Facts
- Burmah Oil Co Ltd engaged in a series of transactions with its subsidiaries, including share exchanges, dividend payments, and capital reductions.
- The transactions were structured so as to result in a substantial tax refund claim by Burmah Oil.
- Although each step was legally valid and separate, the Inland Revenue contended that the transactions formed a pre-ordained scheme designed solely to create a tax advantage.
- The Inland Revenue argued the series of steps had no independent commercial justification aside from obtaining the tax benefit.
Issues
- Whether a series of legally distinct but pre-planned, circular transactions whose sole purpose is to obtain a tax advantage should be treated as a composite whole for tax purposes.
- Whether the Ramsay principle applies to disregard such steps in the assessment of tax liability, particularly where the individual steps lack independent commercial purpose.
Decision
- The House of Lords upheld the Inland Revenue's position, finding that the transactions, though legally valid, constituted a single composite scheme with no genuine commercial purpose beyond tax avoidance.
- The court extended the Ramsay principle to situations involving circular transactions, determining that the circular flow of funds neutralized the economic impact of individual steps.
- The House of Lords held that, for tax purposes, the substance of the transaction as a whole takes precedence over its legal form where the series of steps is pre-ordained and lacks independent commercial significance.
Legal Principles
- The Ramsay principle allows courts to disregard steps inserted into a transaction solely for the purpose of tax avoidance, focusing on the overall substance rather than form.
- The application of the Ramsay principle is not precluded by the circular nature of a transaction; what matters is the composite, pre-planned scheme and the absence of genuine commercial purpose for the inserted steps.
- Subsequent development in cases like Furniss v Dawson further refined the Ramsay principle, emphasizing the requirement for pre-ordination and absence of commercial purpose for each step.
- The economic reality and primary fiscal outcome of the transaction are determinative for tax liability, rather than the existence of legally valid individual components.
Conclusion
IRC v Burmah Oil Co Ltd established that courts may disregard artificial steps in pre-ordained, circular tax avoidance schemes and treat them as a single transaction for tax purposes, reinforcing the approach that substance takes precedence over legal form in the application of UK tax law.
