Artificial losses

The taxpayers took part in a scheme designed to create an artificial loss. They set up trusts to which they lent money in return for a security.

These were then sold to a third party and redeemed at 5% of the redemption price. The taxpayers claimed the loss in their tax returns which HMRC refused.

The Special Commissioner concluded that the securities were not relevant discounted securities as defined in FA 1996 Sch 13 para 3 and dismissed the taxpayers’ appeals. The High Court supported the Special Commissioner so the taxpayers appealed.

The Court of Appeal said that the mere fact that someone intends to obtain a tax advantage does not make a statutory relief unavailable.

However it was necessary to give a purposive construction in order to determine the nature of the transaction and then decide whether the statute would...