This legal community but one such case is the

This essay aims to examine whether the Ramsay principle can be considered nothing more than a useful aid.  The argument explored in this paper is that the Ramsay principle is nothing more than one interpretation guide that can be drawn upon by the judiciary when evaluating tax avoidance schemes. This is derived taking into consideration the recent apparent ‘watering down’ of the importance of the principle in a number cases, given the importance of the Ramsay principle in many subsequent cases following the 1982 House of Lords ‘landmark decision’. The spotlight on tax or more accurately tax avoidance has been unprecedented in the United Kingdom (UK) in the last decade where there have been various peeks in the attempts by various taxpayers and particularly so-called celebrities to avoid paying their ‘fair share’ of tax. “Tax planning involves a deliberate arrangement of the taxpayer’s financial affairs to take advantage of the fiscal opportunities presented by relieving provisions and/or loopholes in tax legislation.”There are several tax cases known in the wider legal community but one such case is the Ramsay case which adopted a new judicial interpretative approach to evaluate tax avoidance schemes.   In the immediate aftermath of the Ramsay case, it seemed that this judicial interpretative approach set forward a judicial doctrine.  However, in subsequent cases leading up to Barclays Mercantile Business Finance Ltd v Mawson 2004 (BMBF) doubt has been caston whether the Ramsay interpretative approach was ever indeed a judicial principle in tax law.  It is contended that in order to examine whether Ramsay can be considered nothing more than a useful aid, the discussion must consider the point at which the principle in Ramsay was created versus the discussion in the next section examiningwhether the principle has been diminished if not extinguished.So, this essay will first explore the emergence of the ‘Ramsay Principle.’ Prior to the decision in Ramsay, the courts applied what is commonly referred to as being ‘the Duke of Westminster’ principle which emerged from Inland Revenue Commissioners v. Duke of Westminster.  The Duke of Westminster principle as explained by Lord Tomlin was to accept that “every man is entitled if he can to order his affairs so that tax attachingunder appropriate Acts is less than it otherwise would be”. Essentially, the Duke of Westminster principle accepted that it is perfectly lawful for individuals to arrange their tax affairs within the confines of the statutory framework.  If individuals used the statutory framework to minimise their tax liabilities then this would be considered lawful even though individuals were effectively working around the statute to lower their tax liabilities.  However, an important point to remember about this approach was that it emerged in a period when commercial transactions were a lot less complicated and as a result it was a lot easier to evaluate the lawfulness of tax avoidance schemes.  As tax schemes became more complicated in the 1970s and 1980s with higher tax rates, tax schemes became more ambitious as a means to lower tax liabilities.  The high water tide mark can be considered the Plummer case which concerned a tax avoidance scheme whereby companies were making five donations to charity as the basis to lower tax liabilities.   As tax avoidance schemes became more complex and taxation in general became more complex, the courts were increasingly forced to evaluate the lawfulness of such schemes against taxation law.  In the Ramsay decision the courts appeared to create a new judicial doctrinal to evaluate tax avoidance schemes.  In Ramsay, the courts had to consider whether a scheme whereby two companies were created one as a loan providing company whilst the other was a functioning company as the basis to eliminate if not reduce tax liabilitiescould be considered lawful.  In Ramsay the courts concluded that such schemes were a “fiscal nullity” which was consistent with the ‘Duke of Westminster’ approach developed in earlier case law.  However, the significance of Ramsay did not become apparent until subsequent cases, such as Moodie v IRC used the approach adopted in Ramsay as the basis to evaluate whether the tax avoidance scheme could be considered lawful.  In finding for the Revenue, the courts concluded that the scheme was unlawful given the broad purpose of the scheme was essentially a sham to limit tax liabilities which denied the reality of the tax affairs of the claimant.  As a result, the Ramsay principle appeared to emerge in circumstances where HMRC sought to challenge the lawfulness of a tax avoidance scheme. In Ramsay, Lord Wilberforce was very careful in his construction of words not refer to the principle of interpretation as being ‘new’ principle of law.  Rather, Lord Wilberforce expressly linked the development of the Ramsay approach as being necessary as a result of the emergence ofnew tax avoidance schemes.  Specifically, Lord Wilberforce stated, “while the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still.”  The statement by Lord Wilberforce made clear that the interpretative approach in Ramsay was because of new taxation schemes but continued the courts were essentially applying consistent judicial interpretative approaches to evaluate these schemes.   The controversy of Ramsay was more evident in the literature with many academics such as Millett and Gammie suggesting that Ramsay set forward a new judicial approach to evaluate tax avoidance schemes.  The basis of the claim that Ramsayrepresented a ‘new’ approach was that under the older ‘Duke of Westminster’ approach the motive of lowering taxation liabilities was irrelevant but now in light of Ramsay the courts appeared to be examining motive as the basis to evaluate the lawfulness of tax avoidance scheme.  The justification of this interpretative approach in Ramsay was done by reference to Chinn v Collins 1981 where the courts had already established the ability of the judges to evaluate tax avoidance schemes as a whole rather than examining lawfulness of a scheme by reference to individual constituent parts of a scheme’s operation. Lord Wilberforce suggested that “it is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or tax consequence and if that emerges from a series or a combination of transactions, intended to operate as such, it is that series which may be regarded.” The importance and significance of the Ramsay judicial interpretative approach towards examining tax avoidance schemes as a whole became evident in subsequent cases.  For example, in IRC v Burma Oil Co Ltd Lord Diplock confirmed the existence of a new approach that examined the lawfulness of tax avoidance schemes as a whole rather than focusing on individual parts of schemes. Further in Furniss v Dawson the House of Lords opined that a series of transactions with the ultimate aim of reducing tax liabilities would be considered lawful.   As a result, it appeared that a new interpretation approach was adopted by the courts that seemed to depart quite significantly from the earlier ‘Duke of Westminster approach by examining schemes as a whole and the aim of such schemes.    Considering the discussion in the previous paragraphs, it is now appropriate to consider whether the Ramsay approach is now dead and hence useless. The death of the Ramsay approach is evident from Lord Hoffmann comments in the BMBF case where he stated: “the primacy of the construction of the particular taxing provision and the illegitimacy of rules of general application has been reaffirmed by the recent decision of the House in BMBF. Indeed, it may be said that this case has killed off the Ramsay doctrine as a special theory of revenue law and subsumed it within the general theory of the interpretation of statutes . . .”This statement by Lord Hoffmann calls into immediate question whether Ramsay was indeed ever a legal doctrine albeit judicially developed; and if it was a special rule what remained of it in the aftermath of the decision in BMBF.   Lord Hoffmann was quite categorical where he explained thatthe courts in Ramsay effectively chose “the constructional approach rather than the Furniss v Dawson formula, the House had to rewrite history in a way that struck some people as a little disingenuous.”  The central approach of the House of Lords in BMBF was that the courts in Ramsay effectively engaged in “some island of literal interpretation” but with this judicially created interpretation emerged some general principles that the courts may rely upon in examining tax avoidance schemes.   The consequences of the BMBF decision has been to question whether the Ramsay principle is now effectively dead and hence useless to the judiciary in their evaluation of tax avoidance schemes.  The question of whether the Ramsay approach is dead seems to be a bit of stretch as there are some cases where the principle has been applied by the courts even in the aftermath of the BMBF decision.  Specifically, in IRC v Scottish Provident Institution which was delivered on the same day as the BMBF decision found that it was necessary to adopt a realistic view of the series of transactions aimed at reducing tax liabilities as the basis to eliminate taxation liabilities. As a result of these conflicting approaches, it seems that Ramsay may be considered a useful interpretation aid whenthe taxation schemes relates to the creation of a legal series of transactions as the basis to avoid taxation.  This approach allows us to take a narrow or a broad view of the usefulness of Ramsay.  Firstly, a narrow approach might suggest that it is necessary for the courts in some instances to adopt a narrow assessment of a ‘tax planning’ scheme simply because the entire scheme is created to avoid tax.  Secondly, a more broader approach may be taken when the scheme as a whole;is adopted as the basis to limit tax liabilities, but this does not affect the reality of the transaction aimed at limiting the tax liability.  In essence, it may be argued that the Ramsayapproach may be considered particularly useful for courts when the judiciary have to evaluate tax avoidance schemes that are simply a sham to manipulate the operation of the law to reduce taxation as opposed to individuals or companies taking advantage of an opportunity to arrange their affairs to reduce tax.  In circumstances where the individual or company is using the law to deliberately construct transactions, often by introducing artificial losses or gains, to limit or eliminate tax liabilities then Ramsay may be considered useful to identify the reality of the situation.    Tax avoidance is an impressionistic and hugely controversial topic and has been a matter of concern to the UK Revenue authorities. This has led to requests for a statutory response.These requests would support Lord Nicholls’ obiter dictum that the Ramsay approach is no more than a useful aid. On one hand, there are those that believe UK needs a general anti avoidance rule (GAAR). Hollis mentions a report by a study group supporting its enactment and their report suggested that it should be ‘targeted’: that is, it should ‘stop some of the most egregious tax schemes’ but not apply to the centre ground of responsible tax planning.’ Apparently this is expected clarifying boundaries between acceptable and unacceptable behaviour in tax law as Hollis further points out the inconsistency of jurisprudence if broader historical perspective is considered. Judges expressed regret in the Mayes case for the ‘windfall that Parliament cannot have seen foreseen’ thus proving the inadequacy of the existing means of combatting artificial tax schemes. Professor Freedman insists that certainty is essential in the definition of criminal activity.  Regarding avoidance, she claims that the legislation should give more direction to taxpayers. Courts struggle to identify unacceptable tax avoidance due to lack of guidance. On the other hand, there are those that believe that a (GAAR) might introduce uncertainities in law. Others question whetherthe UK should have a GAAR at all, whilst others are only concerned whether the GAAR should be statutory or judicial.Some academics argue that the approach adopted by the House of Lords in Ramsey and subsequent cases may well amount to a ‘judicial GAAR.’ Simpson argues that calls for a legislated anti avoidance principle are misplaced. He asserts that the difficulties encountered by the Ramsay Principle are symptoms of a wider malaise within tax law which is the lack of a clear guiding constitutional principle.   In conclusion, the primary aim of the discussion in this paper was to discuss whether the Ramsay approach could be considered a useful aid.  The essay began by examining the emergence of the Ramsay principle.  This essay found that the courts adopted what seemed to be a ‘new’ interpretative approach when examining the lawfulness of schemes designed to limit or reduce tax liabilities.  The discussion proceeded to demonstrate that there has been much analysis on whether this approach represents a new approach or whether the courts were simply evolving their interpretative approach in line with new tax avoidance schemes that were emerging amongst a more complicated taxation framework. The apparent significant departure from the previous approach of examining the lawfulness of a scheme by focusing on each part of a scheme to now examining the overall purpose of a scheme can be considered as being more favoured towards the HMRC by facilitating more possibilities for challenging tax avoidance schemes.  The justification for this change in direction was based on the fact that tax avoidance schemes became more complex which merited justification for extending the reach of the law. This essay progressed further to examine the current status ofRamsay considering subsequent decisions.  This scrutinyfound that Ramsay may be considered useful when evaluating schemes that are simply a sham to limit tax liabilities.  As a result when considering whether the Ramsay approach can be considered a useful interpretation aid for the judiciary when evaluating tax avoidance schemes it may be argued that at least two views may be offered.  Firstly, the Ramsay approach may be considered useful when examining those tax avoidance schemes simply constructed as the basis to limit taxation liabilities.  Secondly, the Ramsay approach may be considered less useful to those transactions that are simply making use of the current taxation framework to manage their taxation liabilities.  It can be argued that this approach may be considered as being consistent with previous principles such as the ‘Duke of Westminster approach’ where individuals have long been able to arrange their affairs to limit taxation liabilities.  It can be considered a fair approach in a modern era where companies are engaged in practices to simply avoid taxation altogether but this avoidance is premised upon a sham reality of the commercial transactions.  In final conclusion, it is contended that the Ramsay approach can be considered a useful judicial interpretation aid that can assist judges identify the reality of taxation avoidance schemes to ensure that taxation system remains effective.