Ramsay applied to dividend scheme

The Court of Appeal has held that a scheme to transfer distributable profits from a company to its shareholders via trust arrangements in respect of a separately incorporated subsidiary gave rise to taxable distributions by virtue of applying the Ramsay principle: Clipperton and Lloyd v HMRC [2024] EWCA 180. The Court described this as a “paradigm case for the application of the Ramsay principle”.

Background

C and L were both 50% shareholders in Winn & Co (Yorkshire) Ltd (“Yorkshire”), which had distributable reserves of £200,000. Rather than simply distribute the profits to themselves and pay income tax on the amounts received, they entered into a marketed tax avoidance scheme. The scheme involved the creation of a new company Scarborough as a subsidiary of Yorkshire, having capital of one A share of £1 and one B share of £1. The B share was held by Yorkshire on trust (a) as to £500 for charity, (b) 0.5% for Yorkshire and 0.5% for charity and (c) 99% for C and L. Yorkshire paid £200,001 for the A share, giving rise to a £200,000 premium. Next the company resolved to reduce its share capital by £200,000 by cancelling the share premium account and crediting it to distributable reserves. Following this, Scarborough declared a dividend of £200,000 on the B share. Both C and L included a disclosure as to the scheme on their tax returns but did not report the income on the basis that it was free of tax. This was on the basis of the application of provisions of the settlements legislation applying where the settlor has a lower income tax rate than the beneficiary.

HMRC considered that the planning did not achieve the desired tax saving either due to the application of the settlements legislation on a proper reading or on the basis of the application of the Ramsay principle.

Both the FTT and UT held that on these facts the Ramsay principle applied to the treat the steps in the scheme as resulting in the payment to C and L of “a dividend or other distribution of a UK resident company” under ITTOIA s.383.

Court of Appeal decision

The Court of Appeal had little problem in agreeing with the FTT and UT in principle. Considering the scheme as a whole, there was little doubt that the “payment by Winn Yorkshire to Winn Scarborough was simply the first step in a scheme designed to distribute the majority of the money to the Appellants. The money was being distributed to them because they were the owners of Winn Yorkshire and wished to extract profits from the company into their own pockets. Everything else was just a means of enabling that to happen”.

The Court went on to describe this as a “paradigm case for the application of the Ramsay principle”.

However, the taxpayers argued that the recent decision in Khan v HMRC [2021] EWCA 624 required a different answer. Khan concerned the acquisition of a company that had distributable reserves. The purchase was for the amount of the distributable reserves plus £18,000 and involved the company transferring the reserves to Khan by way of loan, Khan buying the company, then the company repurchasing shares from Khan in settlement of the amount loaned. HMRC sought to tax Khan on the distribution by way of purchase of own shares and he sought to rely on the Ramsay doctrine to argue that the arrangements should be viewed as a whole, simply involving a composite transaction to make him the owner of the company at the small net cost of £18,000. Viewed realistically, the persons who had received the distribution were the selling shareholders. The Court of Appeal rejected this argument, concluding that s.385 was “not a statutory provision that is concerned with the overall economic outcome of a series of commercially interlinked transactions, but only with the question of who was entitled to the distribution or who actually received it”.

The taxpayers argued that the same approach must be taken with regard to the distribution under s.383, but the Court of Appeal has rejected that argument. This case was concerned with the question whether the amounts ultimately received by C and L were distributions and the Court was entitled to look at the overall composite scheme to determine that question. Khan v HMRC simply involved the question whether Khan had received the admitted distribution on those facts and the Court of Appeal had held that he, as the person who had received it and been entitled to it, was the person in receipt of it for the purposes of s.385.

The decision in Khan did not prevent the courts from applying the Ramsay principle to the question whether the amounts received in this case were distributions.

Comment

The decision is a reminder as to the scope of the Ramsay doctrine and its application to composite schemes where the sole purpose is to obtain a tax advantage. Whilst the Ramsay doctrine may now simply be synonymous with applying a broad purposive construction to particular legislative provisions and to the factual matrix to which they are applied, it remains a important tool for HMRC in appropriate cases.