The special commissioners upheld assessments raised under TMA 1970, s. 29 in respect of the sale and purchase of insurance policies where chargeable gains had arisen as a result of the transactions which had not been assessed when they should have been so that the taxpayer's self-assessment was insufficient.

Facts

On or about 2 April 2000 the taxpayer acquired an endowment policy for £2.4m, and on 3 April 2000 he disposed of that asset in return for a capital redemption policy (CRP). The value of the capital redemption policy was said to be only £139,736, and therefore on the disposal he claimed an allowable loss of £2,260,264.

The Revenue took the view that the transactions were shams in that no premium was paid for the endowment trust policy, no such policy was issued, and therefore there could be no disposal of it for the CRP. The CRP was in fact issued for the cash payment of £2.4m (and no loss arose on that transaction). Even if the transactions were not shams and took place as maintained by the taxpayer, no allowable loss arose because the CRP was in fact worth something close to £2.4m. Finally any disposal of that policy was not, in the circumstances, and applying the principles of the Furniss v Dawson [1984] BTC 71 line of authority, a'disposal' within the meaning of TCGA 1992 so that no loss could arise upon it.

The taxpayer appealed against assessments made by the Revenue pursuant to TMA 1970, s. 29 for additional tax of £906,944.80 in respect of the year ending 5 April 2000. He maintained that the assessments made by the Revenue were not authorised by the provisions of TMA 1970, s. 29.

Issues

Whether any of the transactions were shams; whether there was for the purposes of TCGA 1992 a disposal of the endowment trust policy in consideration for the CRP or any gain or loss for those purposes; and whether the conditions in TMA 1970, s. 29 for the issue of the assessments were satisfied.

Decision

The special commissioners (Theodore Wallace and Charles Hellier) (dismissing the appeal) said that, on the evidence, the endowment policy document was executed on or after 3 April; it was not executed pursuant to an agreement made on or before 2 April; the agreement to assign the endowment policy and the assignment of it were executed on 3 April; and the taxpayer made payment of £2.4 m to the specified account between 3 and 5 April inclusive.

The Ramsay doctrine (WT Ramsay Ltd v IR Commrs [1982] AC 300) might potentially be deployed in three ways in the circumstances of the case. It might be said that: (1) there was no disposal of the endowment policy within the meaning of'disposal' in TCGA 1992, s. 1; (2) TCGA 1992, s. 38(1)(a) limited the deductible sums to'the amount or value of the consideration given [by the taxpayer] wholly and exclusively for the acquisition of the asset ', and that the taxpayer gave none of the £2.4m ‘for’ the endowment policy; and (3) the arithmetical difference between the value of the consideration received by the taxpayer when he disposed of the endowment contract, and the amount be paid for it, was not a ‘loss' within the meaning of the Act.

Disposal

If there was an acquisition of the endowment policy by the taxpayer the assignment might be termed a disposal. On 3 April he transferred his interest in the policy. If he had an interest that was a disposal. His assignment was pre-ordained, but it was still an assignment. ‘Disposal’ was a word of wide import. Its meaning was not intended to be limited or diminished because the actual disposal was pre-ordained or for tax avoidance purposes.

Real loss

In IR Commrs v Burmah Oil Co Ltd [1982] BTC 56, the House of Lords held that the arithmetical difference between the consideration received and given was not a loss for the purposes of the predecessor of TCGA 1992. In TCGA 1992, ‘loss’ and ‘gain’ were not restrictively defined but they had the flavour of something which had real economic consequences which the Act sought to tax or relieve.

The acquisition and disposal of the endowment policy by the taxpayer were not separate transactions divorced from each other. They were part of a pre-ordained series of transactions involving the acquisition of the CRP to which an artificially low value was attributed. No realeconomic or commercial consequences could be attached to the taxpayer's brief period of ownership of the endowment policy: no real loss or gain arose to him on its disposal.

There was a single composite transaction in which on the same day the endowment policy was acquired and disposed of and the CRP received and (within a few days) the money was paid. The issue of the CRP was not simply the consideration for the assignment of the endowment policy but was in practice and reality substantially in consideration of the payment of premium: the consideration for the disposal of the endowment policy was in reality for no more or less than whatever consideration had been given for it.

There was neither gain nor loss on the endowment policy. If the £2.4m was not paid until after the CRP was issued or the assignment executed in reality neither policy would have had any value until the premium was paid, and no real gain or loss could have arisen on the disposal of the endowment policy.

The onus of proof was on the taxpayer to show that he had truly acquired the endowment trust policy but he had brought before the tribunal no cogent evidence that the policy was owned by him before the time of the assignment agreement so that there could have been no disposal of it. On that ground the appeal would be dismissed. Even if the taxpayer had acquired and assigned the endowment policy, the value of the CRP was almost £2.4m and accordingly very little loss would have arisen and it could not be said that the transactions gave rise to a real loss constituting a loss on a disposal within the meaning of the Act. Therefore the appeal would be dismissed even if the taxpayer did not have the onus of proof.

Discovery

The question remained whether the Revenue were entitled to assess under TMA 1970, s. 29. The tailpiece of s. 29(2) afforded two forms of escape for the taxpayer: if the return was made on the basis generally prevailing, or if it was made in accordance with practice generally prevailing at the time it was made. Both the words ‘basis’ and ‘practice’ were qualified by ‘generally prevailing at the time’. That seemed to refer to the Revenue's practice and probably also to the normally accepted practice of the tax profession. There was no evidence that there was any generally prevailing practice or basis under which any particular view would be taken of the tax results of such an avoidance scheme as was represented in the taxpayer's transactions. It followed that the entries were not in accordance with any such practice or basis.

(2008) Sp C 675.
Decision released 11 March 2008.