Furniss (Inspector of Taxes) v. Dawson (1984)

This is an English case, but Indian tax law cannot be understood without it. The old starting point, from IRC v. Duke of Westminster (1936), is that every man may order his affairs to pay less tax, and that the court looks at the legal form of what he did unless it is a sham. W.T. Ramsay Ltd v. IRC (1982) began to cut into that: a pre-planned series of genuine steps could be looked at as a whole.

After Ramsay the lower courts tried to confine it to "self-cancelling" schemes — circular arrangements that left the taxpayer where he started. Furniss v. Dawson refused that limit. Here the scheme was not circular and had real, lasting legal effects, and still the House of Lords disregarded the step inserted to save tax and taxed the real transaction. That is why it is cited as going further than Ramsay: it allowed the Revenue to treat the transaction as what it was in substance — a sale by the Dawsons to the buyer. Indian courts discussing tax avoidance (for example in Vodafone International Holdings v. Union of India) deal with it directly.

George Dawson, his wife and two sons held the shares in two clothing-manufacturing companies (the "Operating Companies"). In September 1971 Mr. Dawson agreed in principle to sell the entire shareholding to Wood Bastow Holdings Ltd.

Acting on advice, the Dawsons decided not to sell directly. Instead:

1. On 16 December 1971 a company, Greenjacket Investments Ltd, was incorporated in the Isle of Man on their solicitors' instructions.
2. On 20 December, at a single completion meeting, the Dawsons sold their shares in the Operating Companies to Greenjacket for £152,000, satisfied by the issue of Greenjacket shares (the First Sale Agreement); and Greenjacket at once sold the same shares to Wood Bastow for £152,000 in cash (the Second Sale Agreement). The meetings were interrupted to exchange each agreement in turn; Lord Brightman observed that "the whole process was planned and executed with faultless precision."

The point of the scheme was a statutory relief. Where shares are exchanged for shares in a company which thereby acquires control, para 6 of Sch. 7 treats there as being no disposal. So the Dawsons claimed they had disposed of nothing taxable — they had merely exchanged shares for Greenjacket shares — and Greenjacket's sale to Wood Bastow produced no gain for Greenjacket. Tax would be deferred until the Dawsons one day disposed of their Greenjacket shares.

The Special Commissioners held that Greenjacket had acquired control and discharged the assessments. Before the case reached the High Court, the House of Lords decided Ramsay and then IRC v. Burmah Oil. The Revenue then argued that the Dawsons had in reality disposed of their shares to Wood Bastow. Vinelott J, and the Court of Appeal (Oliver, Kerr and Slade LJJ), rejected that, chiefly because the scheme had "enduring legal consequences" — Greenjacket continued to exist and owned the sale proceeds. The Revenue appealed.

1. Is the Ramsay principle confined to self-cancelling schemes, or does it apply to a pre-planned series of transactions that has real and lasting legal effects?
2. Can a step inserted into a pre-planned transaction solely to defer or avoid tax be disregarded, so that tax is charged on the end result?
3. On these facts, did the Dawsons dispose of their shares to Wood Bastow?

The Revenue's appeals were allowed (with no order as to costs). The Dawsons had disposed of their shares to Wood Bastow, and capital gains tax was payable.

Lord Brightman: the rationale of the new approach

Lord Brightman first characterised the scheme fairly: it "is not a tax avoidance scheme, but a tax deferment scheme", and indeed "a simple and honest scheme which merely seeks to defer payment of tax until the taxpayer has received into his hands the gain which he has made." That did not save it.

He explained the principle this way: "In a pre-planned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim." So tax falls to be assessed as though there had been a tripartite contract under which the Dawsons transferred their shares to Wood Bastow for money paid, at their direction, to Greenjacket. The taxpayer is not saved "because the arrangement is unsigned or contains the magic words".

The two conditions

Taking Lord Diplock's formulation in Burmah, Lord Brightman set out the limits of the principle:

• "First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction." That composite transaction may or may not achieve a legitimate commercial end — here it did, a real sale to Wood Bastow.
• "Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax" — the test is business purpose, not business effect.

"If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result." How that result is taxed depends on the taxing statute.

Applied here: "In the instant case the inserted step was the introduction of Greenjacket as a buyer from the Dawsons and as a seller to Wood Bastow. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect." As he put it, if the sale had taken place before capital gains tax was introduced, "there would have been no Greenjacket."

Why the courts below were wrong

The courts below had rewritten the test from "no commercial purpose" to "no enduring legal consequences", which "would confine the Ramsay principle to so-called self-cancelling transactions." Lord Brightman said: "It is difficult to escape the impression that the High Court and the Court of Appeal were determined at all costs to confine the Ramsay principle to the sort of self-cancelling arrangement which existed in that case". He also answered the Court of Appeal's fear of double taxation: the Revenue "cannot, and does not claim to, have it both ways" — the gain is taxed once, on the disposal to Wood Bastow, and the base cost of the Greenjacket shares is their value at that date.

Facts for the Commissioners

Whether there was a pre-ordained composite transaction, and whether steps were inserted without any business purpose apart from a tax advantage, are findings of fact for the Commissioners; an appellate court should interfere only where the inference "is insupportable on the basis of the primary facts so found."

The other speeches

• Lord Fraser stated "the true principle of the decision in Ramsay": the fiscal consequences of a preordained series of transactions are "generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately." The series of two transactions "was planned as a single scheme", and "it should be viewed as a whole."
• Lord Bridge accepted Lord Tomlin's Westminster premise but held that when one moves "from a single transaction to a series of inter-dependent transactions designed to produce a given result", it is legitimate to distinguish substance from form "without in any way suggesting that any of the single transactions which make up the whole are other than genuine."
• Lord Roskill said the courts below "have looked back to 1936 and not forward from 1982", and hoped the decision "will now suffice as exorcism" of the ghost of the Duke of Westminster.
• Lord Scarman stressed that "the law in this area is in an early stage of development" and that the limits of the Westminster principle "remain to be probed and determined judicially."

Where there is (1) a pre-ordained series of transactions, or one single composite transaction, and (2) steps are inserted into it which have no commercial or business purpose apart from the avoidance (or deferment) of tax, the inserted steps are disregarded for fiscal purposes and the end result is taxed according to the taxing statute. The principle is not confined to self-cancelling schemes; it applies even though the inserted step has lasting legal effects and the transaction as a whole achieves a genuine commercial end. On the facts, the interposition of Greenjacket was disregarded and the Dawsons were taxed as having disposed of their shares to Wood Bastow.

• Direct question: Trace the development of the judicial approach to tax avoidance from the Duke of Westminster's case to Furniss v. Dawson. Start with Lord Tomlin's dictum, then Ramsay (self-cancelling scheme, looked at as a whole), then Furniss (not self-cancelling, genuine commercial end, inserted step still disregarded). Give Lord Brightman's two conditions word for word.
• Problem question: a seller routes a sale through a newly formed intermediate company, formed only for a tax advantage, in one pre-planned sequence. Apply the two conditions: pre-ordained composite transaction; inserted step with no business purpose apart from tax. Disregard the step and tax the end result.
• Indian context: when you write on tax avoidance, look-through and substance over form in India (for example in answering on Vodafone), say plainly that Furniss v. Dawson is a House of Lords decision, persuasive but not binding in India, and that it went further than Ramsay in allowing the Revenue to recharacterise the transaction.
• Key distinction: business purpose versus business effect — the Greenjacket step had a business effect but no business purpose apart from deferring tax.