Court of Appeal rejects HMRC’s appeal against SHIPS 2 scheme

Court of Appeal rejects HMRC’s appeal against SHIPS 2 scheme

The latest attempt by HMRC to disallow the SHIPS 2 tax planning scheme has been rejected by the Court of Appeal, although it is unlikely that this decision will resolve the litigation. SHIPS 2 was marketed by Matrix Tax Solutions, and operated in respect of the 2003-04 tax year. Its central feature involved the purchase by a non-resident company of non-qualifying life assurance policies (AIG bonds), followed soon after by their partial surrender and a withdrawal of funds. SHIPS 2 was implemented in seven pre-determined steps. Described by Mummery LJ as commercially ‘pointless’, it was designed to produce (a) allowable deductions from total income in the form of corresponding deficiency relief resulting on disposal of the policies within the meaning of ICTA, s 549; and (b) capital sums allowable as deductions in the computation of gains for the purpose of CGT under TCGA 1992, s 38. HMRC resisted the intended tax effects of SHIPS 2, maintaining that two of the steps (ie 3 and 4) – which the scheme relied on to create the corresponding deficiency relief – did not fall within a purposive construction of the relevant ICTA provisions under which the relief was claimed. Mr Mayes appealed to the Special Commissioners, who on the deficiency relief point agreed with HMRC in deciding that steps 3 and 4 had been inserted purely for tax avoidance purposes and should therefore be disregarded. He further appealed to the High Court, where Proudman J decided that there was nothing in the ICTA provisions which indicated that the two steps were not to count, and the Commissioner had made an error in law. Against the wishes of Mr Mayes, the judge remitted the CGT issue to the First-tier Tribunal for further facts to be found, and both parties appealed to the Court of Appeal. In dismissing both appeals, the court agreed with Proudman J that the Special Commissioners had erred in law, and that the CGT issue should be reheard by the First-tier Tribunal. The final comment was made by Toulson LJ, who said: ‘Unattractive as the result is for other taxpayers and the rest of society, I agree … that the court cannot lawfully hold, as a matter of proper construction of the statute, that because the sole purpose of steps 3 and 4 was to avoid tax by the creation of a corresponding deficiency unrelated to any underlying commercial loss, those events are therefore to be treated as if they had not occurred.’ The Court of Appeal admitted that HMRC may well appeal again, as Mr Mayes is the lead applicant in litigation funded by some 70 participants and an estimated £24 million would be lost in tax if SHIPS 2 succeeded.

Commissioners for Revenue and Customs
v Mayes [2011] EWCA Civ 407

Written by Ellie MacKenzie

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