Inland Revenue Commissioners v Scottish Provident Institution: HL 25 Nov 2004

The parties anticipated a change in the system for taxing gains on options to buy or sell bonds and government securities. An option would be purchased before the change and exercised after the change to create losses which could be set off against other taxable gains. The risk to the market maker (Citibank) was set off by a collateral agreement.
Held: The options should be treated as a single transaction, and ineffective to achieve the tax saving intended. The minimal risk that the option would not be exercised because of a fall in prices was not sufficient to displace the fact that the purpose of transaction was not economic but to save tax: ‘We think that it would destroy the value of the Ramsay principle of construing provisions such as section 150A(1) of the 1994 Act as referring to the effect of composite transactions if their composite effect had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned.’
Corporation tax – Cross options in respect of gilts – Collateral amount – Ramsay principle – Whether options self-cancelling – Whether single composite transaction with no commercial purpose other than tax avoidance – Whether commercially irrelevant contingency prevented finding of single composite transaction – Whether appropriate to compute profit and loss in respect of each option on a mark to market basis – Whether each option a qualifying contract – Whether appropriate to attach a nil value to each option on morning of 1 April 1996 – Whether appropriate to exclude collateral amount from computation – Debt contracts – Interpretation of deeming provisions – Finance Act 1994, ss 147A, 150A, 154, 155, 156 and 177(2), Finance Act 1996, Sch 15, para 25.
In applying a purposive interpretation of a taxing provision in the context of a tax avoidance scheme it is legitimate to look to the composite effect of the scheme as it was intended to operate. Lord Nicholls said: ‘The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.’


Lord Nicholls of Birkenhead, Lord Steyn, Lord Hoffmann, Lord Hope of Craighead and Lord Walker of Gestingthorpe


[2004] UKHL 52, Times 26-Nov-2004, [2005] 1 All ER 325, [2005] 1 WLR 3172, [2004] UKHL TC – 76 – 538


Bailii, House of Lords, Bailii


FinanceAt 1994




Appeal fromCommissioners of Inland Revenue v The Scottish Provident Institution OHCS 3-Jul-2003
The parties arranged for the issue of cross options for the purchase of gilts, which would prove when exercised to be very tax effective when a new system of taxing such transaction was in place, and planned losses could be set off against taxable . .
CitedW T Ramsay Ltd v Inland Revenue Commissioners HL 12-Mar-1981
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 . .
CitedCraven v White HL 1988
The inland revenue claimed that several transactions had been arranged for the predominant purpose of obtaining a tax advantage, and that accordingly they should be disregarded. Lord Oliver: ‘[T]he transactions which, in each appeal, the Inland . .

Cited by:

CitedUBS Ag and Another v Revenue and Customs SC 9-Mar-2016
UBS AG devised an employee bonus scheme to take advantage of the provisions of Chapter 2 of the 2003 Act, with the sole purpose other than tax avoidance, and such consequential advantages as would flow from tax avoidance. Several pre-ordained steps . .
CitedRFC 2012 Plc (Formerly The Rangers Football Club Plc) v Advocate General for Scotland SC 5-Jul-2017
The Court was asked whether an employee’s remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.
Held: The . .
Lists of cited by and citing cases may be incomplete.

Capital Gains Tax

Updated: 16 August 2022; Ref: scu.219870