| The House of Lords have had second thoughts about their approach to tax avoidance cases. The famous “Ramsay approach”, which has dominated tax planning in the UK for the last 20 years, has been substantially curtailed, if not killed. |
The McGrath Case
One of Ireland’s most famous tax cases was the McGrath case. Many people have heard of the case, but not everybody remembers why it is famous.
It was the case in which the Supreme Court refused to follow the approach adopted by the House of Lords in the UK to tax planning cases.
The House of Lords, in the Ramsay case, asserted the right to ignore the taxation consequences of transactions entered into solely for tax planning reasons and not having a commercial purpose. That doctrine was developed in successive cases, principally Furniss v Dawson and the Burmah case.
During its development the nature of the approach was restated many times. The judges emphasised that it was a ‘developing doctrine.’ In other words, they reserved the right to change the doctrine as time went on so that it was in reality no doctrine at all but rather an open ended licence on the part of the judges to disregard statutory provisions.
The Irish Supreme Court in the McGrath case rightly characterised the House of Lords approach as an intrusion by the judiciary into the legislative area. It involved rewriting the law, not interpreting it. In that case the Supreme Court invited the Oireachtas to introduce a general anti-avoidance provision into statute law, if they wished to have tax motivated transactions limited in their effectiveness. That has since happened.
House of Lords rethinks
In a recent case, Niven v Westmoreland, the UK House of Lords have dramatically reviewed the Ramsay/Furniss v Dawson approach to tax planning. Although they have not overruled any of the previous cases involving that approach, and indeed have positively approved them, they have ‘reinterpreted’ the rationale behind the various decisions.
They have explicitly rejected the doctrine put forward in some previous UK cases, that the courts could distinguish between ‘acceptable tax mitigation’ and ‘unacceptable tax avoidance’.
Tax mitigation was considered to be acceptable when the taxpayer suffered the economic consequences intended by parliament in order that a particular tax result should be achieved. Where he did not suffer what the judges considered were the appropriate economic consequences, the judges denied him the tax consequences whether or not he had met the requirements of the taxation statutes. This doctrine has been rejected.
The House of Lords now say that distinguishing between acceptable mitigation and unacceptable avoidance is for parliament to do in its statutes.
The House of Lords have managed to reverse course while simultaneously endorsing the past, by explaining that previous judges were not disregarding legislation, and effectively rewriting legislation (as was commonly supposed) but merely adopting conventional rules of interpretation.
Where they came across a tax measure that applied to an economic concept not defined in legislation, they had to take a broad view of what that economic concept meant. Thus, income tax is charged on the profits of a trade. But the profits of a trade are not defined in the legislation.
Therefore the courts, in determining whether or not a particular matter constitutes profits have to look at the matter in quite a wide manner. They may have to look at several transactions taken together, and at the end result of those transactions. They may disregard some transactions if those transactions are economically insignificant. All of this is possible and necessary because ‘profits’ is not defined in the legislation.
On the other hand, some concepts to which taxation legislation applies are strictly legal concepts whose meaning is precisely defined. Thus stamp duty is charged on (amongst other things) a ‘conveyance on sale.’ That is a purely legal concept meaning nothing to the average layman.
Therefore the judges would apply the law quite strictly to stamp duty on a conveyance on sale. There is no room for amalgamating several transactions, or disregarding transactions, in order to find what the true economic consequences are, because the legislation is not being applied to an economic concept.
It is being applied to a legal concept, and either a transaction meets the precise terms of that legal concept, or it does not.
What the House of Lords have set out are the traditional rules of statutory interpretation, as followed for centuries past in the UK, and as followed in Ireland.
General Anti Avoidance section?
The House of Lords decision in the UK has one obvious consequence. The rule of law is restored to tax legislation. Judicial rewriting of legislation as each case comes before them appears to be at an end. But the flipside of that is that it now makes it much more likely that the UK will follow Ireland and introduce a statutory general anti-avoidance provision. This was proposed about a year ago but was shelved as raising too many problems. It seems possible that it will now be dusted off again. |
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| Article appeared in the March 2001 issue.
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