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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Barclays Mercantile Business Finance Ltd. v HM Inspector of Taxes [2002] EWCA Civ 1853 (13 December 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1853.html Cite as: [2002] EWCA Civ 1853, [2002] STI 1809, [2003] STC 66, [2003] BTC 81

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
OF JUSTICE, CHANCERY DIVISION
Park J.

		Royal Courts of Justice Strand, London, WC2A 2LL
		13 December 2002

Peter Gibson L.J.:

1. The taxpayer, Barclays Mercantile Business Finance Ltd. ("BMBF"), appeals against the order made on 22 July 2002 by Park J., dismissing with costs BMBF's appeal against the decision on 18 October 2001 of the Special Commissioners (Mr. T.H.K. Everett and Mr. M.P. Cornwell-Kelly). The Special Commissioners dismissed BMBF's appeals against notices of determination of trading losses for accounting periods ended 31 December 1993 and 1994 respectively and notices of assessment to corporation tax for the same periods.
2. The issue in dispute is whether BMBF is entitled to capital allowances in respect of what it claims was its expenditure on the acquisition of a gas pipeline for the purposes of its trade. But in resolving that dispute questions arise as to the applicability of the approach laid down in the House of Lords in W.T. Ramsay Ltd. v Commissioners of Inland Revenue [1982] AC 300 ("Ramsay") as explained by the House of Lords in Macniven v Westmoreland Investments Ltd. [2001] 2 WLR 377 ("Macniven"). The Revenue accepts that if one looks only at what BMBF did, it would be entitled to capital allowances. But it says that if the transaction involving the acquisition of the pipeline is looked at in its entirety, on the Ramsay approach BMBF did not incur the claimed expenditure on the provision of the pipeline and accordingly it was not entitled to capital allowances. That submission was upheld by the Special Commissioners and, on appeal, by the judge, who further agreed with another submission by the Revenue that this was not a trading transaction by BMBF at all. BMBF says that this was a standard commercial finance leasing transaction giving rise to the ordinary availability of capital allowances. We are told by Mr. Aaronson Q.C., appearing for BMBF, that the decisions thus far have caused widespread concern within the asset-leasing sector of the financial market. Chadwick L.J., in giving permission to appeal, said that the appeal raised an important point of principle which required early guidance from this court. Hence the expedited hearing of the appeal.

The statutory provisions

3. Before I turn to the facts it is convenient to set out the statutory provisions in force at the material time governing capital allowances. S. 24(1) Capital Allowances Act 1990 provided:

"Subject to the provisions of this Part, where

(a) a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant wholly and exclusively for the purposes of the trade, and

(b) in consequence of his incurring that expenditure, the machinery or plant belongs or has belonged to him,

allowances and charges shall be made to and on him in accordance with the following provisions of this section."

It is unnecessary to refer to the details of the writing-down and other allowances and balancing charges provided for in the other parts of s. 24.

4. There are other provisions which restrict the availability of capital allowances in particular circumstances. Thus s. 75 (1) provides (so far as material):

".... where a person incurs capital expenditure on the provision by purchase of machinery or plant, and

(a) he and the seller are connected to each other, or

(b) the machinery or plant continues to be used for the purposes of a trade carried on by the seller, or

(c) it appears with respect to the sale, or with respect to transactions of which the sale is one, that the sole or main benefit which, but for this subsection, might have been expected to accrue to the parties or any of them was the obtaining of an allowance under this Part,

a first-year allowance shall not be made in respect of the expenditure or any additional VAT liability incurred in respect of it or, if made, shall be withdrawn, and these shall be disregarded for the purposes of section .... 25 .... so much (if any) of the aggregate of the expenditure and any such additional VAT liability as exceeds the disposal value to be brought into account under those sections by reason of the sale."

The Ramsay approach

5. It is also convenient to say a few words about the Ramsay approach in the light of the authorities. Lord Nicholls in Macniven said ([2001] 2 WLR at pp. 379, 380):

"1 .... In the Ramsay case the House did not enunciate any new legal principle. What the House did was to highlight that, confronted with new and sophisticated tax avoidance devices, the courts' duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation: see Lord Wilberforce at p. 326.

2 The Ramsay case brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at a prearranged tax avoidance scheme as a whole....

4 Second, this is not to treat a transaction, or any step in a transaction as though it were a "sham" .... What this does is to enable the court to look at a document or transaction in the context to which it properly belongs.

5 Third, having identified the legal nature of the transaction, the courts must then relate this to the language of the statute. For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provisions?"

6. Lord Hoffmann (with whom all the other members of the House agreed) in Macniven (p. 391 para. 44) regarded as the Ramsay principle the decision of the House of Lords to construe particular statutory terms ("disposal" and "loss") in a commercial sense which transcended the individuality of intermediate circular book entries. He referred to what Lord Brightman had stated in Furniss v Dawson [1984] AC 474 at 572C where, paraphrasing what Lord Diplock had said in CIR v Burmah Oil Co. Ltd. [1982] STC 30 at p. 33, Lord Brightman set out the limitations of the Ramsay approach:

"First, there must be a series of pre-ordained transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax – not "no business effect". If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied."

7. Lord Hoffmann commented (at pp. 392,3):

"48 My Lords, this statement is a careful and accurate summary of the effect which the Ramsay construction of a statutory concept has upon the way the courts will decide whether a transaction falls within that concept or not. If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be "disregarded for fiscal purposes", I think that he meant that they should be disregarded for the purposes of applying the relevant fiscal concept....

49 For present purposes, however, the point I wish to emphasise is that Lord Brightman's formulation in the Furniss case, like Lord Diplock's formulation in the Burmah Oil case, is not a principle of construction. It is a statement of the consequences of giving a commercial construction to a fiscal concept. Before one can apply Lord Brightman's words, it is first necessary to construe the statutory language and decide that it refers to a concept which Parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component parts. But there are many terms in tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning. In such cases, the Ramsay principle can have no application."

8. Lord Nicholls (at p. 381 para. 7) referred to Lord Brightman's remarks as describing the factual situation where typically the Ramsay approach will be a valuable aid but not as laying down the factual prerequisites for the application of the Ramsay approach.
9. Lord Hoffmann (at pp. 395,6) under the heading "The limits of Ramsay" gave further guidance on the distinction he was drawing between commercial and legal concepts in taxing statutes:

"58 The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say 'You had better ask a lawyer'. For example, stamp duty is payable upon a "conveyance or transfer on sale" (Schedule 13, paragraph 1(1) to the Finance Act 1999). Although slightly expanded by a definition in paragraph 1 (2), the statutory language defines the document subject to duty essentially by reference to external legal concepts such as "conveyance" and "sale". If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept. If the 'disregarded' steps in Furniss v Dawson.... had involved the use of documents of a legal description which attracted stamp duty, duty would have been payable.

Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones."

10. In accordance with that guidance the Ramsay approach is applicable where it is sought to attach a tax consequence to a transaction which typically consists of a series of pre-ordained transactions or a single composite transaction, in which steps have been inserted which have no business purpose apart from the avoidance of tax. The court gives effect to the statutory language, where the concept to which the statute refers is a commercial one, by disregarding the artificial steps. If the concept is a legal one, there is no scope for the application of the Ramsay approach. I will return later to what seems to me to be the difficult dichotomy between legal and commercial concepts.

The uncontroversial facts

11. A statement of facts was agreed between the parties. It is recited in full in the Special Commissioners' decision. At this point it is sufficient that I set out the uncontroversial salient facts, which I take from the agreed facts, the documents and the findings of the Special Commissioners.

(1) BMBF is a very substantial company within the Barclays plc banking group. Its principal activity is the provision of asset-based finance.

(2) Bord Gáis Éireann ("BGE") is an Irish corporation owned by the Irish Government and responsible for the supply, transmission and distribution of natural gas in Ireland.

(3) Between 1991 and 1993 BGE built a gas pipeline ("the Interconnector") running from Scotland to Ireland with the assistance of a 35% grant from the EU, the construction being financed by loans from a consortium of banks.

(4) On 8 April 1992 Barclays de Zoete Wedd Ltd. ("BZW"), the investment banking arm of the Barclays group, put a proposal to BGE. This included the purchase by a U.K. company of the Interconnector or part of it, the grant of a 20-year lease of it to a U.K. subsidiary of BGE, the guarantee by Barclays Bank plc ("BB") of the rental payments under the lease, a long term supply contract between the subsidiary and BGE and a cash deposit of a sum a little below the expected purchase price of £250 million by BGE with BB as security for its guarantee, the deposit to provide BGE with the cashflow needed by the subsidiary to service the lease. BZW said that the proposal would need to be adapted to suit BGE's needs. BZW was awarded a financing mandate by BGE.

(5) In May 1993 BZW submitted a more detailed proposal to its Credit Risk Management Division for sanction. Under it BGE would sell the Interconnector to Abbey National which would lease it to the U.K. subsidiary of BGE; the subsidiary would sell gas to BGE under a "take or pay" agreement on terms providing the subsidiary with sufficient means to meet the rental payments and to generate a margin of profit; BB would guarantee to the lessor the fixed rental payments payable under the loan but, in view of the proposed length of the lease, BB would require security from BGE in the form of cash deposited with a Barclays subsidiary. BZW said that Abbey National would be able to take advantage of capital allowances by investing in a finance lease of the Interconnector and that those benefits would also be reflected in a level of rental payments attractive to the lessee. Of the cash deposit it was said:

"This will also serve the purpose of fixing and crystallising the benefits to the BGE Group of the finance lease to the extent the scheduled interest payments and repayments of the deposit exceed the rental payments i.e. BGE will set aside a certain amount of funds at the outset which will generate a cash flow which will cover the element of BGE's obligations under the Take or Pay Agreement corresponding to the rental payments, and in addition provide a subsidy reflecting the benefits to the BGE Group of the finance lease."

(6) BGE (UK) Ltd. ("BGE (UK)") was incorporated in England and Wales on 17 June 1993 as a wholly owned subsidiary of BGE.

(7) Negotiations with Abbey National reached an advanced stage, but then broke down owing to legal advice that under its constitution BGE was unable to give a guarantee of the lease obligations of BGE (UK), and in October 1993 it was decided that BMBF should be the lessor.

(8) Other changes to the scheme, interposing BGE as the lessee and providing for a sublease to BGE (UK), increasing the length of the lease and reducing the size of the transaction to a purchase of parts of the Interconnector for £91,292,000, were agreed before 31 December 1993.

(9) On 31 December 1993 the following transactions were entered into pursuant to the scheme devised by BZW:

(a) by two acquisition agreements BMBF agreed to acquire from BGE certain specified plant and machinery relating to specific parts of the Interconnector for £91,292,000 (I refer to the acquired plant and machinery as "the Pipeline");

(b) by a lease agreement ("the Headlease") BMBF agreed to lease the Pipeline to BGE for a pre-primary period from 31 December 1993 to 30 September 1995, and for a primary period from 1 October 1995 to 30 September 2025, with possible annual renewals during a secondary period thereafter; there was a low fixed rental for the pre-primary period, but the primary period rentals were of substantial fixed amounts, not fluctuating with movements in interest rates but calculated on the basis that they escalated by 5% per annum; further they were to be adjusted in the event of changes to U.K. tax law and tax rates; the secondary period rentals were small but not insignificant;

(c) by a sublease agreement ("the Sublease") BGE agreed to sublet the Pipeline to BGE (UK) for the same periods as in the Headlease, the rentals being the same (save that the Sublease contained none of the provisions in the Headlease for the adjustment of rentals in the event of changes in U.K. tax law and tax rates);

(d) by an agreement ("the Assumption Agreement") between BMBF, BGE and BGE (UK), BMBF agreed to make out invoices to BGE (UK) in respect of payments ("the assumed payments") falling due from BGE under the Headlease and that BGE (UK) would settle such invoices, thereby discharging monetary obligations due to BMBF under the Headlease; in turn BGE agreed that payments from BGE (UK) to BMBF would correspondingly satisfy monetary obligations to BGE under the Sublease;

(e) by an agreement ("the Transportation Agreement") between BGE and BGE (UK), BGE (UK) agreed to transport, handle and deliver gas to BGE's order in return for specified payments from BGE, such payments to be made into a BGE (UK) account ("the Transportation Account");

(f) by a guarantee facility agreement and Deed of Guarantee ("the Barclays Guarantee") BB guaranteed to BMBF direct payment by BGE (UK) to BMBF of the assumed payments;

(g) BMBF borrowed from BB £91,784,000 which came from its Treasury at a fixed rate of interest of 10.95% per annum and made a CHAPS payment of £91,292,000 to BGE and ownership of the Pipeline was transferred by BGE to BMBF by two bills of sale;

(h) a letter signed on behalf of BGE, BB and BGE (UK) instructed BB to debit £91,292,000 from BGE's account with BB as soon as it was received from BMBF and to pay that sum to an account of a Jersey company, Deepstream Investments Ltd. ("Deepstream"), with BB;

(i) by an agreement ("the Deposit Agreement") between BGE and Deepstream BGE agreed to deposit £91,542,000 with Deepstream and Deepstream agreed to repay to BGE amounts falling into three categories, A, B and C; the A payments matched the rental payments payable to BMBF and in the primary period rose from £2.8 million in 1995 to nearly £25 million in 2025; the B and C payments were for BGE itself, the B payments being of reducing amounts from £2.6 million in 1994 to £325,000 in the last year of the payments, 2001, while the C payments were of much smaller sums never exceeding £35,000 and payable from 1994 to 2025.

(j) as security for its obligations to BGE (UK) under the Transportation Agreement, BGE assigned its interest in the deposit with Deepstream to BGE (UK) and charged a BGE current account in favour of BGE (UK);

(k) BGE (UK) executed a Deed of Indemnity in favour of BB and assigned to BB its interest in the deposit with Deepstream, the BGE account and its rights under the Transportation Agreement and charged the Transportation Account in favour of BB;

(l) by a further deposit agreement between Deepstream and Barclays Bank Finance Company (Isle of Man) Ltd. ("Barclays (IOM)"), another company in the Barclays group, Deepstream placed £91,542,000 with Barclays (IOM);

(m) Deepstream executed a Deed of Indemnity in favour of BB in respect of BB's obligations under the Barclays guarantee and assigned to BB its rights to the sum deposited with it, granted BB fixed and floating charges over all its assets and charged in favour of BB the account with Barclays (IOM);

(n) the £91,292,000 deposited by Deepstream was returned to BB's Treasury by Barclays (IOM);

(o) by two put options made between another BGE subsidiary, Sudanor Ltd. ("Sudanor "), BMBF and BGE, BMBF was given the right to sell the Pipeline to Sudanor on the termination of the Headlease, BGE acting as BMBF's sales agent.

(10) The purchase price of £91,292,000 represented the net cost to BGE (after deduction of the EU grant) of the Pipeline;

(11) The existence of the deposit held by Barclays (IOM), the interest in which Deepstream had assigned to BB, had the effect that the finance provided by the Barclays group was weighted at 0% in BB's capital adequacy return to the Bank of England (i.e. the transaction was treated as being of no risk and so did not affect the capital adequacy of the Barclays group);

(12) BGE saw the benefits to it of the arrangements as being the following:

"The gross value of the saving is estimated at £12.6m over the life of the lease (£11.7m over years 1-8) and the present value at £9.9m (discounted at 6.75%). Out of these benefits BGE must pay £1.8m of stamp duty. The net present value is therefore projected at £8.1m." (BGE Memorandum dated 14 December 1993)

It was recognised that there were risks associated with receiving those benefits because BGE would be tied to a very long lease, but it was said that in the first 5 years the benefits were likely to be positive provided capital allowances were not denied; in the long term there was much greater uncertainty and the possibility of the benefits being eliminated if taxes were to go up.

The Special Commissioners' decision

12. The Special Commissioners (in para. 36 of their decision) said that BMBF had to pay higher amounts to BB under the terms of its borrowing than it would receive from the rental payments payable to it under the Headlease. The difference, they said, was to be funded by the capital allowances claimed according to the terms of the scheme prepared by BZW.
13. The Special Commissioners, in para. 37, said that the Transportation Agreement was designed to ensure that BGE (UK)'s rental payments could always be met, the effect of the agreement being that BGE financed the payment of BGE (UK)'s rental payments. Having noted that under the terms of the deposit with Deepstream the only moneys which left the Barclays group were the comparatively small B and C payments, the Special Commissioners found as a fact that the events of 31 December 1993 were pre-ordained and designed by BZW to be a composite whole (para. 39).
14. In the passage in para. 48 of their decision where they stated their conclusions the Special Commissioners took the view that what occurred was "a complicated, convoluted tax avoidance transaction." They rejected a submission by Mr. Aaronson that they should look no further than the actions of BMBF. They accepted the submissions by Mr. Goy Q.C., for the Revenue, that s. 24 was looking at a commercial concept and that they had to look at the whole of the transaction. They noted that it was common ground that money by way of security was held in a loop. They continued:

"We also understand that there is no dispute that BGE was unable, in Mr. Goy's words, to get its hands on the money. In relation to that we are grateful to Mr. Perry, a very experienced banker, who said in relation to a loan on a cash secured basis where the security covers the whole of the loan that such a borrower "has not got any more money at the end than he had at the beginning". (Day 2 page 151 line 25).

Accordingly it is apparent that BGE acquired no funds by selling its pipeline to BMBF. The purchase price having been borrowed by BMBF from Barclays left BMBF and lodged momentarily in a designated account of BGE. Thence it travelled by way of deposit to Deepstream and eventually returned to Barclays Global Treasury via [Barclays (IOM)]. Those facts are not disputed by BMBF but we do not accept the argument put forward on behalf of BMBF that such a circular route followed by the money represented no more than was required in order to provide the necessary security.

The only benefit which BGE obtained from the very complicated arrangements choreographed by BZW were amounts B and C paid to it under the terms of the deposit agreement. Payments of amount A returned eventually to BMBF and from BMBF to the Bank. BGE was to benefit to an extent of £8.1m net and the Irish government was to receive £1.8m in stamp duty. Those payments would be financed entirely by United Kingdom taxpayers by means of the hoped for capital allowances. Without the capital allowances BGE would receive nothing, for the amounts of the rents would increase to take account of the non-availability of capital allowances.

Looking at the matter in round we accept Mr. Goy's primary submission that the payment of money by BMBF, even if it is said to have involved BMBF incurring expenditure, cannot be said to have been expenditure on the pipeline.

The payment by BMBF to BGE achieved no commercial purpose. Commercially driven finance leasing is designed to provide working capital to the lessee. But BGE could not get its hands on the money. It parted with a valuable asset allegedly for £91,292,000 but received no immediate benefit from that transaction. It provided no finance to BGE simply because the amounts had to be deposited as part of the arrangements with Deepstream to be repaid only in accordance with the deposit agreement with Deepstream.

Lord Templeman in Ensign Tankers (Leasing) Ltd v Stokes [[1992] 1 AC 655] said at page [677E], when dealing with the predecessor of section 24:

"The section is not concerned with the purpose of the transaction but with the purpose of the expenditure."

In our judgment the purpose of the expenditure by BMBF on 31 December 1993 was not the acquisition of the Pipeline but the obtaining of capital allowances which would result in ultimately a profit to BGE and fees payable to BMBF and BZW. The transaction had no commercial reality.

What actually occurred was that BMBF parted with money to Deepstream and received back in return payments from Deepstream. Certainly BGE was never able to enjoy the alleged purchase price of over £92,000,000. What is more it never expected to do so as is plain from the documents put in evidence.

We do not say that BMBF did not make any expenditure but any expenditure it made was not on the Pipeline and thus BMBF cannot satisfy the conditions laid down by section 24."

15. Accordingly, the Special Commissioners dismissed BMBF's appeal.

Park J.'s judgment

16. On the appeal to the High Court the judge in a careful and detailed judgment, the lucidity of which was rightly acknowledged by Mr. Aaronson, upheld the decision of the Special Commissioners. He pointed out how the £91,292,000 had followed a circular route starting with the Treasury of BB from which it went on loan to BMBF and ending with the Treasury after Barclays (IOM) had received Deepstream's deposit, all in the course of the same day. He described as inevitable the movement of the money through a predetermined route until it ended with another financial participant in the structure, commenting "there was no possibility of it ending as funds available for BGE to use in the ordinary activities of its trade." He also stated that the bulk of the payments, which would fall to be made year by year over the primary period, follow a circular pattern, though he drew attention to those elements in the payments which would not be circular: first, the B and C payments by Deepstream to BGE; second, the fact that the payments by BGE to BGE (UK) under the Transportation Agreement would be likely to be greater than the amounts which went round the circle; third, the fact that BMBF would need more than the receipts which it would receive from BGE (UK) under the Assumption Agreement in order fully to service and repay its borrowing from BB. The judge said that the further funding would be expected to come from the tax savings accruing to BMBF if capital allowances were obtained for the expenditure of £91,292,000 on the Pipeline. He said (in para. 32 of his judgment):

"Capital allowances give tax relief ahead of the rates of commercial depreciation, and the timing benefits of them have present values when the accelerated tax deductions are obtained. It was from the tax reliefs, which either saved for BMBF money which it would otherwise have had to pay to the Revenue or (more probably) enabled it to receive payments for group relief from other members of the Barclays group, that BMBF was able to finance its borrowing from BB and, by the end of the lease, to make an attractive commercial margin."

17. The judge said (in para. 32) that this was in itself entirely normal in finance leasing and not an abuse of the tax system. But he said (in para. 33) that the use of the capital allowances in this case had more effects than those which are customary in all finance leasing, the B and C payments still being payable by Deepstream to BGE even if the capital allowances are not obtained by BMBF, but BGE would be liable to make additional payments, greater than the B and C payments, under the Headlease. That, he said, was likely to cause the provisions allowing termination of the Headlease to be put into effect by BGE.
18. The judge (in para. 46) said that he did not regard the transaction as some sort of unappealing tax avoidance scheme. He (in para. 47) accepted that BMBF and BZW did not think of the scheme in which BMBF participated as standing apart from the general run of finance leasing business, and (in para. 48) that, in general, finance leasing transactions qualify for capital allowances. But he said (in para. 49) that this was not a case where the finance enabled the lessee to have the use of an asset which, absent the lease finance, it would not have, nor was it a case where the lessee uses the proceeds of sale to repay borrowings or for other purposes of the lessee's business. He described all those cases as being where the finance lessor provided "up front" finance to the lessee and the finance so provided is used in the lessee's business. He contrasted that with the present case where BGE already owned the Pipeline, and after the transaction it was still able to use it as before, though by virtue of the Headlease, the Sublease and the Transportation Agreement, and it still owed the banks the money which it had borrowed, nor was the £91,292,000 available for BGE to use in any other way to finance transactions or activities of its business. He agreed (in para. 50) with Mr. Goy's comment that "BGE could not get its hands on the money" and said that the only money BGE was to get out of the transaction was the B and C payments, the financial reality being that those payments were BGE's share of the value of BMBF's capital allowances channelled to BGE via BB, Barclays (IOM) and Deepstream under the system devised by BZW.
19. The judge (in para. 51) expressed the view that as regards finance leasing the underlying purpose of Parliament is "to enable capital allowances to be used so as to provide to lessees at attractive rates finance for them to use and to develop their real business activities".
20. The judge (in para. 56) considered whether the words of s. 24, "has incurred capital expenditure on the provision of machinery or plant", embodied a commercial or a legal concept. He said that they plainly embodied a commercial concept, incurring expenditure on the provision of something not being legal terminology. He said (in para. 58):

"the expenditure was really incurred on the creation or provision of a complex network of agreements under which, in an almost entirely secured way, money flows would take place annually over the next 32 or so years so as to recoup to BMBF its outlay of £91m plus a profit .... I consider that it was the money flows which mattered, and it was on the rights to the money flows that, as a commercial matter, BMBF really expended the £91m on which it had borrowed".

The judge accepted (in para. 60) that finance lessors always wish to limit the credit risk to which they are exposed, but he said that there can be cases where the credit risk is so comprehensively eliminated that it becomes apparent that the lessor has not really laid out its money on a leasing transaction at all. He said (in para. 61) that the structure would have worked whatever the purchase price and that it could be argued that the Pipeline was surplus to the requirements of the scheme, analogous to an unnecessary fifth wheel on the coach.

21. The judge then considered an argument for the Revenue that BMBF did not incur any expenditure at all but, in the absence of a finding by the Special Commissioners accepting or rejecting that argument, he was not prepared positively to conclude that BMBF did not incur the expenditure. However, he did accept a further argument for the Revenue that even if BMBF did incur expenditure on the provision of the Pipeline, it did not do that wholly and exclusively for the purposes of its trade. After considering the distinction drawn in Lupton v FA & AB Ltd. [1968] 1 WLR 1401 by Megarry J. between (1) transactions which have fiscal elements in them but which are nevertheless trading transactions and (2) transactions where the fiscal elements are present to such an extent that the transactions are not trading transactions at all, the judge held that the transaction in the present case fell into the latter category. The judge said (in para. 73):

"The transaction was really about creating a complex and sophisticated structure which enabled BGE every year to receive payments representing its share of the tax savings (or group relief payments) received by BMBF from the capital allowances. The underlying thinking was, as it seems to me, that BGE had the pipeline, which was a big item of machinery or plant and thus a potential subject matter for a big claim for capital allowances, and that BMBF had an established status and know-how as a finance lessor. The two items would be utilised in combination within the structure devised by BZW, with the real end product being, not the provision of finance at rates which were both profitable to the provider (BMBF) and attractive to the recipient (BGE), but fiscal savings to be shared between the two of them and to be provided at the expense of the UK Revenue."

The rival arguments

22. On this appeal Mr. Aaronson does not dispute that there was a composite scheme including not only the sale and leaseback but also the security arrangements. But he submits that the judge erred in concluding that BMBF did not incur expenditure on the provision of the Pipeline for four principal reasons:

(1) the Ramsay approach does not permit the re-characterisation of BMBF's expenditure on the acquisition of the Pipeline as "expenditure on the provision of a complex network of agreements";

(2) the concept of incurring expenditure on the provision of machinery or plant as it is found in s. 24 is not a commercial but a legal concept;

(3) it is not an essential feature of finance leasing either that the vendor of the asset to be leased back should be able to "get its hands on" the sale proceeds immediately or that the lessor should be exposed to some (unspecified) degree of credit risk;

(4) it was not the underlying purpose of Parliament in enacting s. 24 "to enable capital allowances to be used so as to provide to lessees at attractive rates finance for them to use and to develop their real business activities".

23. Mr. Aaronson further submits that the judge erred in concluding that BMBF did not incur the expenditure in question wholly and exclusively for the purposes of its trade.
24. By a Respondent's Notice the Revenue repeats the submission that BMBF did not incur expenditure at all by reason of the circular and self-cancelling movement of money.
25. Mr. Goy supports the reasoning and conclusion of the judge. His submissions were as follows:

(1) on the assumption that BMBF incurred expenditure, it did not do so on the provision of machinery or plant;

(2) if it did, it did not do so wholly and exclusively for the purposes of its trade;

(3) it did not incur expenditure at all.

26. All three submissions depend on the correctness of the Special Commissioners' view of the transaction as having "no commercial reality", the purpose of the expenditure by BMBF being not the acquisition of the Pipeline but the obtaining of capital allowances resulting ultimately in a profit to BGE and fees payable to BMBF and BZW. That view was in turn largely dependent on its conclusion that, because BGE could not get its hands on the purchase price, the only benefits which BGE obtained from the arrangements were the B and C payments and that those payments were financed by the capital allowances. These views and conclusions were accepted uncritically by the judge.
27. However Mr. Aaronson challenged the correctness of those findings in the light of the evidence before the Special Commissioners. I return therefore to the Special Commissioners' decision. The Special Commissioners had in addition to the agreed statement of facts a large number of documents and the evidence, written and oral, of three witnesses called by BMBF. The first was Christopher Boobyer. He was the director of BMBF primarily responsible for the transaction and has vast experience in what is known as big ticket leasing, that is to say leasing (generally finance leasing) arrangements made direct with customers for individual asset values above £20 million. Among his many distinctions he has since 1998 been chairman of the Inland Revenue Panel, a joint Finance Leasing Association and Inland Revenue forum set up to discuss national issues affecting tax, accounting and regulatory policy in the leasing field with senior Treasury and Inland Revenue officials, and is the editor and co-author of Leasing Finance, now in its third edition. The second was Patrick Perry who from 1991 until his retirement in 2000 was Group Treasurer of the Barclays group. The third was Donald Wilson who after working for 42 years for British Gas became a director of BGE (UK) shortly after its incorporation. Apart from recording the fact that the three witnesses provided evidence the Special Commissioners make only brief references to their evidence.
28. First, they said that from Mr. Boobyer's evidence it was apparent that BMBF was aware that there were to be security arrangements for the lease and transportation agreements and that there was to be a cash collateral equivalent to the price paid for the Pipeline. Second, they accepted his written evidence that a corporate certificate issued by BGE was never sent to BMBF. Third, they referred to his evidence that Sudanor was formed so that the put option could be granted to BMBF if it wished to exit the Headlease. Fourth, Mr. Boobyer's description in his witness statement of finance leasing is quoted, viz.

"The basic premise of the finance leasing industry is that lessors pass on the value of the capital allowances available to them in respect of the asset being financed to the customers. The customer gets the use of the asset concerned and pays rent at a rate which reflects the margin required by the Bank and the reduced funding cost to the Bank of providing lease finance as a result of the tax deferral benefit available."

29. The Special Commissioners make no reference to other material parts of Mr. Boobyer's evidence. He made clear that what he meant by finance leasing was a form of asset financing whereby asset-owning companies enter into a sale and leaseback transaction with a purchaser/lessor and indirectly benefit from the capital allowances available, which are passed on by the lessor in lower rentals and the lessor recoups the cost of acquisition and obtains a profit margin through those rentals, taking security by acquiring title to the asset. In his oral evidence Mr. Boobyer was adamant that this was a standard commercial finance leasing transaction for BMBF, negotiated at arm's length first with BB from which BMBF borrowed the purchase price, second with BZW which put the scheme together, and third with BGE which insisted on the transaction being a fixed rate transaction from the start. He explained that the profit which BMBF derived from the deal was calculated by giving it a net after tax margin of 0.8965% applied to the day-to-day balance of the capital outstanding, those being the same terms as had been negotiated between BGE and Abbey National. As Mr. Boobyer put it, "we literally stepped into their shoes". In cross-examination it was put to him that BMBF entered into documents that would effectively ensure that the purchase price went straight into the deposit account. He replied:

"No we did not. BMBF paid the acquisition price to BGE. What BGE did with it did not have involvement or concern with BMBF."

Although pressed by Mr. Goy that a provision in each acquisition agreement for the purchase price to go into a specified account was to facilitate the taking of security, Mr. Boobyer said he could not accept that: it was on BGE's instructions that BMBF was to make payment into the account that BGE specified; for the vendor to specify an account to receive payment was a standard provision. He reaffirmed that this transaction was an ordinary, straightforward, commercial leasing transaction and denied a suggestion by Mr. Goy that it was somewhat unusual.

30. Mr. Perry's evidence is only referred to in one respect by the Special Commissioners and that is only for his oral evidence that on a loan on a cash secured basis where the security covers the whole of the loan, such a borrower "has not got any more money at the end than he had at the beginning". The Special Commissioners do not record that that was said in answer to the question whether, on the hypothesis that the loan is made on terms that the lender requires the borrower to deposit the money lent and that the deposit must be used to repay the loan, any additional funds had been made available to the borrower. They also do not refer to his evidence that the fact that the loan from BB to BMBF contained interest and principal payment terms matching the rents payable under the leasing arrangements with BGE was entirely normal for a finance lease transaction, that cash secured lending was by no means unknown, nor that as Group Treasurer he did not see BMBF, Barclays (IOM), Deepstream and BZW as all part of the same operation, the responsibility of the directors of each company being confined to that company. The Special Commissioners do not refer to the explanation given by Mr. Perry of the regulatory requirements imposed on banks whereby banks have to maintain minimum levels of capital depending on the risk weighting of transactions which they undertook, those requirements causing banks to try to negotiate security in the form which will best improve the weighting position of each transaction. The relevance of that is, of course, that BB's insistence on BGE providing a cash collateral which would result in the transaction in question being zero-rated, so far from being a matter to excite suspicion, was driven by normal banking considerations.
31. Mr. Wilson's evidence is not referred to at all. The Special Commissioners say of BGE (UK) that it is a £100 company with a board consisting of three directors but apparently only one other employee, most of its operations being carried out by means of contracts with independent contractors. The Special Commissioners appear to have overlooked Mr. Wilson's written evidence that BGE (UK)'s capital was £400,000 and that it had a board of five directors. Insofar as the Special Commissioners are suggesting that this was an insubstantial company with no purpose other than as part of a structure to ensure the availability of capital allowances (as Mr. Goy had put to Mr. Wilson), they ignore Mr. Wilson's written evidence that in addition to being the sublessee of the Pipeline it owned other parts of the Interconnector and had assets well in excess of £30 million under construction, and his oral evidence flatly denying that its only purpose was as part of the structure to obtain capital allowances. Further his oral evidence was that the intention and expectation were that the Interconnector would be a profitable operation with pre-tax profits ultimately of £40 million per annum and that BGE (UK) would very soon be a profitable company.
32. In the light of that evidence from apparently impeccable witnesses whose evidence is not said by the Special Commissioners to be disbelieved, it is not apparent to me on what evidence the findings to which I have referred in para. 26 above are based. They appear to be an acceptance of the Revenue's assertions that the B and C payments represent the benefit of the capital allowances, that this was no ordinary finance lease transaction and served no commercial purpose, and that it was aimed only at obtaining capital allowances which would result in a profit to BGE and fees payable to BMBF and BZW. That the capital allowances were taken by BGE in the form of the B and C payments does not appear from any document. On the contrary, as is apparent from the BZW document referred to in para. 11 (5) above it was recognised that the cash deposit required by BB as security for its guarantee would produce a benefit for BGE over and above the covering of the rental payments. That benefit is not linked to the capital allowances. Further the Special Commissioners' conclusion runs counter to Mr. Boobyer's insistence that this was an ordinary finance leasing transaction and that in finance leasing the benefit of the capital allowance obtained by the lessor is passed on to the lessee in the form of lower rentals. Yet if the Special Commissioners are right, they were not passed on in that form but were taken out of the deposit with Deepstream in the form of the B and C payments. Of course it was open to the Special Commissioners to reject the evidence of a witness, but they would have been bound to explain why they did so. I can see no basis on which they could properly have rejected the evidence of Mr. Boobyer, given the extent of his experience in the field of lease financing.
33. Further, Mr. Aaronson was able to demonstrate that of the £91,534,000 deposited with Deepstream by BGE only £82,468,000 needed to be invested (at the rate implicit in the Deepstream deposit of 9.641%) to fund the rental stream (at the implicit interest rate of 8.6%), and that the balance of £9,066,000 could be invested at 9.641% to provide a return over and above that required to cover the interest payments. That return would account for the B and C payments. The A payments total £402,042,725, the B payments £11,708,600 and the C payments £917,548. Unfortunately no evidence was given to the Special Commissioners in respect of the figures Mr. Aaronson now gives. Mr. Goy however, very fairly, accepts as mathematically accurate that the purchase price received by BGE was greater than the sum which it would need to invest in order to fund the payment of the rental stream. It would be astonishing if a major Irish corporation with its own advisers would not exploit the deposit, which it had to make to obtain BB's guarantee of the rental payments, as far as it could for its own benefit. There is no inconsistency, in my opinion, between the view that the benefit of the capital allowances would be passed on to the lessee in the form of lower rentals in the ordinary way and the BGE memorandum of 14 December 1993 referring to the "effective saving" as £12.6 million over the life of the lease and "the net present value of the benefits" as £8.1 million. Nowhere in the memorandum are that saving and those benefits to BGE equated with the capital allowances intended to be obtained and indirectly passed to BGE (UK).
34. This is not a case where the Special Commissioners were choosing between conflicting evidence. The Revenue produced no evidence. Despite the great respect which it is appropriate to accord to a specialist and experienced tribunal, particularly when its findings are adopted by a judge as knowledgeable as Park J., I have reached the clear view that the Special Commissioners could not properly conclude on the evidence before them that the B and C payments "would be financed entirely by United Kingdom taxpayers by means of the hoped for capital allowances." That is simply not substantiated by any written or oral evidence.
35. Further I cannot accept that the only benefits which BGE obtained were the B and C payments. BGE sold the Pipeline for £91,292,000. It received that sum, but for its own commercial purposes it agreed to deposit it on the terms of the Deposit Agreement. Effectively it thereby purchased three annuities corresponding to the A, B and C payments, the A payments matching obligations arising annually under the Headlease. Implicit in those payments is the fact that interest will have been earned on the deposit. It seems to me quite unrealistic to say that BGE received no benefit from its entitlement to the A payments. True it is that they were earmarked to be passed to BMBF, but that was in discharge of obligations incurred by BGE to BMBF for the purposes of BGE's business. Nor is it realistic to say that BGE never enjoyed the sales proceeds: they were invested in the deposit with Deepstream.
36. As for the commercial reality of the transaction, whether the sale and leaseback transaction or that transaction with the security arrangements, I have found it very difficult to understand what was thought by the Special Commissioners and the judge not to be commercial about it. I say that, whether it is viewed as a composite whole or step by step. It is hardly surprising that in relation to a transaction involving such large sums of money and intended to be in operation for a very long period, all the parties would want to make provision to reduce the risks of the obligations they were respectively undertaking as far as possible. But it should be borne in mind that this was not an entirely risk-free transaction for either BMBF or BGE. BMBF, in order to secure its 0.8965% profit via the rental payments, was agreeing to invest a very substantial sum, well in excess of the minimum for big ticket leasing, on acquiring a new unproved pipeline which it was to let on an unusually long lease to a non-U.K. corporation owned by a foreign state, the rents under the lease in effect to be paid by a new company starting up. Whilst BMBF was protected against any risk arising from changes in tax rates or capital allowances, not surprisingly it sought to ensure that it would receive the covenanted rental payments which would give it its profit, but it had no security other than the Pipeline for the "strip risk" estimated at £25 million, being the difference between the maximum sum payable by BMBF on termination and the amount of the guarantee by BB. BGE, to achieve its saving with a present value of £8.1 million, was conscious that it too was exposed to risks. They would arise if capital allowances were refused or reduced, and if tax rates changed. Nevertheless it chose to go ahead with the transaction on the terms negotiated not with a company in the Barclays group but with Abbey National, into whose shoes BMBF stepped. The other participants in the scheme devised by BZW, viz. BB, Deepstream and Barclays (IOM), all did so on ordinary commercial terms. To my mind the commerciality of the transaction is plain. I respectfully disagree with the contrary inferences of the Special Commissioners and the judge on this point: they seem to me to be based on an incorrect appreciation of the facts.

Conclusions

37. I now come to the statutory provisions. The purpose of the capital allowances legislation would appear to be to encourage the expenditure of capital on plant and machinery. The fact that the trader incurring the expenditure would not himself use the plant or machinery but would lease it and pass on the benefit of the capital allowances to the lessee was not seen to be any reason for not conferring capital allowances on that trader who had incurred the expenditure. I can see nothing in the legislation which substantiates the judge's view that s. 24 was enacted so that capital allowances could be used to provide lessees with finance at attractive rates to use and to develop their real business activities. S. 24 focuses on the incurring of expenditure by the trader on the provision of plant or machinery wholly and exclusively for the purposes of his trade. It therefore requires one to look only at what the taxpayer did. To the test posed in s. 24 it is immaterial how the trader acquires the funds to incur the expenditure or what the vendor of the provided plant or machinery does with the consideration received. Provided that the expenditure is incurred on the provision of plant or machinery and is so incurred wholly and exclusively for the purposes of the trader's trade, subject to s. 75(1) it is irrelevant to the operation of s.24 (1) whether or not the trader's object is or includes the obtaining of capital allowances. The express reference in s. 75 (1)(c) to the disallowance of a first-year allowance where the sole or main benefit that might have been expected to accrue was the obtaining of an allowance suggests that save in a case to which that provision applies, the expectation of, or the intention to obtain, such benefit is not a reason for denying the capital allowances.
38. Further in Barclays Mercantile Industrial Finance Ltd. v Melluish [1990] STC 314 Vinelott J. said, in respect of a film finance lease, that what became s. 75(1)(c) was not satisfied even though the lessor could not offer a lease back at an acceptable rent unless it could obtain a capital allowance; that was because the lessor's main object and purpose in that case was to make a profit on a purchase and lease of the film. Vinelott J. said at p. 343 that the provision was aimed at artificial transactions designed wholly or primarily at creating a tax allowance. He gave as an instance of an artificial transaction the case of a company purchasing machinery or plant which is used for a brief period and then sold. In the present case on Mr. Boobyer's evidence BMBF's sole purpose was to enter into the sale and leaseback to obtain to obtain the net 0.8965% profit, which Abbey National had negotiated and which it would obtain regardless of any changes to capital allowances, as part of its ordinary finance leasing trade, and there was no artificial transaction designed to create a tax allowance. I do not accept that the Pipeline was some sort of unnecessary fifth wheel to the transaction coach. Of course the scheme for a finance leasing transaction with security arrangements can be adapted to any plant or machinery of any value, but the asset is of essential importance, providing as it does security to the purchaser/lessor as Mr. Boobyer said. If capital allowances are to be obtained in full for the expenditure on the provision of the asset, that expenditure must not exceed the value of the asset.
39. The Special Commissioners and Park J. appeared to think that the inability of BGE to "get its hands on the money" showed that there was no expenditure on the provision of the Pipeline. Park J. further considered that the provision of "up front" finance to the lessee in the terms which I have described in para. 13 above was an essential feature of the requirements of s.24 (1). and that there must be some degree of credit risk to the lessor. I cannot accept any of these glosses on the simple statutory language. The Revenue accepts that in a sale and leaseback transaction where the vendor sells the plant or machinery to a lessor like BMBF on the basis that the proceeds will be applied in extinguishing a debt to the lessor, capital allowances are available. In such a case the vendor can never get his hands on the money. Such a transaction does not produce any "up front" money in any normal sense. I cannot see how what the vendor does with the purchase moneys can affect the availability of the allowances when s. 24 is directed only at the actions of the incurrer of the expenditure.
40. The Revenue's chief point appears to be that because the £91,292,000 went round in a circle, the Ramsay approach applies. Mr. Goy placed particular reliance on the Ensign case in this context. That case involved a complex tax avoidance scheme aimed at providing to English investors forming a limited partnership, VP, an entitlement to capital allowances for expenditure of $14 million on a film although the partners were never liable to spend more than $3,250,000 of their own money. An essential part of the scheme was what purported to be two loans of $9,750,000 and $1 million borrowed by the film producer, LPI, from its bank and passed to the partnership by way of non-recourse loans. They were purportedly applied immediately by VP as expenditure on the film by repayment into LPI's bank account, leaving no balance outstanding at the end of the day's trading. The loans were repayable to LPI by payment out of the net profits of the film under arrangements which the House of Lords found to be inconsistent with the concept of a commercial loan, involving repayment out of profits from the film. Lord Templeman said that the expenditure of $10,750,000 was really to be found to have been incurred by LPI ([1992] 1 AC 655 at p. 674C) and VP neither borrowed nor spent $10,750,000 (p. 678D). In contrast VP's actual expenditure of $3,250,000 was real and not magical and so qualified for the capital allowance (p. 677F).
41. Lord Hoffmann in Macniven (at p. 398 para. 68) said that for the purposes of some concepts in tax legislation the circularity of the cash flow and the fact that the transaction took place entirely for tax purposes would stamp the transaction as something different from that contemplated by the legislature. But he does not say that the circularity of the movement of money would in itself be enough. I do not accept that the circulation of money in the present case means that the transaction is to be treated like the scheme in Ensign. In our case there is nothing comparable with the artificial self-cancelling payments found in that case. There is no non-recourse or other uncommercial loan nor any immediate payment back to the same purported lender. Each step taken was properly commercial and on arm's length terms. On a true construction of the documents and on a proper analysis of the facts as urged by Lord Templeman to be the task of the courts (see. p. 611B) there was a real expenditure by BMBF on the acquisition of the Pipeline, and it is irrelevant to the application of s. 24 that the purchase money originated in a borrowing from BB out of BB's Treasury and that it ended up back in BB's Treasury after passing through the hands of BMBF, BGE, Deepstream and Barclays (IOM).
42. Mr. Goy suggested that there were four clear indications of artificiality in the arrangements. Two of them, BGE's inability to get its hands on the money and BGE's benefits being limited to the B and C payments, I have already discussed. The third indication was said to be the unusual Deepstream deposit, providing as it did that the deposit could not be terminated for 31 years. The fourth was said to be the fact that the purchase price of the Pipeline was not based on a valuation but was the expenditure by BGE on the Pipeline less the EU grant. Mr. Goy also posed the question: why did not BGE deposit the cash collateral directly with BB?
43. Whether or not the Deepstream deposit was unusual was not explored in any evidence. There is no indication anywhere in the evidence that the terms of the deposit were not commercial; the bargain was struck between two arm's length companies, BGE and Deepstream. As for the purchase price of the Pipeline, Mr. Boobyer did accept in cross-examination that the EU grant was deducted from the expenditure so as to be sure of BMBF getting the capital allowances, but it was not suggested to Mr. Boobyer that the resultant price was not a price which two arm's length companies, BGE and BMBF, could properly arrive at in a sale and leaseback transaction of an asset as difficult to value as the Pipeline. There is no evidence as to why BGE itself did not deposit the cash with BB; BMBF does not know. But Mr. Aaronson was able to draw our attention to two commercial reasons (one relating to the uncertainties created by the much debated views expressed by Millett J. in Re Charge Card Services [1987] Ch 150, and the other arising out of the Irish insolvency rules known as the Examinership Procedure which might have affected the zero-weighting of the BB guarantee) which might have operated on the minds of those taking the decision whether BGE should make a direct deposit with BB. He further referred to Charge Card and to doubts about the applicability of the exemption under s. 349(3) Income and Corporation Taxes Act 1988 from deducting tax from payments of yearly interest as constituting commercial constraints militating against Deepstream making a deposit directly with BB in London. It is not profitable to speculate on those matters. It is sufficient to say that I am not persuaded that any of the points relied on by Mr. Goy establishes artificiality in the arrangements.
44. On the view I have reached on the facts and s. 24 it is hard to see any scope for the application of the Ramsay approach. But if in accordance with Lord Hoffmann's guidance in Macniven it is necessary to determine whether the concept of incurring expenditure on the provision of an asset is legal or commercial, I would hold that it was legal by analogy with the concept of "payment" which in Macniven was held to be a legal concept. I do not doubt that it is due to my own failings that I find Lord Hoffmann's dichotomy of concepts a difficult one to apply. The touchstone appears to be whether the commercial man would say of a statutory expression "You had better ask a lawyer" (see [2001] 2 WLR at p. 395 para. 58). It is far from obvious to me that the commercial man, knowing anything of the dozens of cases in which the distinction between capital and income has been explored, would say that those concepts are commercial; whether a transaction is of an income or capital nature is normally treated as a question of law (see Beauchamp v F W Woolworth plc [1990] AC 478 at 491A per Lord Templeman). Yet income and capital are described by Lord Hoffmann as business concepts (p. 396 para. 60). On any view, as it seems to me, the fundamental question is the true construction of the statutory provisions, and the application of the meaning so ascertained to the facts. I take refuge in the fact that the expression "incurring expenditure" archetypally would include a payment. In my judgment, just as in Macniven it was immaterial to the meaning of "payment" that the company borrowed money from its shareholder to whom it promptly paid the borrowed money, so in the context of s. 24 it is irrelevant to the meaning of "incurred …. expenditure" that the money used in the expenditure was borrowed by BMBF from BB out of the Treasury and was used by BGE in a way which eventually brought it back to the Treasury from Barclays (IOM). On that footing, the Ramsay approach does not apply.
45. If that is wrong and the relevant concept is a commercial concept, then in accordance with Macniven one must identify the legal nature of the transaction, stripping out artificially inserted steps. Looking at the pre-ordained events of 31 December 1993 as a composite whole I would regard the legal nature of the transaction as a sale by BGE of the Pipeline to BMBF, the lease of it back to BGE and thence, by the Sublease, to BGE (UK), and the giving by BGE of security to BB for BB's guarantee to BMBF of the fixed rental payments. What is the artificially inserted step which has no business purpose apart from the avoidance of tax? Mr. Goy's answer was the payment by BMBF to BGE. For the reasons already given, I cannot accept that. There was a plain business purpose for that step, viz. the acquisition of the Pipeline so that it could be leased back to provide the rental stream and thereby to enable BMBF to earn the profit which it invariably seeks, and which Abbey National intended to obtain, on such a finance leasing transaction and to provide BMBF with security. The fact that BMBF intended to obtain capital allowances which it would pass on to the lessee and thence to BGE (UK) does not, in my judgment, detract from the genuineness of that business purpose.
46. In my judgment, the incurring by BMBF of the expenditure was wholly and exclusively for the purposes of its trade of providing asset-based finance. With respect to the judge, in the light of the evidence, and in particular that of Mr. Boobyer, I can see no basis for re-characterising the transaction in the way the judge did. It seems plain to me that BMBF incurred expenditure on the provision of the Pipeline by a transaction which, despite having a fiscal element in it, in that capital allowances were to be obtained and passed on to the lessee in the form of lower rentals, was a genuine trading transaction. I would hold that the facts of the present case are far removed from the artificial structure employed in a dividend-stripping scheme such as that used in the Lupton case.
47. For the reasons already given, I would reject Mr. Goy's third submission that there was no expenditure at all by BMBF. In the present case the circular movement of money and the intention of BMBF to obtain and pass on capital allowances do not stamp the transaction as something different from that contemplated by Parliament as giving rise to an entitlement to capital allowances under s. 24. That circularity, which arose through BB insisting on security in the form of a cash collateral being provided by BGE, was not of direct concern to, still less under the control of, BMBF and is irrelevant to the fact that expenditure was incurred through BMBF paying BGE for the Pipeline. Parliament has provided for capital allowances to be available on a purchase of plant or machinery, even though the plant or machinery is then leased, and, as Mr. Boobyer said in his Witness Statement, the Revenue has long been aware of the practice of finance lessors utilising capital allowances through passing them on to lessees in the form of lower rentals. That cannot affect the fact that there was expenditure by BMBF.
48. For these reasons I would allow this appeal and set aside the order of the judge and the decision of the Special Commissioners.

Rix L.J. :

49. I agree.

Lord Justice Carnwath:

50. I also agree. I add my own comments in deference to the contrary views of the experienced Commissioners, and of the Judge, whose practical knowledge of this field is second to none.
51. The issue in the present case can be shortly stated. BMBF, whose trade was that of providing asset-based finance, entered into a transaction which, viewed on its own, would have attracted capital allowances (I shall refer to it as "the BMBF transaction"). It comprised the acquisition of a pipeline for £91m from BGE, its lease-back to BGE, and a sub-lease from BGE to BGE (UK). It is common ground that, if one stops there, capital allowances can be claimed. The Revenue's argument, which succeeded below, is that the BMBF transaction should not be seen in isolation, but should be seen as part of a wider scheme ("the "BZW scheme"), effected solely to gain a tax advantage; and that, if it is looked at in that light, then for fiscal purposes nothing happened. There was no expenditure, no provision of an asset, and no trade. This is said to be the effect of applying the "Ramsay principle", as interpreted in subsequent cases most particularly MacNiven.
52. In my view, there are two main difficulties with this approach. The first is that the tax advantage, which is said to have infected the whole scheme, is one which is a normal and accepted part of BMBF's finance leasing trade. As the judge recognised, in this trade:

"… the obtaining of capital allowances for the leasing company's expenditure on acquiring the machinery or plant is fundamental. The lease rates are set at levels which assume that the lessor (or companies grouped with it) will benefit from the allowances. If the allowances are not obtained after all, the transaction ceases to make financial and commercial sense." (para 7)

In other words, the availability of capital allowances provides the "bed-rock" of the trade (to use Mr Goy's term, accepted in cross-examination by Mr Boobyer).

53. Furthermore, the entitlement to capital allowances is not confined to investments in what one might call investment in new plant. As the Judge also recognised, finance-leases are commonly used to restructure the financing arrangements on existing plant. He mentioned, as "a common kind of finance leasing", the case where:

"the lessee already has the asset… but has paid for it with borrowed money on which it is paying full commercial rates of interest; it sells the asset to the leasing company and takes a finance lease-back at more favourable rates; it uses the purchase price to repay its borrowings" (para 49)

Mr Goy accepted that this was a typical form of finance lease, which would attract capital allowances; and that it would do so, even if the "more favourable rates" were attributable to nothing other than the availability of capital allowances.

54. On that analysis, which is not disputed, the mere fact that the essential purpose of the arrangement was to obtain a tax advantage in the form of capital allowances, cannot, under this statutory scheme, be a ground of objection. The judge distinguished the examples of typical finance leases, on the basis that -

"in all of these cases the finance lessor provides 'up-front' finance to the lessee, and the finance so provided is used in one way or another in the lessee's business. But in the transaction involved in the present case, no up-front finance was provided."

However, there is nothing in the statute to suggest that "up-front finance" for the lessee is an essential feature of the right to allowances. The test is based on the purpose of the lessor's expenditure, not the benefit of the finance to the lessee. Nor, as the judge recognised, should it make any difference whether the arrangements by which the tax advantage was achieved were simple or, as the Commissioners thought in this case, "complicated and convoluted."

55. The other main difficulty with the Revenue's argument is that it treats as irrelevant the viewpoint of the taxpayer, in this case BMBF, although it is that to which the section directs attention. The Commissioners took the same view. They said that it was necessary to look "at the whole of the transaction; all the documents acts and events of 31st December 1993 and not merely what BMBF did"; the judge agreed (para 53). The justification given by the Commissioners for this approach was, not anything in the evidence before them, but reference to another case, Overseas Containers (Finance) Ltd –v- Stoker 61 TC 473. However, in that case, it is clear that attention was paid to the group as a whole, because on the facts that was the true analysis of the position; the taxpayer company was inserted purely for the purposes of the scheme and had no separate trading life.
56. In this case, BMBF was an established trading company. It gave apparently credible evidence that it had a distinct business purpose for this transaction, which was seen as identical in kind to its normal finance leases, and that it was not concerned with the details of the BZW scheme. Both the Commissioners and the Judge seemed to have ignored that evidence. In my view, on the basis of the evidence we have been shown, there were no reasonable grounds for treating the "purpose" of the BMBF transaction as other than a true trading purpose of BMBF itself.
57. Against that background, the section leaves very little room for application of the Ramsay principle. The judge thought that the pipeline transaction could be disregarded as simply "the fifth wheel of the coach". I find that difficult to follow, even if one looks at the BZW scheme as a whole. One cannot ignore the reality of the pipeline, nor can one ignore the fact that ownership was transferred to BMBF, with whom it remains, and that leases were granted to BGE and BGE(UK). On any view, those are real transactions with lasting consequences in the real world.
58. There might be more room for argument as to whether there was "expenditure", given the apparent circularity of the payments. However, once one accepts the transfer of ownership, it is difficult to question the reality of the expenditure by which the purchase price was discharged. Furthermore, BMBF gave evidence that it financed the purchase-price in the normal way by a loan from its parent Bank, in accordance with its standard drawing facility, and that it was not concerned with the security arrangements made by the Bank. There is no indication that this evidence was disbelieved.
59. In any event, there seems to me a close analogy with the issue, which was decided by the House of Lords in MacNiven. The ratio was that, for the purposes of section 338 of the Taxes Act, there had been "payment" of yearly interest, in the ordinary meaning of that term, and that the Ramsay principle could not alter that simple fact. This was explained succinctly by Lord Nicholls ([2001] 2 WLR 377, at para 15):

"In the ordinary case the source from which a debtor obtains the money he uses in paying his debt is immaterial for the purposes of s 338. It matters not whether the debtor used cash in hand, sold assets to raise the money, or borrowed money for the purpose. Does it make a difference when the payment is made with money borrowed for the purpose from the very person to whom the arrears of interest are owed? In principle I think not. Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons are the debtor and the creditor. Once that is accepted, as I think it must be, I do not see it can matter that there is no business purpose other than gaining a tax advantage. The genuine discharge of a genuine debt cannot cease to qualify as payment for the purpose of s 338 by reason only that it was made solely to secure a tax advantage. There is nothing in the language or context of s338 to suggest that the purpose for which a payment of interest is made is material."

Similarly, under the BMBF transaction, BMBF obtained ownership of a pipeline and incurred an obligation to pay for it. That obligation was discharged by the expenditure of the £91m. There is nothing in the section to suggest that it matters what is the source of the £91m, or alternatively what is to be done with the £91m by the recipient, once the obligation has been discharged.

60. Those considerations are in my view sufficient to dispose of the appeal in favour of the taxpayer. However, I should add some comments on the submissions of the Revenue on the Ramsay principle, in the light of the speeches in MacNiven. Implicit in those submissions seemed to be a view that, once one has categorised a statutory concept as "commercial" in the sense used by Lord Hoffmann, then it is possible and appropriate to undertake a free-ranging inquiry into the "commerciality" of the particular scheme, unconstrained by the limitations set in previous cases. For the reasons I shall outline, I do not believe that to be so.
61. It is striking that some 20 years after Ramsay, and even with the assistance of at least five major House of Lords decisions explaining or reinterpreting Ramsay, there should be such a wide divergence of views as to the nature of the principle. The arguments in this case were "ships that pass in the night" (Mr Aaronson's words) or "chalk and cheese" (Mr Goy's words). To understand why that should be so, it is helpful to look at the development of the principle in the earlier cases in the House of Lords, before considering whether there is anything in the two most recent (McGuckian and Macniven) which changes the position.
62. Ramsay, of course, represented a breakthrough, but the facts were extreme. In the memorable description of Templeman LJ in the Court of Appeal ([1979] 3 AllER 213, 214), it was -

"Yet another circular game in which the taxpayer and a few hired performers act out a play; nothing happens save that the Houdini taxpayer appears to escape from the manacles of tax."

That was an "off-the-peg" scheme. Burmah showed that the same approach could be applied to a bespoke version, carefully crafted by respectable professional advisors. Furniss v Dawson [1984] AC 474 represented both the consolidation of the principle and a significant extension. The speech of Lord Brightman, with which all the other members of the House agreed, reads as though intended to be a definitive statement of the essential criteria and limits of the principle, and it has been so regarded in all the subsequent cases, at least until McGuckian.

63. Thus, in Craven–v-White [1989 AC] 398, 500 Lord Oliver (giving the majority speech) asked –

"Are those criteria definitive as they appear to have been intended by Lord Brightman to be …?"

to which question he arrived (after fourteen pages of painstaking analysis) to an affirmative answer (see p 514 F-H). His analysis made clear that Lord Brightman's formulation of the principle represented a significant advance on Ramsay. Lord Oliver's view is of particular interest, coming from one who was as he said "a reluctant convert" (cf his judgment in the Court of Appeal in Furniss itself (reported in [1984] AC at 477). He said (Craven –v- White p 501 E):-

"The Ramsay principle is simply that you look at the result which the parties actually intended to and did produce and apply it with the ordinary fiscal consequences which flow from that result. Furniss involved going a considerable step further than this and, by re-constituting the actual constituent transactions into something that they were not in fact, attributing to the parties an intended result which they did not in fact intend. To that unintended result there are then attached the fiscal consequences which would have flowed if the transaction had actually taken the form into which it is deemed to be re-constituted."

64. His subsequent analysis made clear that the critical factors which enabled the Courts to make this breakthrough were two matters: first, the inter-dependence of the transactions which enabled the Court to apply the analogy of a tri-partite contract (p 501H, 508C-G); and secondly the lack of commercial motive for the inserted steps:

"…The absence of any commercial motive underlines the artificiality of the inter-related transactions and entitles the Court to disregard them because they are not intended to produce anything other than an artificial fiscal result." (p 507 C-D)

Lord Oliver's analysis was endorsed by the majority of the House of Lords in Fitzwilliam v IRC [1993] 1 WLR 1189 (see p. 1201, per Lord Keith).

65. As appears from the last passage, the principle is essentially one of fiscal statutory interpretation (even though it may be extended by analogy to other contexts – see e.g. Gisbourne v Burton [1989] QB 390). The transactions are "reconstituted" for fiscal purposes but not for other purposes. It has been described as an application of ordinary principles of "broad purposive interpretation" to taxing statutes, by giving effect "to the purpose and spirit of the legislation" (see per Lord Steyn and Lord Cooke, in McGuckian [1995] STC 908, 915, 910). However, it is difficult to see it as a pure rule of statutory interpretation, in the normal sense. The way in which the House of Lords got over the obvious conceptual hurdles in Furniss was, not by re-interpreting the statutory words, but by "reconstituting" the facts (to use Lord Oliver's term).
66. Thus, the "purposive" approach is applied, not just to the construction of the statute, but also to the characterisation of the facts. As Sir Anthony Mason NPJ said (in adopting the Ramsay principle in the Hong Kong Court of Final Appeal) it is "both a rule of statutory construction… and an approach to the analysis of the facts." (Shiu Wing v Commissioner of Estate Duty [2000] HKFCA 64). As such, it can perhaps be justified as statutory interpretation in the broader sense. It recognises the underlying characteristic of all taxing statutes, as parasitic in nature. They draw their life-blood from real world transactions with real world economic effects, to which the Revenue is not a party. To allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.
67. The speeches in McGuckian itself do not involve any departure from Lord Brightman's formulation of the rule. Lord Browne-Wilkinson thought the case "fell squarely" within Lord Brightman's statement of "the classic requirements for the application of (the Ramsay) principle" (p912f); Lord Steyn quoted the same passage as summarising "the limits of the principle" (p 918a-c); Lord Cooke also thought the case fell within the limitations stated by Lord Brightman (p 921a); Lord Lloyd agreed with all three speeches (p 914h; he also agreed with Lord Clyde who made no express reference to Furniss). However, Lord Cooke added:

"The present case does fall within these limitations, but it may be as well to add that, if the ultimate question is always the true bearing of a particular taxing provision on a particular set of facts, the limitations cannot be universals. Always, one must go back to the discernible intent of the taxing act." (p 921a-b)

He went on to suggest that "the journey's end may not yet have been found," a thought echoed by Lord Steyn (at p 916g).

68. Against this background one returns to MacNiven. The ratio, as I have said, was that there had been "payment" of interest, and that the statutory context left no room for application of the Ramsay principle. Thus, the limits of that principle did not arise directly for decision. The principal speeches in the House of Lords have already been referred to by Peter Gibson LJ, and it is unnecessary to repeat them. As he noted, Lord Hoffmann, with the agreement of the other members of the House, reviewed the cases since Ramsay itself, which he described as the "fountainhead". He described Lord Brightman's formulation in Furniss as

"… a careful and accurate summary of the effect which the Ramsay construction of a statutory concept has upon the way the Courts will decide whether a transaction falls within that concept or not…

It is a statement of the consequences of giving a commercial construction to a fiscal concept. Before one can apply Lord Brightman's words, it is first necessary to construe the statutory language and decide that it refers to a concept which parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component parts. But there are many terms in tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning." (para 48-9)

On this view, therefore, the first step is to decide whether the statutory concept is "legal" or "commercial", one guide being whether a commercial man, asked what it means, would say "you had better ask a lawyer" (para 58).

69. Like Peter Gibson LJ, and with similar respect to its source, I find some difficulty in understanding this dichotomy. It was a difficulty shared by both leading counsel before us. Lord Hoffmann clearly regarded McGuckian and Furniss, as illustrations of "commercial" concepts, in the sense he used the term, and as therefore susceptible to Ramsay analysis. However, in each case, there seems a strong case for regarding the statutory concept as one of law, or certainly one on which a commercial man would look to a lawyer for advice.
70. In McGuckian, Lord Hoffmann thought, the Crown's argument, based as it was on Furniss, had created "unnecessary difficulties", since it required an intervening assignment as part of the scheme to be disregarded, without which one could not explain how any money had been received by the assignor (para 53). In his view, the question in McGuckian was –

"… not whether the assignment should be disregarded but whether, from a commercial point of view, it amounted to an exchange of income for capital." (para 54)

He considered that the payment had retained its "commercial" character as revenue, in spite of the scheme designed to turn it into capital.

71. However, as has been pointed out by Peter Gibson LJ, the distinction between capital and revenue has been regarded, at least in recent House of Lords authority, as an issue of law. Certainly, it is not one which a commercial man would be likely to approach without the assistance of a lawyer. As Lord Cooke said in McGuckian:

"…the line can be notoriously difficult to draw, as the division is necessarily to some degree artificial, and has to be worked out pragmatically by courts, lawyers, and accountants." ([[1997] STC at p 918j)

72. Furniss also needed to be fitted into Lord Hoffmann's dichotomy. Since the Ramsay principle was clearly held to apply in that case, the statutory concept had to be treated as falling on the "commercial" side of the line. Lord Hoffmann saw it as an extension of Ramsay:

"Thus while the question in Ramsay had been whether there was a disposal giving rise to a loss, the question in Furniss –v- Dawson was whether the disposal had been to one person rather than another."(para 46).

Again, this interpretation is not without difficulty. The facts of Furniss were summarised by Lord Hoffmann (para 45):

" The Dawsons wanted to sell their shares in the family business to a company called Wood Bastow Holdings Ltd. But they wanted to postpone the payment of capital gains tax. So they formed an Isle of Man company (Greenjacket) and exchanged their shares in the company owning the business for an allotment of shares in Greenjacket. The advantage of this transaction was that by para 6 of Sch 7 to the 1965 Act, a disposal of shares to Greenjacket in exchange for an allotment of its shares was treated as a reorganisation of share capital and by para 4 of the same Schedule a disposal of shares forming part of a reorganisation was not treated as a disposal for the purposes of capital gains tax. By a preplanned transaction, Greenjacket then sold the shares to Wood Bastow for cash. But the Revenue claimed that there had been no 'real' disposal to Greenjacket. It was merely a preplanned stage in a disposal from the Dawsons to Wood Bastow and fell outside the exception for a reorganisation of share capital."

73. As this summary makes clear, the question under the statute was not strictly whether there had been a "disposal" to one person or another; it was whether what would otherwise have been a disposal was to be treated as no disposal by virtue of specific provisions in the statute, applicable to a "share exchange" as defined. Neither of the leading counsel before us felt able to explain or support the characterisation of that issue as "commercial" rather than "legal". Nor was there anything in the speeches in Furniss to suggest that the decision turned on that distinction. (The House did not apparently have any concern that, if one ignored the disposal to Greenjacket, one could not explain how Greenjacket received the money. The answer, presumably, was that it did not matter, since the interposition of Greenjacket was purely tax-driven.)
74. For the reasons already given, I do not find it necessary for the purposes of this case, to reach a concluded view on how the new line is to be drawn. I can well understand that the term "payment" in section 338 of the Taxes Act was deemed to be too precise to admit of any broader interpretation; whereas the term "loss" in Ramsay was more flexible. In the present case, if forced to choose, I would have been inclined (unlike the commissioners and the judge) to regard the concept of "expenditure" on the provision of an asset, as analogous to "payment" of interest, and therefore "legal", by analogy with MacNiven. However, I find it much more difficult to see how McGuckian or Furniss are to be fitted into the analysis. No doubt the working out of this distinction will become clearer in future decisions. For the time-being, it would be wrong in my view to see MacNiven as marking a significant change of direction, whether by way of narrowing or expansion of the Ramsay principle. As Lord Nicholls said (para 8), it confirms that "the paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the cases."
75. For these reasons, in addition to those already given, I would allow the appeal.