Furniss v. Dawson
Encyclopedia
Furniss v. Dawson is an important House of Lords
case
in the field of UK
tax
. Its full name is "Furniss (Inspector of Taxes) v. Dawson D.E.R., Furniss (Inspector of Taxes) v. Dawson G.E., Murdoch (Inspector of Taxes) v. Dawson R.S.", and its citation
is [1984] A.C. 474, or alternatively [1984] 2 W.L.R. 226.
Its effect was to extend the applicability of The Ramsay Principle.
had entered into a complex and self-cancelling series of transactions which had generated an artificial capital loss
. The House of Lords decided that where a transaction has pre-arranged artificial steps which serve no commercial purpose other than to save tax, then the proper approach is to tax the effect of the transaction as a whole.
The tax authorities argued:
The Court of Appeal had given a judgement agreeing with the Dawsons on these points.
The court decided in favour of the Inland Revenue (as it then was: it is now HM Revenue and Customs).
The judgement can be viewed as a battle between:
two conflicting ideas which could, at their extremes, be expressed as:
Lord Brightman came down firmly in favour of an extension of the Ramsay Principle. He said that the appeal court
judge (Oliver L. J.), by finding for the Dawsons and favouring the Westminster rule, had wrongly limited the Ramsay Principle (as it had been expressed by Lord Diplock in a case called IRC v. Burmah Oil Co. Ltd.). Lord Brightman said:
Oliver L. J. had given considerable weight to the fact that the existence of Greenjacket Investments Ltd. was real and had enduring consequences. At the end of the transaction, the Dawsons did not own the money which had been paid by Wood Bairstow Ltd.: instead, Greenjacket Investments Ltd. owned that money and the Dawsons owned Greenjacket Investments Limited. Legally speaking, those are two very different situations. However Lord Brightman saw this as irrelevant. In any case where a predetermined series of transactions contains steps which are only there for the purpose of avoiding tax, the tax is to be calculated on the effect of the composite transaction as a whole.
but to all forms of direct taxation. It also applies in some of the jurisdictions where decisions of the English courts
have precedent
ial value.
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
case
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
in the field of UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
. Its full name is "Furniss (Inspector of Taxes) v. Dawson D.E.R., Furniss (Inspector of Taxes) v. Dawson G.E., Murdoch (Inspector of Taxes) v. Dawson R.S.", and its citation
Case citation
Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...
is [1984] A.C. 474, or alternatively [1984] 2 W.L.R. 226.
Its effect was to extend the applicability of The Ramsay Principle.
The Ramsay Principle
The most important background to Furniss v. Dawson was the decision of the House of Lords a few years earlier in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A. C. 300. In the Ramsay case, a company which had made a substantial capital gainCapital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
had entered into a complex and self-cancelling series of transactions which had generated an artificial capital loss
Capital loss
Capital loss is the difference between a lower selling price and a higher purchase price, resulting in a financial loss for the seller. The IRS states that "If your capital losses exceed your capital gains, the excess can be deducted on your tax return"....
. The House of Lords decided that where a transaction has pre-arranged artificial steps which serve no commercial purpose other than to save tax, then the proper approach is to tax the effect of the transaction as a whole.
Facts of the Case
The facts of the case are of less significance than the general principle which arose from it. However, in summary, they are:- The three respondents, the Dawsons, were a father and his two sons. They owned two successful clothing companiesLimited companyA limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. And the former of these, a limited company limited by shares, may be...
called Fordham and Burton Ltd. and Kirkby Garments Ltd. (which are together called "the operating companies" throughout the case). - A company called Wood Bairstow Holdings Ltd. offered to buy the operating companies from the Dawsons, and a price was agreed.
- If the Dawsons had sold the operating companies direct to Wood Bairstow the Dawsons would have had to pay substantial capital gains taxCapital gains taxA capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
("CGT"). - There was a rule that if a person sold his shares in Company A to Company B, and instead of receiving cash he received shares in Company B, then there was no CGT payable immediately. Instead, CGT would become payable when (if ever) that person later sold his shares in company B.
- With the intention of taking advantage of this rule to delay the payment of CGT, the Dawsons arranged for an Isle of ManIsle of ManThe Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
company called Greenjacket Investments Ltd. to be formed. (It was intended to become "Company B".) - The Dawsons sold the operating companies to Greenjacket Investments Ltd. in exchange for the shares of Greenjacket Investments Ltd.
- Greenjacket Investments Ltd. sold the operating companies to Wood Bairstow Holdings Ltd.
Arguments
The Dawsons argued:- that the CGT rule mentioned above worked in their favour and they could not be taxed until such time (if ever) as they sold their shares in Greenjacket Investments Ltd.; and
- that the Ramsay Principle did not apply, since what they had done had "real" enduring consequences.
The tax authorities argued:
- that Greenjacket Investments Ltd. only existed as a vehicle to create a tax saving;
- that the effect of the transaction as a whole was that the Dawsons had sold the operating companies to Wood Bairstow Holdings Ltd.;
- that because the intervening stages of the transaction had only been inserted to generate a tax saving, they were to be ignored under the Ramsay Principle, and instead the effect of the transaction should be taxed; and
- that the transaction being "real" (which is to say, not a shamShamSham, a word found in Arabic, English and Chinese, may refer to:-Arabic use:* Sham, or Alsahm, the Arabic name for the star Alpha Sagittae* Sham, , al-Sham, or Bilad al-Sham, endonym of the region bordering the eastern Mediterranean Sea, usually known as the Levant or Greater Syria, comprising...
) was not enough to save it from falling within the Ramsay Principle.
The Court of Appeal had given a judgement agreeing with the Dawsons on these points.
The Decision
The judgement of the court was given by Lord Brightman. The other four judges (Lord Fraser of Tullybelton, Lord Scarman, Lord Roskill and Lord Bridge of Harwich) gave shorter judgements agreeing with Lord Brightman's more detailed judgement.The court decided in favour of the Inland Revenue (as it then was: it is now HM Revenue and Customs).
The judgement can be viewed as a battle between:
- extending the principle in the Duke of Westminster's Case (Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1); and
- extending the Ramsay Principle;
two conflicting ideas which could, at their extremes, be expressed as:
- a rule that any taxpayer may organise his affairs in any way he wishes (provided it is legal) so as to minimise tax (Westminster) and
- a rule that a taxpayer will be taxed on the effect of his transactions, not upon the way he has chosen to organise them for tax purposes (Ramsay).
Lord Brightman came down firmly in favour of an extension of the Ramsay Principle. He said that the appeal court
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
judge (Oliver L. J.), by finding for the Dawsons and favouring the Westminster rule, had wrongly limited the Ramsay Principle (as it had been expressed by Lord Diplock in a case called IRC v. Burmah Oil Co. Ltd.). Lord Brightman said:
-
- The effect of his [Oliver L. J.'s] judgment was to change Lord Diplock's formulation from "a pre-ordained series of transactions ... into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax" to "a pre-ordained series of transactions ... into which there are inserted steps that have no enduring legal consequences." That would confine the Ramsay principle to so-called self-cancelling transactions.
Oliver L. J. had given considerable weight to the fact that the existence of Greenjacket Investments Ltd. was real and had enduring consequences. At the end of the transaction, the Dawsons did not own the money which had been paid by Wood Bairstow Ltd.: instead, Greenjacket Investments Ltd. owned that money and the Dawsons owned Greenjacket Investments Limited. Legally speaking, those are two very different situations. However Lord Brightman saw this as irrelevant. In any case where a predetermined series of transactions contains steps which are only there for the purpose of avoiding tax, the tax is to be calculated on the effect of the composite transaction as a whole.
Consequences
Furniss v. Dawson has had far-reaching consequences. It applies not only to capital gains taxCapital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
but to all forms of direct taxation. It also applies in some of the jurisdictions where decisions of the English courts
Courts of England and Wales
Her Majesty's Courts of Justice of England and Wales are the civil and criminal courts responsible for the administration of justice in England and Wales; they apply the law of England and Wales and are established under Acts of the Parliament of the United Kingdom.The United Kingdom does not have...
have precedent
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
ial value.