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United Kingdom

The first UK Budget from 'New Labour' on July 2 kept the possibility of a general statutory anti-avoidance provision — perhaps on the Australian model — very much alive, but did not actually contain proposals for one. So for the time being that leaves UK advisers to work out the significance, if any, of some very broad statements in the House of Lords, as the ultimate level of tax appeal, in its decision on June 12 1997 in McGuckian. This was a victory for the UK Revenue, but how important a victory remains to be seen.

The case concerned the sale of future dividend income from an Irish company by offshore trustees of a settlement for a UK resident. The offshore trustees controlled the Irish company. The purchaser was a company provided by the tax adviser. Although no future dividend income was guaranteed, the purchase price was fixed and turned out to be 99% of the dividend which was actually paid a few days later by the Irish company. The sale price was not in fact paid on time in accordance with the terms of sale but only out of the dividend when that was actually paid.

The UK Revenue wanted to apply look-through principles derived from the Ramsay/Furniss line of UK cases to ignore all the transactions save for the payment of the dividend. This was to enable the Revenue to maintain a tax assessment against the UK resident under very specific statutory anti-avoidance provisions concerning the transfer of income abroad.

The case was an example not of circular self-cancelling transactions — as in Ramsay — but of an attack on a linear transaction, by far the commoner type of tax avoidance transaction. The Revenue's victory was that despite the dividend sale, 99% of the dividend income was attributed to the offshore trust and so to the UK resident. It is how the House of Lords arrived at that conclusion — unanimously — which is causing some reflection among tax advisers.

The conventional Furniss analysis is to see if there is a pre-ordained series of transactions, to identify and ignore any steps in that series which are wholly tax-motivated, in that way to find the end result and to tax accordingly. In finding the end result, the enduring legal consequences of steps which have not been ignored must be taken into account. In that sense, end result has been viewed in a legal rather than an economic way.

One of the judgments applied that conventional approach, although in not attributing the whole dividend to the offshore trust it looked to cash-flows rather than actual legal rights and obligations in the end result.

However, although the whole decision could be explained in that way, the majority judgments adopted a much broader approach. That broader approach shows either expressly or impliedly that taxing statutes must be interpreted to achieve their purpose which could involve a challenge to arrangements beyond the circumstances of the conventional Furniss analysis. Because the facts of the case were within the limits of the conventional Furniss approach and because the operation of some more generalized approach was not explained, the decision might yet suffer the fate of being confined to its own facts.

Be that possibility as it may, the majority concluded that the offshore trust had received income rather than sale proceeds without applying a conventional Furniss analysis. If taken at face value, this could lead to the UK Courts assuming a generalized power to recharacterize where there is tax avoidance. That would be a change of real constitutional significance and the majority judgments show no intention to upset the present legal order of things. However, at the very least, within the conventional Furniss approach, advisers will need to consider how far the characterization of cash-flows within the end result is determined by their legal substance or by their economic substance.

Stephen Hoyle

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