If you give your clients any advice at all on tax, even if only to mention tax favourable investments such as pensions and ISAs, I am sure you have come across the “Ramsay Principle”. This principle requires a court to look at the final effect of a series of steps rather simply than the effect at the end of each step. The court should look at whether the overall transaction, end to end, is what parliament intended when the relevant tax legislation was framed, rather than relying on a strict interpretation of the law relating to each step. This applies whether or not the steps were put in place in order to achieve the tax effect.
But have you ever come across the “Reverse Ramsay Principle”? That the court should not allow a strict interpretation of each of the pieces of legislation relating to a transaction to disadvantage a taxpayer unfairly and in a way clearly not intended by parliament?
If you have not come across “Reverse Ramsay” it is not really surprising, as this principle does not actually exist. This may seem grossly unfair, but such is the way tax law works.
“Reverse Ramsay” is not, however, something I have dreamed up out of thin air. It is an argument used by a taxpayer in the interesting recent case of Ames v HMRC (2015).
In this case, Mr Ames invested £50,000 in shares which were accepted by HMRC as eligible for Enterprise Investment Scheme (EIS) income tax relief. He was unable to claim the income tax relief as he did not have any taxable income in that or the previous year.
The lack of income tax relief did not concern Mr Ames, as the relief he wanted was the capital gains tax relief when he eventually sold the shares. He believed the company in which he was investing was going to grow rapidly and he was proven right. Six years later his £50,000 investment had turned into £333,200 and he sold the shares.
Mr Ames did not include this gain in his self assessment return. He believed an investment in valid EIS shares should not attract tax on the gain if he retained the shares for at least three years, which he did. HMRC, however, disagreed, and opened an enquiry. They told Mr Ames he was not entitled to capital gains tax relief as he had not claimed EIS income tax relief, and presented him with a tax bill of £72,811.20.
Mr Ames was naturally aggrieved. According to the law, if he had received taxable income of just £1 in either of the two relevant years and had claimed income tax relief on this from his EIS investment, that investment would then have been subject to capital gains tax relief as well. But because he did not claim income tax relief he now had to suffer capital gains tax of over £70,000.
His case in the First Tier Tax Tribunal was that this was not a result intended by parliament. The legislation was written with the intention of ensuring the capital gains tax was only relieved when the EIS investment met the requirements for income tax relief. Clearly the legislators had not intended someone who had £1 of taxable income to be in a far better position re capital gains tax than someone who had no income. He asked the court to use the “Ramsay Principle” in reverse, and rule that looking at the overall transaction it was the intention of parliament he should receive the capital gains tax relief even though the effect of separate bits of the legislation was that he was not entitled to it.
The decision of the Tribunal was that the legislation, although complex, was quite clear that the relief could not apply in this case. The wording of the legislation meant that a capital gains tax exemption is only available if the taxpayer had claimed and received EIS relief for income tax. The Tribunal did not accept that the Ramsay Principle could in effect be applied in reverse and oblige HMRC to consider the overall effect of the transactions in the light of the intention of parliament.
Beware, therefore, when giving any tax advice to your clients. There is no such thing as a “Reverse Ramsay Principle”. If the strict interpretation of the legislation applied to different steps of a series of transactions is penal on your client in a way presumably not intended by parliament, the client cannot use this as an argument to avoid or reduce the unfair tax which then arises.
One other lesson to learn from Ames v HMRC is to make sure any client investing in an EIS claims the income tax relief even if the claim makes no difference at all to their tax position. According to Temple Tax Chambers barrister Keith Gordon the Ames appeal only failed because he used a spurious argument (“Reverse Ramsay”) and if he had used other arguments he may have succeeded. But it would still be a brave taxpayer who adopted a strategy the First Tier Tax Tribunal had already ruled did not work.
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