Inland Revenue Commissioners (appellants) v John McGuckian (respondent). Revenue - Income tax - Tax avoidance scheme - Taxpayer resident in United Kingdom - Owning shares in company incorporated in Republic of Ireland - Transfer of shares to nonresident trustee of settlement - Taxpayer beneficiary of shares - Dividend paid to another company resident in UK - Returned to trustee - Whether tax avoidance scheme - Income and Corporation Taxes Act 1970 (c. 10), section 478.

The House of Lords (before Lord Browne Wilkinson, Lord Lloyd of Berwick, Lord Steyn, Lord Cooke of Thorndon and Lord Clyde); speeches delivered 12 June 1997.

IN 1976 and 1977 the taxpayer and his wife, Mr and Mrs McGuckian, on advice, transferred their shareholding in Ballinamore Textiles Ltd, a company incorporated in the Republic of Ireland, to the trustee of a settlement, Shurltrust Ltd, a Guernsey company. The beneficiaries of the settlement were the taxpayer and his wife and the income was payable to the wife.

Shultrust assigned to Mallardchoice Ltd, a United Kingdom company, the right to any dividend payable by Ballinamore in 1979 for a consideration of £396,054. The dividend declared was £400,055, which was paid by Ballinamore to Mallardchoice. After deduction of certain expenses £396,054 was then paid to Shultrust.

The taxpayer's appeal against the assessment for 1979-80 was allowed by the special commissioner (Mr Brian O'Brien) who decided, inter alia, that the transactions were not a sham and that, since the notice of assessment stated that the tax liability arose under section 478 of the Income and Corporation Taxes Act 1970, he could not uphold it under section 470.

On 13 September 1994 of the Court of Appeal in Northern Ireland (The Lord Chief Justice Sir Brian Hutton, Lord Justice Kelly - and Lord Justice Carswell) ([1994] STC 888) allowed, in part, an appeal by the Crown from the decision of the special commissioner, who had stated the case at the request of both the Crown and the taxpayer.

Where a taxpayer made pre ordained series of transactions, or composite transaction, with or without a legitimate commercial or business end and inserted in those transactions such steps which had no commercial or business purpose apart from the avoidance of a tax liability, those steps had to be disregarded and the end result looked at. Such transactions were taxable within section 478 of the 1970 Act and the principle of WT Ramsay Ltd v Inland Revenue Commissioners ([1982] AC 300) and Furniss v Dawson ([1984] AC 474).

The House of Lords so held in allowing an appeal by the Crown.

The 1970 Act provides by section 478: "For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows: (1) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provision of this section, be deemed to be the income of that individual for all the purposes of the Income Tax Acts.

Andrew Park QC and Launcelot Henderson QC (both of the English Bar) for the Crown, E.G. Nugee QC, Michael Ashe QC (both of the English Bar), Michael Keogh BL (of the Northern Ireland Bar) and John Smart BL (of the English Bar) for the tax payer.

LORD BROWNE WILKINSON, after stating the facts, said that for section 478 to apply five conditions had to be satisfied: (1) the taxpayer (or his or her spouse) had made a "transfer of assets" by virtue of which income became payable to a person resident outside the United Kingdom; (2) there was income of the nonresident; (3) the taxpayer (or his or her spouse) had power to enjoy the income of the nonresident; (4) it was by virtue or in consequence of the transfer, or the transfer with associated operations, that the taxpayer had power to enjoy the income; and (5) the taxpayer could not take advantage of the defence in section 478(3) afforded to transactions which did not have a tax avoidance objective. All those conditions were fulfilled here.

Lord Browne Wilkinson referred to the Crown's argument saying that the Crown argued that, applying the Ramsay principle (supra), the sale of the right to the dividend by Shurltrust to Mallardchoice, though not a sham, had to be disregarded for tax purposes. The sale was an artificial transaction inserted for the sole purpose of gaining a tax ad vantage. The reality of the transaction was the payment of a dividend by Ballinamore to the shareholder, Shurltrust, which received it as income.

Lord BrowneWilkinson said that the case fell squarely within the classic requirements for the application of that principle as stated by Lord Brightman in Furniss v Dawson (supra, at 527): First, there had to be a preordained series of transactions, or one single composite transaction. That composite transaction might or might not include the achievement of a legitimate commercial (i.e., business) end. Secondly, there had to be steps inserted which had no commercial (business) purpose apart from the avoidance of a liability to tax. If those two ingredients existed, the inserted steps were to be disregarded for fiscal purposes. The court must then look at the end result. How the end result would be taxed depended on the terms of the relevant taxing statute.

Lord BrowneWilkinson said that there could be no doubt that the only possible conclusion on the facts was that the requirements were satisfied. No business purpose for the assignment of the dividend rights to Mallardchoice had been suggested. Given the genesis of the composite transaction the only possible inference was that the assignment was inserted for the sole purpose of gaining a tax advantage. The sale and assignment for value to Mallard choice of the future right to the 1979 dividend was a discrete transaction directed to that dividend alone which was carried through by artificial and pre ordained steps inserted for no business purpose. As such the liability for tax on the indirect receipt of such dividend by Shurltrust had to be determined by stripping out the artificial steps and applying the provisions of the taxes Acts to the real transaction, i.e. the payment of a dividend to the shareholder, Shurltrust, which received such dividend as income.

It followed that the Crown's claim to tax under section 478 must succeed.

LORD LLOYD OF BERWICK agreed and LORD STEYN, LORD COOKE OF THORNDON and LORD CLYDE delivered concurring opinions.

Solicitors: Solicitor of Inland Revenue for the Crown; Gregory, Rowcliffe and Milners (London) for Mills Selig (Belfast) for the taxpayer.