Collector of Stamp Revenue v Arrowtown Assets Ltd; 4 Dec 2003

References: [2003] HKCFA 52, [2004] 1 HKLRD 77, (2003) 6 HKCFAR 517, ACV 4/2003
Links: Hklii
Coram: Ribeiro PJ, Lord Millett NPJ
Ratio: (Hong Kong Final Court of Appeal) The court was asked as to the accounting treatment of interests incurred in the development for the purpose of generating the profits, and therefore whether the relevant Ordinance prohibited the capitalisation of interest for the purpose of computing the taxpayer’s assessable profits and allowable deductions.
Held: The resolution of that question depended on the proper accountancy treatment of capitalised interest.
Ribeiro PJ said: ‘The . . preferable, view is that the Ramsay principle does not espouse any specialised principle of statutory construction applicable to tax legislation, whatever its language, but continues to assert the need to apply orthodox methods of purposive interpretation to the facts viewed realistically. In common with Lord Hoffman in MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 . . I am of the view that Lord Brightman’s formulation in not a principle of construction, but, as stated above, a decision that the Court is entitled, for fiscal purposes, to disregard intermediate steps having no commercial purpose as a consequence of an orthodox exercise of purposive statutory construction.’ and ‘Accordingly, the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’
Lord Millett NPJ said: ‘Both profits and losses therefore must be ascertained in accordance with the ordinary principles of commercial accounting as modified to conform with the Ordinance. Where the taxpayer’s financial statements are correctly drawn in accordance with the ordinary principles of commercial accounting and in conformity with the Ordinance, no further modifications are required or permitted. Where the taxpayer may properly draw its financial statements on either of two alternative bases, the Commissioner is both entitled and bound to ascertain the assessable profits on whichever basis the taxpayer has chosen to adopt. He is bound to do so because he has no power to alter the basis on which the taxpayer has drawn its financial statements unless it is inconsistent with a provision of the Ordinance. But he is also entitled to do so, with the result that the taxpayer is effectively bound by its own choice, not because of any estoppel, but because it is the Commissioner’s function to make the assessment and for the taxpayer to show that it is wrong.’ and . .
‘the subject is to be taxed by the legislature and not by the courts’.
This case cites:

  • Restated – W T Ramsay Ltd v Inland Revenue Commissioners HL ([1981] 1 All ER 865, [1982] AC 300, Bailii, [1981] UKHL 1, [1981] STC 174)
    The taxpayers used schemes to create allowable losses, and now appealed assessment to tax. The schemes involved a series of transactions none of which were a sham, but which had the effect of cancelling each other out.
    Held: If the true nature . .
  • Cited – MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd HL (Gazette 15-Feb-01, Times 14-Feb-01, House of Lords, Bailii, [2001] UKHL 6, [2001] 1 All ER 865, (2001) 73 TC 1, [2001] 2 WLR 377, [2003] 1 AC 311)
    The fact that a payment of interest was made only to create a tax advantage did not prevent its being properly claimed. Interest was paid for the purposes of setting it against tax, when the debt was discharged. A company with substantial losses had . .

(This list may be incomplete)
This case is cited by:

  • Cited – Barclays Mercantile Business Finance Ltd v Mawson (HM Inspector of Taxes) HL (Bailii, House of Lords, [2004] UKHL 51, [2004] 76 TC 446, [2005] 1 All ER 97, [2005] 1 AC 684, [2005] STC 1, [2004] 3 WLR 1383, [2004] BTC 414, 76 TC 446, [2004] STI 2435, 7 ITL Rep 383, Bailii, [2004] UKHL TC_76_446)
    The company had paid substantial sums out in establishing a gas pipeline, and claimed those sums against its tax as capital allowances. The transaction involved a sale and leaseback arrangement which the special commissioners had found to be a . .
  • Cited – Campbell v Inland Revenue Commissioners SCIT (Bailii, [2004] UK SPC00421, [2004] STC (SCD) 396)
    SCIT INCOME TAX – Anti-Avoidance – Relevant discounted security – Loss on gift to wife – Subscription for security and gift part of scheme to produce loss – Avoidance not the Appellant’s sole purpose in . .

(This list may be incomplete)

Last Update: 03-Aug-16
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