HMRC's Ramsay argument fails

In Altrad Services Ltd and Robert Wiseman and Sons Ltd v HMRC [2022] UKUT 185 (TCC), the Upper Tribunal (UT) held that an artificial series of transactions designed to create 'magical' additional capital allowances was not defeated by a Ramsay-based argument relied upon by HMRC.

Background

The appellants had entered into arrangements intended to 'step up' their entitlements to capital allowances on plant and machinery.  They had disclosed the arrangements to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime.  Each appellant owned plant and machinery (Assets) on which they were entitled to claim capital allowances, pursuant to the Capital Allowances Act 2001 (CAA 2001), on a reducing-balance basis. The arrangements were designed to work as follows (the sums used in the example below are notional values for ease of illustration):

1. The Assets were sold to a leasing company (L) for their market value (say, £100), as a result of which the appellants ceased to be legal or beneficial owners of the Assets.  

2. Immediately after the sale, L entered into a short-term finance lease with a duration of three or four weeks with the appellants, under which each appellant was obliged to pay lease rentals totalling, say, £5.  

3. Each appellant granted L a put option, allowing L to sell the Assets back to the appellants for £95 (the predicated market value of the Assets on termination of the lease) on termination of the relevant lease. 

4. L granted another company in each appellant's group a call option, entitling that company to purchase the Assets from L for the same option price as the option price under the put option.

5. All sums due to L (under the lease, put option, and ancillary documents) were guaranteed by each appellant's ultimate parent.

6. All sums due were paid by each appellant, and each lease terminated in accordance with its terms, whereupon L exercised the put option, each appellant paid the put option price of £95, and each appellant therefore became legal and beneficial owner of the Assets (again).

It was intended that on the sale of the Assets to L (step 1 above), a disposal event would occur for the purposes of section 61(1)(a), CAA 2001, requiring the appellants to bring a disposal of value £100 into their general capital allowances pool.  Because, for the purposes of the legislation, the lease at step 2 was a 'long funding finance lease', each appellant would be entitled to capital allowances under section 70A, CAA 2001. These would be calculated by reference to qualifying expenditure treated as incurred on the provision of the Assets.  The value of the capital allowances would be the aggregate of £5 (being the present value of the lease rentals) and £95 (being the option price).  The disposal value of £100 would therefore be entirely counteracted.  

On the lease's expiry, the appellants were required, under section 70E, CAA 2001, to bring a disposal value into account. This would be calculated by taking difference between "QE" (that is, the amount of qualifying expenditure treated as incurred under the lease – so, in the example given above, £100), and "QA" (that is, the aggregate total of the payments made as rentals under the lease, in our example, £5) and the payments made under the guarantee of the residual amount (in our example, the option price of £95).  The total of these figures is £100 and the disposal value is nil.  On exercise of the put option, each appellant incurred £95 of 'further' expenditure which would qualify for capital allowances under section 11, CAA 2001.  

The effect of all this was that the appellants argued that they were entitled to capital allowances of £95 without having acquired any new plant or machinery.  

HMRC, perhaps not surprisingly, did not agree with this analysis, arguing that in light of the decision in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 (Ramsay), the appellants, in effect, still owned the assets throughout, with the result that neither the transfer of the Assets nor any subsequent step had any effect for capital allowances purposes.  In HMRC's view, the appellants were only entitled to claim capital allowances on the reducing balance basis, as they would have been if none of the steps in the arrangements had taken place. 

HMRC issued closure notices reducing the appellants' entitlement to capital allowances. The closure notice for the first appellant related to its accounting period ended 31 December 2010 and, by denying capital allowances, made it liable to additional corporation tax of £2,977,863. The closure notice for the second appellant related to its accounting period ended 31 March 2011 and resulted in an additional corporation tax liability of £12,623,202.82.

The appellants appealed the closure notices to the First-tier Tribunal (FTT).  

FTT decision

The appeals were dismissed.

The FTT, in dismissing the appeals, agreed with HMRC that there was no 'cessation' of ownership for the purposes of section 61(1)(a), CAA 2001. This was on the basis that the appellants had the 'certain knowledge' that (barring unforeseen events) they would reacquire ownership of the Assets within a short period of time.  The FTT commented that the temporary loss of ownership was the first step in a composite scheme that was intended to deliver 'magical' additional qualifying expenditure (and therefore capital allowances). The grant of the leases and reacquisition of the Assets therefore had no effect, and accordingly the appellants incurred no additional expenditure on the provision of the Assets.  This meant that the relevant provisions of the long funding lease rules were not engaged.

The appellants appealed to the UT.

UT decision

The appeals were allowed.

The UT placed particular emphasis on the way that HMRC had run its case.  It stressed that HMRC's Ramsay argument had been made in a limited and specific way, and was based on the proposition that the sale of the Assets did not lead to either appellant ceasing to own the Assets.  The UT even went so far as to note that "some readers of this decision may find it surprising that an artificial series of transactions which, on the unchallenged findings of the FTT, were devoid of business purpose and effected only to achieve a 'magical' increase in qualifying expenditure should survive a challenge based on the Ramsay line of cases."  

Unfortunately for HMRC, it had not advanced an alternative argument.  The UT considered that it was necessary to consider the meaning and purpose of the relevant parts of the legislation (here, section 61(1)(a), CAA 2001).  Once this exercise had been performed, it was necessary to ascertain the relevant facts in order to determine whether the sale of the Assets fell within the legislation, as purposively construed.  The UT held that the FTT's findings of fact could not, by themselves, demonstrate the efficacy of HMRC's Ramsay argument since they were not directed at the proper construction of the legislation.  

The UT applied the two-stage approach to statutory interpretation set out in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 (and noted by the Supreme Court in Rossendale Borough Council v Hurstwood Properties (A) Ltd and others [2021] UK SC 16, as being of general application, based on the 'modern purposive approach to the interpretation of all legislation').  In doing so, it reached the conclusion that the phrase 'ceases to own' in section 61(1)(a) was to be applied by reference to a particular snapshot in time, and not over a period of time.  It referred to a particular disposal event and disposal value, and did not invite any analysis of why a taxpayer came to cease to own an asset, or whether it was likely, or pre-ordained, or even possible, that they might come to own it again.  

The UT therefore concluded that the FTT had misdirected itself as to the meaning of the relevant legislative provisions.  Under the proper construction, the appellants had ceased to own the Assets, within the meaning of the legislation.  HMRC's argument was predicated entirely on the proposition that the appellants did not cease to own the Assets. HMRC therefore failed, and the UT remade the FTT's decision in favour of the appellants so that the 'stepped-up' capital allowances were available to them.  

Comment 

It is refreshing to see the judiciary carefully scrutinising a Ramsay argument and, on this occasion, rejecting it. All too often HMRC play the Ramsay card when out of options and not confident of defeating the taxpayer with a specific technical argument.

The UT hinted strongly that if HMRC had pleaded its case more expansively the result might have been different.  In determining what arguments to run when litigating a case, there is often a tension between 'putting one's best foot forward' and showing confidence in a primary argument and running the risk that a court or tribunal does not agree with it. In this instance, HMRC might have succeeded if it had pleaded its case more expansively.  

The decision can be viewed here.