Restricting Ramsay?

SHARON ANSTEY LLB (Hons), solicitor, ATII, IAC, considers the effect of the Ramsay principle on stamp duty.

THE DECISION IN MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237 has been widely seen as restricting the Ramsay principle's application to stamp duty. In this article, I will consider whether that is the case and the extent to which the decision in Ingram v Commissioners of Inland Revenue [1985] STC 835 is reconcilable with Westmoreland.

Nineteen years after Ramsay (54 TC 101) was decided, Lord Hoffmann in delivering the leading speech in Westmoreland provided a comprehensive review of the principle. Most commentators regard his speech as a valiant attempt to turn Ramsay from a general anti-avoidance provision into a logically consistent principle of construction, and to wrench the leading Ramsay cases into conformity with that principle.

A principle of construction

In his ruling in Westmoreland, Lord Hoffmann's speech starts with the statement that 'everyone agrees that Ramsay is a principle of construction' but goes on to say that 'there is ultimately only one principle of construction, namely to ascertain what Parliament meant by using the language of the statute'.

Having established this overriding principle, Lord Hoffmann goes on to analyse Ramsay, which he explains concerned an acquisition of shares followed by their disposal on which, the taxpayer contended, a loss accrued. He cites Lord Wilberforce's statement that the capital gains tax was:

'… 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 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.' (Italics added by Lord Hoffmann.)

Lord Hoffmann goes on to say that in this passage 'the contrast being made throughout Lord Wilberforce's speech is between juristic or arithmetical realities on the one hand, and commercial realities on the other. He is construing the words 'disposal' and 'loss' to refer to commercial concepts which are not necessarily confined by the categories of juristic analysis'. He considers that 'the innovation in the Ramsay case was to give the statutory concepts of "disposal" and "loss" a commercial meaning'. He goes on to say that:

'There is nothing new about terms used in tax legislation … being construed as referring to business or commercial concepts which may not be capable of being held within the confines of juristic analysis. A good example is the term "profits or gains of the year of assessment" which forms the basis of the charge to tax under Case I of Schedule D.'

Purposive construction

In Lord Hoffmann's view, therefore, the Ramsay principle is merely an example of the need to determine what Parliament has meant in enacting the particular words of a taxing statute. To that extent, it is an example of purposive construction. Purposive construction, however, involves giving due weight in determining the meaning of a word or phrase used in a Parliamentary statute, to the purpose of the statute. It does not mean regarding a statute as giving effect to that purpose without regard to the actual words used.

The Ramsay principle, according to Lord Hoffmann, involves identifying occasions on which Parliament has used a word in a broadly commercial sense rather than in a narrow juristic one.

Implications

Lord Hoffmann's approach has a number of implications for the application of the principle.

First, the famous list of conditions for the application of the Ramsay principle contained in the judgment of Lord Brightman in Furniss v Dawson [1984] STC 153 is not a summary of the principle itself, but merely a 'careful and accurate summary of the effect which the Ramsay construction of a statutory concept has upon the way the courts will decide whether a transaction falls within that concept or not'. The process of identifying artificial transactions in a series which are then ignored in taxing the series as a composite whole might be appropriate for the sort of provisions considered in Ramsay and Furniss, but will be inappropriate in considering other provisions. Lord Hoffmann said in Westmoreland that in Commissioners of Inland Revenue v McGuckian [1997] STC 908, 'the question was different from that in Furniss v Dawson and therefore did not necessarily respond to precisely the same analysis'.

Secondly, once the sense in which Parliament uses words in a statute is identified, the terms of that statute must then be applied.

Lord Hoffmann said:

'If "the legal position" is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business "substance" of the matter is not to ignore the legal position but to give effect to it.'

Even where a statute uses a word in this wider commercial sense the taxpayer will not be subject to tax if, applying this construction to the statute, it does not impose the tax. Thus Lord Hoffmann says that:

'Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones.'

Thirdly, the Ramsay principle is not primarily concerned with preventing tax avoidance. It is concerned with construing the words used by Parliament in the sense in which Parliament used them. Thus in Commissioners of Inland Revenue v Willoughby and another [1997] STC 995 '… the House had to grapple with what [tax avoidance] meant... because the statute expressly provided that certain provisions should not apply if the taxpayer could show that he had not acted with "the purpose of avoiding liability to taxation". … But when the statutory provisions do not contain words like "avoidance" or "mitigation", I do not think that it helps to introduce them'.

Fourthly, if the Ramsay principle is an application of the principle that the court's task is to construe the words of Parliament in the sense intended by Parliament under which certain words and phrases have a meaning found in a wider commercial usage rather than a narrow juristic one, it follows that the principle may require consideration of different matters according to the nature of the statutory provision being considered.

Re-evaluating the Ramsay authorities

Lord Hoffmann's analysis considers the leading cases of Ramsay, Commissioners of Inland Revenue v Burmah Oil Co Ltd [1982] STC 30, Furniss v Dawson, and McGuckian showing how the decisions in those cases may be understood in the light of this view of the true nature of the Ramsay principle. Ramsay and Burmah involved decisions on whether the taxpayer company had suffered a capital loss within the meaning of the capital gains tax legislation. According to Lord Hoffmann, both cases were decided on the basis that the words 'disposal' and 'loss' referred to commercial concepts:

'In the Ramsay case … there had never been any commercial possibility that the transactions would not have cancelled each other out. Therefore, notwithstanding the juristic independence of each of the stages of the circular transaction, the commercial view would have been to lump them all together, as the parties themselves intended, and describe them as a composite transaction which had no financial consequences.'

As an aside, I find it difficult to envisage, although Lord Hoffmann apparently did not, one businessman saying to another over his gin and tonic 'that deal was a composite transaction which had no fiscal consequences'.

In the same way Lord Hoffmann regarded Burmah as an entirely straightforward application of Ramsay to the concept of a disposal giving rise to a loss in the capital gains tax legislation. It meant a loss in commercial terms and not a series of pre-planned transactions which had no business purpose.

Lord Hoffmann's view of the Ramsay principle amounts to a radical restatement of it. His heroic attempt to wrench previous Ramsay cases into conformity with his view of the principle has the result that what was beginning to be regarded as a well defined doctrine is once again capable of protean development.

Ingram – the facts

The only decided case in which the Ramsay principle has been applied to stamp duty was Ingram v Commissioners of Inland Revenue. To what extent is Ingram reconcilable with Westmoreland?

Ingram concerned a scheme which had been designed to avoid stamp duty on the sale of a house. The transactions which took place were as follows. First, the vendor, Mr Simon, and the purchaser, Mrs Ingram, entered into an agreement for a grant of a 999-year lease of the property to Mrs Ingram for a lease premium of £145,000 and an annual rent of £25. Mr Simon then contracted to sell the property subject to the agreement for lease for £500 to a company owned and controlled by the partners in Mrs Ingram's solicitors, H Ltd. H Ltd and Mrs Ingram then entered into an agreement for the sub-sale of the freehold subject to the agreement for lease to Mrs Ingram for £600.

Diagram 1: Ingram

Taxpayer's analysis

The analysis of these transactions by Mrs Ingram's advisers was that the agreement for the lease was not a conveyance or transfer on sale, and was not otherwise stampable. Subsequently the law was changed by the introduction of a provision deeming an agreement for the grant of a lease to be treated as the grant itself (now paragraph 14(2) of Schedule 13 to the Finance Act 1999). The transfer from Mr Simon to Mrs Ingram was a conveyance or transfer on sale, but one which took place under the two agreements to which H Ltd was a party and, taking into account sub-sale relief under section 58, Stamp Act 1891, the consideration for the transfer was £600 and, therefore, subject to proper certification, no stamp duty was chargeable.

Revenue's position

The Revenue contended that the consideration for the transfer was £145,600. It was agreed that Mrs Ingram's purpose in structuring the transactions in this form was to avoid stamp duty.

The Revenue raised a number of arguments other than Ramsay in support of its position, all of which were rejected by Mr Justice Vinelott. The questions to be decided by the court therefore resolved themselves to two.

First, could the Ramsay principle apply to stamp duty? Secondly, if it could, did it apply to Mrs Ingram's transactions?

Ramsay and Ingram

Mr Justice Vinelott concluded that the Ramsay principle could apply to stamp duty:

'The case for the taxpayer is that this principle can have no application in the field of stamp duty. It is said that that conclusion follows necessarily from the principle that stamp duty is tax on instruments. In the case of a preordained composite transaction each instrument executed in the course of carrying it out must be examined to see what part of the transaction was affected by it. The preordained end of the composite transaction is irrelevant in determining the legal nature of each step taken to achieve that end. In the words of Mr Justice Rowlatt in Murex Ltd v Commissioners of Inland Revenue [1933] 1 KB 173:

Mr Justice Vinelott said that he was unable to accept these submissions because to determine whether an instrument falls within a chargeable category and the duty payable, it is necessary to ascertain the substance of the transaction effected by it:

'The Ramsay principle requires that (in a case where the conditions described by Lord Brightman are satisfied) a composite transaction or series of transactions be treated as a single transaction achieving the preordained end. Applying that principle in the instant case, the transfer must be treated as accomplishing the transfer of the unencumbered freehold interest to the taxpayer at the agreed price, that being the end preordained when the first step (the lease agreement) was taken.'

He said that the defect in the taxpayer's argument was that if the Ramsay principle is treated as having no application in the field of stamp duty, a preordained series of transactions would fall to be treated as a single transaction having one legal consequence for the purpose of taxes other than stamp duty and as a series of different transactions having different consequences for the purpose of stamp duty.

Having concluded that the Ramsay principle could apply to stamp duty, Mr Justice Vinelott had little difficulty in finding that Mrs Ingram's transactions fell squarely within Lord Brightman's formulation of the principle in Furniss v Dawson.

Reconciling Ingram and Westmoreland

Is the Ingram decision reconcilable with Lord Hoffmann's speech in Westmoreland? The first thing to note is that although Lord Hoffmann refers to stamp duty in his judgment, he does not refer to the Ingram case either to overrule or to confirm it.

The Ramsay principle in Lord Hoffmann's view is simply a recognition that there are some words and phrases used in legislation which adopt a commercial rather than narrowly juristic usage. If Lord Hoffmann's speech is followed in future cases, the court's task will be to identify where, in legislation, Parliament has adopted a wide commercial rather than a narrow juristic usage. It is clear that in Lord Hoffmann's view, the phrase in the stamp duty legislation 'conveyance or transfer on sale' is an example of Parliament adopting a strict juristic usage rather than a wide commercial one.

Lord Hoffmann does not say, however, that Parliament has or will never adopt a commercial usage in stamp duty legislation. Westmoreland tells us nothing about the meaning of 'consideration', for example, in paragraph 2 of Schedule 13 to the Finance Act 1999, which fixes the rate of duty on a conveyance or transfer on sale. It could be said that Lord Hoffmann's approach in Westmoreland in dealing with earlier Ramsay cases is to re-interpret previous decisions as being consistent with his formulation of the principle which he achieves by doing some violence to the detailed reasoning in the case concerned. Doing some such violence to Mr Justice Vinelott's ratio decidendi in Ingram, one could regard it as a decision based on taking a broad commercial view of what constitutes consideration. Whether or not that is the approach which will be taken to the Ingram decision remains to be seen.

Broader principle of construction?

What is more, there are a number of stamp duty cases which are not within the Ramsay series where the decisions are extremely difficult to understand if one applies a traditionally literalist method of construction. Oughtred v Inland Revenue [1960] AC 206 and Parinv [1998] STC 305 are, surely, examples of cases where the decisions are almost inexplicable on a close reading of the relevant legislation and previous case authority. Such cases, however, may be seen as examples of Lord Hoffmann's 'one principle of construction', namely to ascertain what Parliament meant by using the language of the statute. In this way, both Ingram and these non-Ramsay cases could be brought within the wider principle which Lord Hoffmann identifies as underlying the Ramsay principle.

If Lord Hoffmann's approach is followed in future cases, one will return to the pre-Westmoreland Ramsay cases to identify particular words and phrases in legislation which are to be given a wide commercial meaning.

Narrowing Ramsay?

Westmoreland might be regarded as restricting the application of the Ramsay principle to stamp duty, both specifically and generally. It might be seen as restricting it specifically, because it is clear that the phrase 'conveyance or transfer on sale' cannot be given a broad commercial Ramsay meaning. It restricts it generally, because if one can say of a word or phrase used in legislation that 'a commercial man, asked what they meant, will say 'you had better ask a lawyer', the Ramsay principle will not apply to those words and phrases. Stamp duty must surely be full of phrases which a normal commercial man would refer to a lawyer for their definition. I would think that that would apply to contract, lease, instrument, use and trust to take just a few words and phrases at random from Schedule 13.

Widening Ramsay?

On the other hand, many other words in the legislation will not have a specific legal sense; to take examples again from Schedule 13, the words 'agreement' or 'duplicate'. Again there is an intermediate category of words of which, to use Lord Hoffmann's test, a commercial man would feel that he knew the meaning without recourse to a lawyer even though they are in fact specialist terms in commercial law. Other examples from Schedule 13 might be renounceable letters of allotment or counterpart.

It is surely a strange test which asks a court to identify the sense in which a word or phrase in legislation is used by asking whether a normal commercial man would apply to a lawyer for their definition. After all, the courts will only be called upon to consider the question when the parties have gone to court to determine the meaning of words on which they cannot agree.

The broad and strait ways

Be that as it may, it is clear that Westmoreland could be applied by the court in two opposing ways. First, the court may assume that most legislative words and phrases refer to the usage of ordinary commercial men and, therefore, that specialist juristic usages in legislation are rare. That would result in the Ramsay principle expanding into an almost universal principle of broad purposive construction; a development which was threatened by the speeches of Lord Cooke and Lord Steyn in McGuckian.

Secondly, the courts may assume that the legislature will usually make use of a specialised legal vocabulary in drafting legislation.

Surely, the latter is a more realistic view, but it is one which even now does not appear to be accepted by many judges.

It would be strange if Lord Hoffmann's speech in Westmoreland, which seems to have been designed to restrict the Ramsay principle, results in it applying to any word without a specific juristic meaning. The potential for the expansion of the principle would then be enormous. It seems that the Westmoreland decision could be used either to justify a substantial narrowing of the application of the Ramsay principle to stamp duty or an equally substantial widening. Future cases will show which it is to be, but one would have to be sanguine indeed to assume that the question will be decided in the taxpayer's favour.

Sharon Anstey is with McKie & Co, a firm which provides specialist taxation advice to professional advisers.

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