Ramsay approach re-affirmed

The Court of Appeal has applied the Ramsay approach to a circular and entirely tax motivated capital allowances scheme in HMRC v Altrad Services Ltd [2024] EWCA 720. The decision, whilst not surprising on its facts, contains significant analysis of the Ramsay principle drawing in particular on the recent Supreme Court decision in Rossendale.

These cases appear to re-emphasise the scope of the principle and its potential to ignore arrangements which might clearly meet the technical wording of legislation but fail a broader, real world, purposive interpretation.

Background

The case concerns a marketed tax avoidance scheme designed to exploit the capital allowances legislation in a way that would substantially increase the taxpayer's pool of expenditure on plant and machinery qualifying for allowances without incurring the economic consequences of such expenditure.

The arrangements involved were disclosed under the DOTAS regime and involved a trader which had an existing item of plant on which it claimed allowances to increase the amount of expenditure qualifying for allowances by entering into a planned series of transactions over a period of three to four weeks at no cost to the trader apart from the fees for implementation. Moreover, the item of plant remained in the uninterrupted use of the trader for the whole period.

The scheme involved the sale of the assets to a bank at market value with a lease back for four weeks. At the end of the lease term, the bank would exercise a put option to sell the assets back to the trader. It was contended that the effect was that the sale and finance leaseback would be tax neutral as both a disposal event and a reacquisition for the same amount. Although the termination of the leaseback would be a disposal event, the terms of the put option resulted in a nil value, but the payment to acquire the assets constituted new capital expenditure on which allowances could be claimed.

As the Court noted, there was no obvious reason the scheme should not be repeated many times over to generate increasing amounts of capital expenditure.

HMRC's primary argument was that on a purposive construction of the legislation, as applied to the facts viewed realistically, the scheme failed because when the taxpayer sold the relevant assets to the bank, they did not "cease to own" the assets within the meaning of CAA 2001 s.61, so there was no disposal of the assets. Since the assets never left the taxpayer for these purposes, the following steps of the scheme did not have the intended consequences.

FTT and UT

The FTT accepted HMRC's argument that the scheme failed on Ramsay principles. The scheme was purely tax driven and devoid of any commercial purpose. Viewing the transaction as it was intended to operate as a composite whole, at the end of the three or four week period during which the leases were in place, the appellants ended up in exactly the same position as they had started in, as the legal and beneficial owners of the assets having had the use of the assets in their trades throughout.

The Upper Tribunal reversed the decision of the FTT holding that the FTT had not been entitled to apply a purposive construction of the phrase "cease to own" to ignore the admittedly effective sale to the bank. The FTT had found that  appellants gave up ownership of the assets (subject to the leaseback) with the attendant legal and commercial effects that entailed. The sale was not a sham and it was not possible to construe the legislation as ignoring such a transaction.

Court of Appeal

The Court of Appeal has now held that the Upper Tribunal was wrong to overturn the decision of the FTT.

The Court emphasised the essence of the Ramsay approach is 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.

The underlying purpose of the legislation had been correctly identified by the FTT, with a recognition that it applied to "real world" transactions. Moreover, the terminology used ("cease to own") involved simple, non-technical language in which the individual wording is not defined and so should take their ordinary and natural meaning.

The question, therefore, was whether the taxpayer, in a real and practical sense, ceased to own the assets which they sold to the bank. In answering that question, it was necessary to regard the scheme as a whole in the way it was intended to operate. Adopting that approach, the Court had no hesitation in concluding that the taxpayer did not cease to own the assets in those circumstances for the purpose of s.61. "On the contrary, the whole purpose of the scheme was that the same assets would be returned to the sole beneficial ownership of the taxpayers upon exercise of the put option by the Bank three weeks later, and that for all practical purposes the taxpayers would continue to have the uninterrupted beneficial use of the assets for the purposes of their trade in the meantime."

Indeed, as the Court noted, "No rational legislature could have intended traders with existing allowances to be permitted to increase the amount of their capital allowances in such a way".

The Upper Tribunal had erred by considering that the decision of the House of Lords in Melluish (concerning whether fixtures acquired by a lessor and leased to local authorities belonged to the lessor) required it to focus on legal and beneficial ownership. However, as the Court of Appeal noted, Melluish did not involve any consideration of the Ramsay principle, involved an entirely different factual context and turned on the technicalities of English land law. This decision had diverted the UT's attention from the cardinal principle, where a Ramsay analysis is in issue, of regarding a composite scheme as a whole.

Comment

The decision appears to be very much a paradigm case for the Ramsay approach, involving circular arrangements having no commercial purpose other than tax avoidance. However, it is interesting that this is the second case in recent weeks to mention the importance of the recent Supreme Court decision in Hurstwood Properties (A) Ltd v Rossendale Borough Council [2021] UKSC 16 in determining the correct approach to the Ramsay principle.

Rossendale is not a tax case and concerned a scheme to avoid business rates through the use of leases granted to SPVs which were then wound up. The decision turned on whether the SPVs were the "owners" or whether the local authorities could look to the defendants as the persons who granted the leases despite the fact they had (from a legal perspective) divested themselves of ownership.

The Court of Appeal quotes extensively from Rossendale as to the correct approach to the Ramsay principle and, as such, it seems clear that this Supreme Court decision now forms a highly significant decision on its scope (as well as the most recent, authoritative Supreme Court enunciation of the principle).

The Court noted that it was "both relevant and instructive to see how the Supreme Court dealt with the argument of the local authorities that the defendants remained the "owners" of the unoccupied commercial properties ..., despite the grant by them of leases to SPV companies which (a) were not shams, and (b) as a matter of real property law conferred on the SPVs a legal entitlement to possession of the properties. The Supreme Court ... held that on the unusual facts of the case, and on a purposive construction of the legislation, it would "defeat the purpose of the legislation" to identify "the person entitled to possession... as the person with the immediate legal right to possession of the property".

In doing so, the Court of Appeal has emphasised "in particular (a) the express recognition by the Supreme Court in that "The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax", and (b) the explanation given for this, namely that "it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance".

Indeed, the Court noted that the Supreme Court quoted from the "celebrated passage" from the judgment of Judge Learned Hand in Gilbert, suggesting that the court wished to endorse that eminent American judge's reasoning that "we cannot suppose that it was part of the purpose of the Act to provide an escape from the liabilities that it sought to impose" as well as the preceding proposition that "If ... the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it" (which was cited by Lord Wilberforce in Ramsay itself [1982] AC 300, 326). The Court of Appeal notes that "the Supreme Court here comes close to enunciating a general principle which should be applied to the interpretation of all United Kingdom tax legislation".

In rejecting the Court of Appeal's more restrictive approach to the Ramsay principle in Rossendale (where Sir Launcelot Henderson, who has given the leading judgment in Altrad, also gave the leading judgment considering that the purposive approach could not ignore the clear legal effect of the arrangements), it appears that the decision of the Supreme Court in Rossendale has re-emphasised the potential scope of a purposive construction of tax legislation to ignore or recharacterise tax avoidance arrangements which might technically meet the strict wording of the legislation but which fail to meet the broader purpose of that legislation.