done anymore.  

Ramsay’s Principles. 

WT Ramsay Ltd V IRC [1982] has left us in the following position: 

  1. The Taxpayer is entitled to benefit from Legal Tax Avoidance arrangements. 

“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.”

This means that Tax authorities cannot prejudicially review the structures of the tax payers with the intent of punishing him for legal  tax avoidance or destroying his attempts to do so lightly.  The tax payer is entitled  to structure his entities, tax structures and transactions to benefit from clear allowances in the law to avoid tax and benefit from the same solely being  and designed to avoid a tax as long as the entity, structure or transaction itself is not prohibited by the same tax avoidance allowance in the legislation. 

  1. Whatever pieces of Legislation a Government chooses to impose taxes are not infallible, any ambiguity will not be interpreted to benefit the Government’s intention but to the advantage of the taxpayer.  

 “A subject is only to be taxed upon clear words, not upon “intendment” or upon the “equity” of an Act. 

 The court will decide what  “clear words” are on normal principles and the court is not confined to a ‘literal” approach of the law.  The entire context and scheme of a piece of Tax legislation will be considered along with its purpose.

  1. There is clear distinction between genuine and sham ‘documents’ and ‘transactions.

Tax commissioners are the fact finders and they must decide whether a document, or a transaction, is genuine or a sham.

 A document or transaction is to be considered a “sham” when it professes to be one thing but is something different. 

A document or transaction is genuine, where when in law, it is what it professes to be, and it does not mean anything more than that. 

  1. The determinations Tax Commissioners make about Transactions and Documents are persuasive to the Courts. 

The court will not lightly embark on their own analysis of documents or transactions for their authenticity.  

While the court is obliged to accept documents or transactions, found to be genuine by Commissioners; The court cannot be compelled to look at a document or a transaction with blinkers, and isolate it from a context that it obviously came from. 

  1. The Court is free to analyze a document or transaction in isolation or as a part of a series, as cases requires. 

If the court can see 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, the court can analyze the documents and transactions as a whole. The form and substance of a document and Transaction are equally important.

Rather, it is the Court’s job to ascertain the legal nature of any transaction involving a tax and a consequence of tax. If that assessment emerges from a context with a  series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. 

The Position of the Tax Payer

It is the burden of the Tax payer to identify legislation that permits him to legally avoid taxes and to create tax structures or programs that allow him to benefit from that tax relief without offending the legislation by the tax structure or program he implements. 

While the Tax Payer sets on this journey, Lord Hoffman in Carreras Group Limited v Stamp Commissioner [2004] STC 1377,  clarified that when courts are  interpreting tax legislation the they are likely to  assume that the legislation is concerned with the characterisation of transactions which have a commercial unity rather than the component steps taken individually:

Astall v HMRC [2009] EWCA Civ 1010, [2010] STC 137 helped clarify,  that where courts are concerned with Characterization of entire transactions when they have ‘commercial unity’ rather than the individual steps that some transactions can be divided into, this approach does not deny the existence or legality of the individual steps but may deprive them of significance for the purposes of the characterisation required by the statute.

This is where the position of the Taxpayer becomes more precarious.  As the Tax Payer is left to invent  his vehicle to navigate the tax reprieve, he must be aware of the fact that;

Whether the statute is concerned with a single step or a broader view of the acts of the parties depends upon the construction of the language in its context.  Sometimes the conclusion that the statute is concerned with the character of a particular act is inescapable

 MacNiven (Inspector of Taxes) v Westmoreland Investments Limited [2001] UKHL 6, [2001] STC 237,

Every Taxpayer must be prepared for challenge that the character of his transactions under his Tax  Structure may be of interest despite the fact that he is permitted to undertake things purely for the sake of tax avoidance. He may not be able to rely on individual steps to speak more loudly than the entire Commercial Transaction he has undertaken.

Given our current climate, we must all be concerned with the types of tax structures and  vehicles we use to access tax relief. We must be careful to plan structures that access the legal opportunity to avoid taxes without offending the actual opportunity by the types of transactions we use.  That is where Governments will use everything in their arsenal to maximize the playing field that the ‘Ramsay Principles’ outline. 

Further, we must now all ask whether in the future, Governments will interject ideals of ‘Social Partnerships Policies,’ ‘Community Upliftment, and ‘Corporate Responsibility’ into general tax avoidance opportunities.  This would be a departure from capitalism.  Certainly not in line with constitutional rights and also anathema to “Private property rights.  Many thousands of wealthy Chinese have chosen to leave China where there are no real property rights for the west where property rights are enshrined in the constitution. The Chinese government has snuffed Hong Kong out of existence overnight as a global financial centre, these threats are realistic and must be planned for.

 This path would not be far fetched, and the taxpayer would not be able to rely on individual steps in his transactions to satisfy these new types of requirements. The very idea of ‘ Commercial Unity’ may become an enemy of the state in many states.  Certainly Latin America and China and many other countries will continue to attack private property rights as is Europe with its increased amount of anti-avoidance legislation.  Rather, he would have to invent an wealth creation and tax structure, commercially unified and  dependent on the very vehicle he chooses  to navigate safely.   

Heavier scrutiny will continue to be placed on existing tax avoidance possibilities that are present for the expected Charities and Organizations that carry out Philanthropic work. What may be advertised as accountability for them, will really only be stringent testing for entities that do not classify as such. 

The ‘Reasonable Man,” determined to plan his affairs in the midst of ‘charming fiscal policy’ may see windfalls with curious caps, while Companies and other Individuals likely will not be so lucky. Where they are demonized as greedy and undeserving in the Public’s sight, public opinion will force governments to close doors on tax avoidance opportunities for companies and tailor what little is left to Corporate Social Responsibility until the wealthy and the innovative leave and these countries become poorer because they have no one incentivized to earn profits.  While we know a compromise, for the ease of doing business and flows of wealth must be struck, there will be long wars in court, before that.

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