What is Purposeful Construction in the matter of Tax Avoidance
Where the intention of Parliament is only to tax real gains, then the courts and tribunals are free only to recognise real losses.
So, does having a real commercial purpose or at least a purpose other than tax avoidance make a difference?
Perhaps this is not such a straightforward question because maybe the legal concept rather than the commercial one needs consideration.
Some argue that it is not necessarily the taxpayer’s motive and whether there was a real commercial purpose. A provision granting relief from tax is generally to be taken to refer to transactions undertaken for a commercial purpose and not solely for the purpose of complying with the statutory requirements of tax relief. However, even if a transaction is carried out in order to avoid tax it may still be one that satisfies the statutory description. In other words, tax avoidance schemes sometimes do work.
As ever, an example combining mechanistic interpretation verses commercial purpose is perhaps easier to understand. Take for instance a taxpayer considers he made a “real” loss in the sense he was worse off after the planned series of transactions than he was before.
It is reasonable to suggest that the logic of a loss being a “real” loss is that it cannot have been a loss that was intended to arise.
Take for example if a taxpayer intended to give away some of his assets, the act of giving away is not a commercial loss as it is intentional. This situation of a taxpayer choosing to give away assets as part of tax avoidance scheme was covered in the recent FTT case of Audley:-
Audley [2011] UKFTT 219 (TC)
As part of a tax avoidance scheme, the taxpayer gave away his home with a true value of £1.8million plus £250,000 in cash to a family trust. The trustees issued to him relevant discounted securities (“RDS”) in return with a face value of £2,050,000. Because of the terms of the RDS, for instance that it was only repayable in 60 years, the value of the RDS at date of issue was considered to be only £35,700. A few days later, and in accordance with the pre-planned scheme, the taxpayer gave the RDS to a second family trust. The taxpayer claimed a loss on the basis that A = £2.050,000 and B = £35,700 so that “A minus B” left him with a loss of £2,014,300 for the purpose of paragraph 2(2)(b).
The Tribunal dismissed his appeal against HMRC’s refusal of the loss relief, holding that what the taxpayer paid for the loan note was its true value (£35,700) and the excess was given as a gift to the first family trust:
- “[at para 88]...This was not a subscription of £2.05m for a loan note issued by the trustees of a family trust; rather it was a gift of the house and a significant amount of cash to the trustees….The only thing obtained in return was the loan note which had a market value of £35,700.
- [at para 89]...To the extent that any amount can be said to have been paid for the acquisition of the loan note, it is limited to the true value of the loan note when issued: £35,700.”
It is implicit in this decision that it was irrelevant that the taxpayer was worse off after the planning than before it: before the planning was executed he owned a house and some cash. After it was executed, he only possessed a life interest in the house and cash. That this “real” decrease in assets is irrelevant to the question of whether there has been a real loss was surely right for a number of reasons.
First, it was planned. It is part of the planning scheme and it did not arise by chance. It is implicit in the RDS legislation that Parliament envisaged that an RDS involved risk: a deep gain might arise or it might not. The “loss” envisag
