## Facts

- The case concerned complex arrangements involving the assignment of income.
- The transactions under scrutiny were alleged to constitute shams primarily aimed at avoiding tax.
- The documentation and conduct of the parties revealed a discrepancy between the expressed legal purpose and their true intentions.
- The court examined agreements, correspondence, and accounting records, identifying inconsistencies.
- The Special Commissioners' decision found that the transactions were shams designed to evade tax liability.

## Issues

1. Whether the transactions in question constituted genuine arrangements or shams.
2. Whether the substance-over-form doctrine should be applied to disregard the formal documentation in favor of the true nature of the transactions.
3. How to distinguish between sham transactions and lawful tax mitigation.

## Decision

- The Court of Appeal upheld the finding that the transactions were shams designed to avoid tax.
- The court determined that the lack of commercial rationale and artificial nature of the arrangements indicated a lack of genuine intent.
- It was found that inconsistencies between documentation, conduct, and testimony provided strong evidence of a sham.
- The formal documentation was considered non-conclusive; the court was required to ascertain the true intentions of the parties.

## Legal Principles

- The substance of a transaction, not merely its form, determines its legal effect for tax purposes.
- A sham transaction arises when the parties intend to give a false appearance that differs from the true legal relationship.
- Genuine tax mitigation through lawful arrangements is distinguishable from sham transactions based on the parties’ genuine commercial purpose.
- Courts must scrutinize both documentary evidence and the actual conduct of parties to identify shams.
- Transactions created solely for an artificial tax advantage and lacking legitimate commercial purpose may be disregarded by tax authorities.

## Conclusion

Hitch v Stone established that for tax law purposes, courts will look beyond the form of an arrangement to its actual substance, treating as a sham any transaction where parties lack genuine intent and commercial rationale, thereby limiting the effectiveness of artificial tax avoidance schemes.


Hitch v Stone [1999] STC 431; [2001] EWCA Civ 63