MOODIE Vs. INLAND REVENUE COMMISSIONERS AND ANOTHERS SOTNICK V INLAND REVENUE COMMISSIONERS AND ANOTHERS

JUDGEMENT

(1.) These two appeals, by taxpayers from order made by Hoffmann J. on 4 May 1990, raise the question whether a tax avoidance scheme, which was accepted as affective for its purpose by the house of Lords in Inland Revenue Commissioners v. Plummer, 1980 AC 896 has been rendered ineffective by the subsequent decision of the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners, 1982 AC 300. The special commissioners so held and their decision was affirmed by Hoffmann J. by the orders under appeal.

(2.) The taxpayer, Mr. Moodie, heard of the scheme, known as the Cardale Capital Income Plan, from his bank. The scheme subsequently went through several editions, but the version with which the taxpayer was concerned was mark I and, as the commissioners found, was in its essential features identical to that which was considered in Plummers case. Those essential features may be summarised as follows. (a) By an annuity agreement made on 8 March 1971 with Home and Overseas Voluntary Aid Services Ltd. (H. O. V. A. S), a company with charitable status, in consideration of the sum of Pounds 59,400 paid by H. O. V. A. S., the taxpayer agreed to pay to H. O. V. A. S. for five years, or during the remainder of his life if shorter, an annuity at such rate as should after deduction of income-tax at the standard rate equal Pounds 12,000. (b) H. O. V. A. S. paid this consideration by overdrawing on its account with Slater Walker Ltd. (the bank). (c) The consideration was paid into the taxpayers account with the bank. (d) The taxpayer used the consideration money plus Pounds 600, to purchase from Old Change Court (Investments) Ltd. (O. C. C.), another company in the Slater Walker group, 10 promissory notes to the total value of Pounds 60,000. By a collateral agreement between the taxpayer and O. C. C. these promissory notes carried interest at the rate of six and a half per cent. per annum, less tax : no interest was to be paid before 1 April 1973 or after 1 April 1975. (e) The promissory notes were then deposited with H. O. V. A. S., together with 3,764 British Investment Trust shares and 3,600 Scottish United Investors share belonging to the taxpayer, as security for the payment of the annual sums due under the annuity agreement. The dividends on these shares were to be paid to the taxpayer. (f) The annual sums of Pounds 12,000 payable by the taxpayer to H. O. V. A. S. under the annuity agreement were paid by standing order by the taxpayer on his account with the bank. The overdraft so created was immediately liquidated by H. O. V. A. S. releasing promissory notes to the value of Pounds 12,000, and O. C. C. paying the amount of these promissory notes to the bank for the credit of the taxpayer. (g) The possibility of the taxpayer dying during the period of the annity agreement was covered by an insurance policy taken out at the inception of the scheme. (h) The taxpayer signed certificates of deduction of income-tax to be sent to H. O. V. A. S. with each annual payment under the annuity agreement. The intention was that H. O. V. A. S., as a charity, should then claim payment of this tax.

(3.) These were the essential features of the mark I scheme undertaken by the taxpayer (although there were many other matters of detail which it is unnecessary to mention) and as the commissioners rejected the Crowns contention that the arrangements made pursuant to the scheme were a sham, and held that they had reality and substance, the Crown now accepts that the scheme was effective to give rise to the legal relationships and consequences which it purported to create. Nevertheless there are a number of other matters which should be mentioned since they are directly material to the Crowns fiscal nullity argument. (1) They only cash or real money in the system was the sum of Pounds 3,693 paid by the taxpayer to the bank to set the scheme in motion. That sum was made up of Pounds 20 overdraft interest, Pounds 103 stamp duty, Pounds 2,970 initial fee payable to S. Cardale and Co. Ltd., the promoters of the scheme, and Pounds 600 insurance premium. (2) All other steps in the scheme were effected by book-keeping entries in the participants accounts with the bank. The commissioners found that at each stage of the scheme, i.e., the payment of the initial consideration for the annity by H. O. V. A. S. to the subsequent annual payments of the annity and the encashment of the promissory notes, the money represented by these book-keeping entries were round in a complete circle, albeit with the introduction of other Slater Walker companies into the circle.