2000 (2) TMI 839 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of the Ramsay principle.
2. Whether the transactions constituted payments of interest within the meaning of section 338 of the Income and Corporation Taxes Act 1988.
3. Application of section 338(5)(a), section 75(3), and section 787(1) of the Taxes Act.
4. Binding nature of an agreement under section 54 of the Taxes Management Act 1970.

Summary:

1. Applicability of the Ramsay Principle:
The Ramsay principle, derived from W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300, requires courts to ascertain the legal nature of transactions and relate them to fiscal legislation. The principle emphasizes that courts can look at a prearranged tax avoidance scheme as a whole and disregard steps inserted solely for tax avoidance. However, the House of Lords clarified that the Ramsay principle is not a new legal principle but an approach to interpreting taxing statutes purposively.

2. Payments of Interest under Section 338:
The key issue was whether the transactions between Westmoreland Investments Ltd (WIL) and the trustees of the Electricity Supply Pension Scheme constituted payments of interest within the meaning of section 338 of the Income and Corporation Taxes Act 1988. The Court of Appeal found that the payments were genuine and not sham transactions. The House of Lords agreed, stating that the payments discharged WIL's obligation to pay interest, and there was no basis to give "payment" in section 338 a meaning other than its normal legal meaning.

3. Application of Specific Tax Avoidance Provisions:
- Section 338(5)(a): The Crown argued that the payments should not be treated as charges on income as they were not "ultimately borne by the company." The court found that the burden of the interest payment never shifted from WIL.
- Section 75(3): The Crown contended that the interest payments were not made "wholly and exclusively for purposes of the company's business." The court held that since the loans were borrowed for business purposes, the interest payments met the requirement.
- Section 787(1): This section denies relief for payments made under schemes designed primarily for tax reduction. The court concluded that the original loan, not the subsequent arrangements, was the relevant transaction under which the interest was paid.

4. Agreement under Section 54 of the Taxes Management Act 1970:
WIL cross-appealed, arguing that an agreement under section 54 for the year ended 31 March 1988 should bind the Crown regarding charges on income available for future periods. The court rejected this argument, stating that section 54 agreements determine the amount chargeable for the specific period and do not conclusively determine amounts for future periods.

Conclusion:
The House of Lords dismissed the Crown's appeal, affirming that the interest payments made by WIL were genuine and fell within the meaning of section 338. The court also dismissed WIL's cross-appeal regarding the binding nature of the section 54 agreement for future periods.