In Simon Padfield, Satnam Bhogal, Allan Dunn & Conor McCloskey v HMRC [2020] TC07983, the First Tier Tribunal (FTT) held that a tax avoidance scheme involving derivative trading to generate an allowable loss and a tax-free gain in separate transactions had to be viewed as a whole, with the gain cancelling out the loss.
The scheme was promoted to generate either a capital loss to shelter chargeable gains or a deductible loss to be utilised against other taxable miscellaneous income. There were four appellants in this case and each:
- They entered into forward purchase and forward acquisition contracts for securities through Schroders bank.
- Triggers were set on the trades so that either a small overall gain was achieved, or large gains and losses were realised but to the extent that they cancelled each other out. The securities consisted of a mix of gilts and either shares or certificates of deposit. The type acquired and disposed of was depended on whether a gain or loss arose.
The scheme worked so that:
- The gilts always gave rise to a gain. This was not chargeable to tax under s.115 Taxation of Chargeable Gains Act 1992 (TCGA 92).
- The loss always occurred on the shares or certificates of deposit. The appellants claimed these losses in accordance with the TCGA provisions for the shares and s.152 Income Tax Act 2007 (ITA 07) for the certificates.
An investigation by HMRC found that there were 59 participants in the scheme in total. Each had taken part in the trades until a loss had been produced. Some trades produced a loss at the first attempt.
HMRC argued that Ramsay applied and that the series of transactions should be viewed on the whole, with the gains cancelling out the losses. The appellants argued that each transaction was distinct and they were 'real world' transactions each with legal effect.
The FTT found that:
- The transactions were self-cancelling and with no business purpose.
- Transactions that have a legal effect can still be disregarded when taking a composite view.
- The VIS scheme was clearly tax avoidance. It was a use of a complex artificial structure to create a loss that would otherwise not have existed.
- The argument that if the scheme was tax avoidance then there would be GAAR or Targeted Anti-Avoidance Rule (TAAR) within the legislation to stop it and did not prevent the Tribunal from applying Ramsay.
- In relation to the excess loss over the matched gain (each loss was slightly more than the gains), the facts showed that the excess loss equated to an amount paid to Schroders at the outset and was considered non-refundable. With this in mind, the Tribunal agreed with HMRC that this was a fee payable to Schroders and not a loss on disposal.
The FTT held that a composite view of the transactions needed to be taken, as per Ramsay. The transactions were self-cancelling so no losses arose that were allowable for Capital Gains Tax (CGT) or deductible against miscellaneous income.
Comment
We have a more detailed analysis of this case in Ramsay exposes loss-making scheme as tax avoidance (subscriber guide) for tax enthusiasts, including the judge's conclusions on the application of Ramsay and the associated legislation.
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General Anti-Abuse Rule (GAAR)
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