Craven v White [1988] STC 476

Facts

  • The case involved taxpayers who structured a series of share sales intended to avoid capital gains tax.
  • The taxpayers arranged several steps aiming to create artificial losses before selling shares.
  • The overall transaction did not conclude as the parties initially planned.
  • The question was whether the courts could apply the Ramsay rule to disregard these steps for tax purposes when the plan was not entirely completed.

Issues

  1. Whether the Ramsay rule applies to tax avoidance arrangements that have not been fully carried out.
  2. Whether unfinished or altered tax avoidance schemes can be subjected to the Ramsay rule.
  3. To what extent incomplete or changed schemes may allow HMRC to challenge tax results based on the overall plan.

Decision

  • The House of Lords held that the Ramsay rule could not apply unless all steps in the tax avoidance scheme were fully completed.
  • The court determined actual completion is a prerequisite before examining the composite effect and purpose of a tax avoidance plan under the Ramsay rule.
  • If a plan is abandoned or changed partway, applying Ramsay to the unfinished steps would be inappropriate and could unjustly penalize taxpayers.

Legal Principles

  • The Ramsay rule enables courts to assess tax arrangements by their overall effect, disregarding steps inserted solely for tax avoidance.
  • The principle from Craven v White is that the Ramsay rule can only apply after completion of all intended steps within a tax avoidance scheme.
  • Unfinished or altered plans may only be reviewed to the extent that completed steps have achieved tax reduction.
  • Each step in an arrangement should have a genuine business purpose beyond tax objectives to reduce the risk of the Ramsay rule applying.
  • Tax planning is permitted within the bounds of the law, but artificial schemes aimed solely at tax avoidance are likely to be challenged.

Conclusion

Craven v White confirmed that the Ramsay rule applies exclusively to fully executed tax avoidance schemes, preventing premature or unwarranted application to incomplete or altered plans. This ensures fair treatment of taxpayers, clarifies the rule’s scope, and safeguards legitimate business arrangements while providing courts with a clear standard for evaluating tax avoidance.

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