1992 P T D 651

[1992 I T R 501]

[Court of Appeal]

Bofore: Balcombe, McCown L.J. and Sir Christopher Slade, JJ

MOODIE and another

versus

INLAND REVENUE COMMISSIONERS and another

Appeal No. Nil, decided on 30/04/1991.

Income tax---

---- Tax avoidance---Annuity scheme---Scheme for sale of annuities to registered charities---Claims for deduction from total income for any "annuity or other annual payment"---Application of anti-avoidance principles to arrangements---Whether scheme a fiscal nullity---Whether payments deductible for tax purposes Income and Corporation Taxes Act, 1970 (c.10) SS2(1).

The two taxpayers were among a number of persons who during the 1970s participated in versions of a tax avoidance scheme aimed at surtax payers which provided for a registered charity to purchase annuities from those wishing to participate in the scheme. By virtue of section 52(1) of the Income and Corporation Taxes Act, 1970,(Income and Corporation Taxes Act, 1970, section 52(1); "Where any annuity or other annual payment charged with tax under Case III of Schedule D, not being interest, is payable wholly out of profits or pins brought into charge to income-tax-(a) no assessment to Income-tax (other than surtax) shall be made on the person entitled to the annuity or other annual payment, and (b) the whole of the pests or gains shall be assessed and 'charged with income-tax on the person liable to the annuity or other annual payment, without distinguishing the annuity or other annual payment, and (c) the person liable to make the payment; whether out of the profits or gains charged with income-tax or out of any annual payment liable to deduction, or from which a deduction has been made, shall be entitled on making the payment to deduct and retain out of it a sum representing the amount of income-tax thereon at the standard rate for the year in which the amount payable becomes due, and (d) the person to whom the payment is made shall allow the deduction on receipt of the residue of the payment, and the person making the deduction shall be acquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid.") the charity was thought to be able to recover the tax deducted when the taxpayers paid the annuity to it and the taxpayers would be able to deduct the amount of the annuity from their income for tax purposes. To provide the charity with sufficient funds to make the capital payments to the tax payers and to give it security against possible failure by a taxpayer to pay a due instalment, financing arrangements were made: thereby the sum received from the charity was used by a taxpayer to purchase promissory notes that were deposited with the charity and the annual payments due from the taxpayer would be made therefrom. In consequence of a decision of the House of Lords laying down principles rendering tax avoidance schemes fiscally ineffective the revenue resisted the claims made by the two taxpayers' for tax deductions for the annuity payments made to certain charities for the years from 1970-71 to 1976-77. Special Commissioners, hearing appeals by the taxpayers against the consequential assessments to income tax and surtax raised on them, upheld the Crown's case that the arrangements that they had entered into were a fiscal nullity, with the result that neither of the taxpayers was entitled when computing his total income for tax purposes to deduct the payments described as annuities. Hoffmann, J. dismissed the taxpayers' appeals by way of case stated, holding that such artificial manufacture of a series of payments was not the payment of "an annuity or other annual payment" within the meaning of section 52 of the Act of 1970.

On appeal by the taxpayers--

Held, allowing the appeals, that the House of Lords had held that payments by a taxpayer under a similar annuity scheme were "annual payments" within the meaning of section 52(1) of the Income and Corporation Taxes Act, 1970; that, notwithstanding subsequent decisions in which the House of Lords had laid down principles nullifying the effect of tax avoidance schemes, that decision had not been overruled and was indistinguishable on the facts from the transactions by the taxpayers; and that, accordingly the payments by the taxpayers fell within the scope of section 52(1) of the Act of 1970 and were deductible in computing their total income for tax purposes.

Inland Revenue Commissioners v. Plummer (1980) A.C. 896, H.L. (E), applied.

Ramsay (W.T.) Ltd. v. Inland Revenue Commissioners (1982) A.C. 300, H.L. (E) and Craven v. White (1989) A.C. 398, H.L. (E) distinguished.

Decision of Hoffman, J. [1990] 1 W.L.R. 1084 reversed.

The following cases are referred to in the judgments:

Attorney-General v. Parsons [1955] Ch. 664; [1955] 3 W.L.R. 29, CA.

Chinn v. Hochastrasser [1981] A.C. 533; [1981] 2 W.L.R. 14; [1981] 1 All E.R. 189, H.L. (E).

Craven v. White [1989] A.C. 398; [1988] 3 W.L.R. 423; [1988] 3 All E.R. 495, H.L. (E).

Duke v. Reliance Systems Ltd. [1988] A.C. 618; [1988] 2 W.L.R. 359; [1988] 1 All E.R. 626, H.L. (E).

Furniss v. Dawson [1984] A.C. 474; [1984] 2 W.L.R. 226; [1984] 1 All E.R. 530, H.L.(E).

Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1981] 54 T.C. 200, H.L. (Sc).

Inland Revenue Commissioners v. Plummer [1980] A.C. 896; [1979] 3 W.L.R. 689; [1979] 3 All E.R. 775, H.L. (E).

Jones v. South-West Lancashire Coal Owners Association Ltd. [1927] A.C. 827,

H.L. (E).

Morelle Ltd. v. Wakeling [1955] 2 Q.B. 379; [1955] 2 W.L.R. 672; [1955] 1 All E.R. 708, CA.

Morelle Ltd. v. Waterworth [1955] 1 OR 1; [1954] 3 W.L.R. 257; [1954] 2 All E.R. 673, CA.

Ramsay (W.T.) Ltd. v. Inland Revenue Commissioners [1982] A.C. 300; [1981] 2 W.L.R. 449; [1981] 1 All E.R. 865, H.L. (E).

Roberts v. Cleveland Area Health Authority [1979] 1 W.L.R. 754; [1979] LC.R 558; [197912 All E.R.1163, CA.

The following additional cases were cited in argument:

Cairns v. MacDiarmid [1982]56

T.C. 566, CA.

Customs and Excise Commissioners v. Faith Construction Ltd. [1990] 1 Q.B. 905; [198913 W.L.R. 678; [198912 All E.R. 938, CA.

Rank Xerox Ltd. v. Lane [1981] A.C. 629; [1979] 3 W.L.R. 594; [1979] 3 All E.R. 657; 53 T.C.185, H.L. (E).

Rhokana Corporation Ltd. v. Inland Revenue Commissioners [1938] A.C. 380; 21 T.C. 552, H.L. (E).

Appeal from Hoffmann, J.

The taxpayers, Mr. Oliver Christopher Moodie and Mr. Richard Eric Sotnick, appealed against various assessments to surtax for years from 1973-74 to 1976-77 claiming entitlement to deduct for tax purposes certain payments, described as annuities, from their total income. The special commissioners rejected both cases. On appeal by way of cases stated the judge upheld the commissioners' determination on the ground that the taxpayers had participated in tax saving schemes of an artificial and self-cancelling nature that deprived the payments of the essential characteristics of an "annuity or other annual payment" within the meaning of section 52 of the Income and Corporation Taxes Act, 1970.

By a notice of appeal dated 5 June 1990 the taxpayers appealed on the grounds that (1) the judge erred in law in holding that the decision of the. House of Lords in Inland Revenue Commissioners v. Plummer [1980] A.C. 896 did not compel him to reverse the commissioners' determination; (2) the judge misdirected himself in repeatedly describing the transactions entered into by the taxpayers as a "game" when it had been found as a fact that the transactions were not a sham; (3) the judge misdirected himself in holding that the essential reality of an annuity purchase was contradicted by the fact that the capital sum was only released by instalments equal to and simultaneous with the annuity instalments. That overlooks the fact that the taxpayers were entitled to receive interest on so much of the capital sum as had not for the time being been released to him, and (4) the judge erred in law in holding that the payments made by the taxpayers were not deductible in computing their total income for income tax purposes.

By a respondent's notice dated 14th March 1991, the Crown sought to affirm the judge's decision on the following additional ground, namely, that the commissioners' determination did not have to be reversed by reason. of the decision in Plummer as there was a reasonable legal distinction between that case and the taxpayers' case in that the findings of fad made by the commissioners were materially distinguishable from the findings of fact on which the decision in Plummer was based.

The facts are stated in the judgment of Balcombe L.J.

Andrew Thornhill Q.C. and Kevin Prosser for the Tax-payers.

Jonathan Parker Q.C. and Peter Cranfield for the Crown.

Dates of hearing- 12th, L3th,14th March and 30th April, 1991.

JUDGMENT

BALCOMBE L.J., J. --These two appeals, by taxpayers from orders made by Hoffmann, J. on 4th May, 1990, raise the question whether a tax avoidance scheme, which was accepted as effective for its purpose by the House of Lords in Inland Revenue Commissioners v. Plummer [1980] A.C. 896 has been rendered ineffective by the subsequent decisions of the House of Lords in W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300. The special commissioners so held and their decision was affirmed by Hoffmann J. by the orders under appeal.

The taxpayer, Mr. Moodie, heard of the scheme, known as the Cardale Capital Income Plan, from his bank. The scheme subsequently went through several editions, but the version with which the taxpayer was concerned was mark I and as the commissioners found, was in its essential, features identical to that which was considered in Plummer's case. Those essential features may be summarised as follows. (a) By an annuity agreement made on 8th March, 1971 with Home and Overseas Voluntary Aid Service Ltd. ("H.O.VA.S"), a company with charitable status, in consideration of the sum of Pound 59,400 paid by H.O.VA.S., the taxpayer agreed to pay to H.O.VA.S. for five years, or during the remainder of his life if shorter, an annuity at such rate as should after deduction bf income tax at the standard rate equal Pound 12,000. (b) H.O.VA.S. paid this consideration by overdrawing on its account with Slater Walker Ltd. ("the bank"). (c) The consideration was paid into the taxpayer's account with the bank. (d) The taxpayer used the consideration money plus Pound 600, to purchase from Old Change Court (Investments) Ltd. ("O.C.C."), another company in the Slater Walker group, 10 promissory notes to the total value of Pound 60,000. By a collateral agreement between the taxpayer and O.C.C. these promissory notes carried interest at the rate of six and a half per cent per annum, less tax: no interest was to be paid before 1 April 1973 or after 1 April 1975. (e) The promissory notes were then deposited with H.O.VA.S., together with 3,764 British Investment Trust shares and 3,600 Scottish United Investors shares belonging to the taxpayer, as security for the payment of the annual sums due under the annuity agreement. The dividends on these shares were to be paid to the taxpayer. (f) The annual sums of Pound 12,000 payable by the taxpayer to H.O.VA.S. under the annuity agreement were paid by standing order by the taxpayer on his account with the bank. The overdraft so created was immediately liquidated by H.O.VA.S. releasing promissory notes to the value of Pound 12,000, and O.C.C. paying the amount of these promissory notes to the bank for the credit of the taxpayer. (g) The possibility of the taxpayer dying during the period of the annuity agreement was covered by an insurance policy taken out at the inception of the scheme. (h) The taxpayer signed certificates of deduction of income-tax to be sent to H.O.VA.S. with each annual payment under the annuity agreement. The intention was that H.O.VA.S., as a charity, should then claim payment of this tax.

These were the essential features of the mark I scheme undertaken by the taxpayer (although there were many other matters of detail which it is unnecessary to mention) and as the commissioners rejected the Crown"s contention that the arrangements made pursuant to the scheme were a sham, and held that they had reality and substance, the Crown now accepts that the scheme was effective to give rise to the legal relationships and consequences which it purported to create. Nevertheless there are a number of other matters which should be mentioned since they are directly material to the Crown's "fiscal nullity" argument. (1) The only cash or "real money" in the system was the sum of Pound 3,693 paid by the taxpayer to the bank to set the scheme in motion. That sum was made up of Pound 20 "overdraft interest," Pound 103 stamp duty, Pound 2,970 initial fee payable to S. Cardale and Co. Ltd. the promoters of the scheme, and Pound 600 insurance premium. (2) All other steps in the scheme were effected by book-keeping entries in the participants' accounts with the bank the Commissioners found that at each stage of the scheme, i.e., the payment of the initial consideration for the annuity by' H.O.VA.S. to the taxpayer with the purchase by him of the promissory notes, and then the subsequent annual payments of annuity and the encashment of the promissory notes, the money represented by these hook-keeping entries went round in a complete circle, albeit with the introduction of other Slater Walker companies into the circle.

So, as Hoffmann J. said in his judgment [1990] 1 W.L.R.1084,1087:

"The scheme was thus self-cancelling at two levels. First, the aggregate of payments cancelled each other out over the five-year period of the annuity... But secondly and more importantly, the scheme was self?-cancelling at the level of each annual payment. The capital sum which [the taxpayer] was supposed to receive in exchange for the annuity was only released to him by instalments equal to and simultaneous with the annuity instalments."

The other taxpayer, Mr. Sotnick, entered into the mark II version of the scheme. In his case the annuity agreement was made on 16 February 1972, the annuity was for Pound 9,000 per annum the consideration for the annuity was the sum of Pound 37,700 and the charitable company was the Deprived Children's Aid Fund Ltd. ("D.CA.F."), but these are matters of detail. The mark 11 scheme differed from the mark I scheme in the following respects. (a) The taxpayer paid the first annuity payment of Pound 9,000 out of his own resources. (b) D.C.A.F. borrowed the Pound 37,700 from within the Slater Walker group, and paid it into a new account opened for the taxpayer at the National Westminster Bank, into which account the taxpayer paid a sum of Pound 1,900 plus Pound 25 bank charges. (c) The total sum of Pound 39,600, representing 110 per cent of the amount of the four annuity payments yet to be made, was applied in the purchase of 3 per cent. Savings Bonds 1965-75 ("the gilts"). (d) The gilts were then deposited with D.CA.F., as security for the four remaining annuity payments. (e) D.CA.F. in turn deposited the gilts with the Slater Walker group as security for the repayment of its loan. (f) As each annuity date came round the sum of Pound 9,000 was paid to D.C.A.F. by standing order on the taxpayer's bank account and the money so used was replaced by the release and sale of the requisite amount of the gilts. (g) The taxpayer received interest year by year on the amount of the guts remaining unsold.

In this case also the commissioners rejected the Crown's contention that the annuity agreement was a sham. Nevertheless they made a number of findings pertinent to the Crown's "fiscal nullity" argument which I need not set out in detail. The judge summarised the effect of the mark II scheme by saying that it "retained its self-cancelling character both at the overall and at the annual levels".

In the implementation of both schemes certain minor variations of detail occurred. Thus in Mr. Moodie's case he waived his right to receive the accrued interest on the promissory notes. In Mr. Sotnick's case the gilts were sold before the scheme had worked itself out and were replaced as security by promissory notes to the value of the outstanding annuity payments: Mr. Sotnick received Pound 3,362.71 from the proceeds of sale of the gilts. Nevertheless these variations of detail are irrelevant to the issues on this appeal.

In each case before the commissioners the question was whether, in computing his total income for tax purposes in the years under appeal, the taxpayer was entitled to deduct the annuity payments under the schemes. Mr. Moodie's appeals against the assessments to income-tax and surtax which did not allow for the deduction of the annuity payments were heard shortly before similar appeals by Mr. Sotnick. In each case the commissioners, relying on their understanding of the principles expounded by the House of Lords in Ramsay's case [1982] A.C. 300, held that the appeals failed. In Mr. Moodie's case they said:

"Our task, as we see it, is not simply to compare this case with the case stated in Plummer but to review the facts established by the very full evidence which was put before us and to consider whether they come within the principles of fiscal nullity as those principles are now understood in the light of the decided cases from Ramsay to Furniss v. Dawson [1984] A.C. 474...The question remains, whether [the taxpayer] made payments of an annuity in the sense contemplated by the legislation ...The annuities contemplated by the Taxes Acts are, in our opinion, those by which a taxpayer's financial resources are in reality diminished. Since we are satisfied that [the taxpayer's] resources were not in fact, nor were intended to be, diminished by the payments provided for in the annuity agreement the agreement was ineffective to create a charge on [the taxpayer's] income for tax purposes."

In Mr. Sotnick's case they said:

"Looking at the preplanned series of operations as a whole in accordance with the Ramsay principle we can find no commercial reality in it. Payment of the second and subsequent annuities was effected, by a series of circulars, progressively self-cancelling, arrangements which resulted in a sum of money provided by the Slater Walker group being returned to it by instalments. Payment of interest on the amount outstanding to [the taxpayer] helped to create the illusion of commerciality, but it was in reality only a part of the scheme and was, no doubt, taken into account in calculating the terms on which he was able to participate in the scheme. Viewed as a whole the transaction had no place in the real world. Although clothed with the appearance of greater reality than the mark I scheme it was nonetheless, on closer examination, so artificial and devoid of any purpose other than a fiscal purpose that it must, in our opinion, be treated as a fiscal nullity...

"There remains for consideration the decision in Plummer on which Mr. Thornhill sought to rely, contending that, although preceding Ramsay in time, it had been decided on the same approach. We do not accept that contention. The argument in Plummer proceeded on different lines and the decision is not, in our opinion, authority on the application of the Ramsay principle which had not then emerged. Nor has the law stood still since Ramsay. In Furniss v. Dawson [1984] A.C. 474, 513 Lord Scarman said: `The law will develop from case to case' and he cited Lord Wilberforce's reference to the emerging principle of the law in Ramsay.

It would not in our opinion be right to approach the issues before us by comparing the evidence in this case with the facts found in Plummer. We have to assess the effectiveness of the mark II scheme under the law as it now stands; and we must apply the Ramsay principle as it has emerged through the cases. On that principle, for the reasons given above we conclude that annuity agreement was fiscal nullity, ineffective to create a charge on [the taxpayer's] income for tax purposes."

The judge agreed with the commissioners.

Before us the argument proceeded under two main heads. (1) Are we bound by the decision of the House of Lords in Plummer's case [1980] A.C. 896 to hold that the taxpayers' payments under the annuity agreements were annual payments within section 52 of the Income and Corporation Taxes Act 1970? (2) If we are not so bound, were the annuity payments not annual payments for fiscal purposes 'as a result of the application of the Ramsay principle?

The binding effect of Plummer's case:

As already mentioned, the scheme considered in Plummer's case was the mark I version, identical in all essential features to that with which Mr Moodie was concerned. As Lord Wilberforce said, at p.908c, "In the Courts the plan has been subjected to a four-way attack." Those four ways were; (a) that the annuity payments were in reality payments of capital, being a repayment to H.O.VA.S. of the capital sum which it had paid to the taxpayer at the inception of the scheme. This argument was rejected on the grounds that once it was accepted that the transactions were not a sham, the Court could not disregard their legal structure. (b) That the annuity payments were not made wholly out of profits or gains brought into charge to income tax as required by section 52(1)(c) of the Act of 1970. This argument was rejected on the grounds that the actual source out of which the payments were made was irrelevant provided that, as was the case, the taxpayer had taxed income of an amount sufficient to cover the annual payments. (c) An argument, based on section 434(1) of the Act, that the annuity payments were not made for valuable and sufficient consideration. This argument was summarily rejected at all levels above that of the commissioners. (d) That the scheme was a "settlement-- under section 457 of the Act, that the annuity payments were income arising under a settlement and that accordingly the annuity payments were to be treated for the purposes of surtax as the income of the taxpayer.. This argument was rejected on the ground that the scheme lacked the necessary element of "bounty" to constitute a settlement within the meaning of section 457. As Lord Wilberforce said in Plummer's case, at page 913:

"My Lords, there cannot be any doubt that in this case no element of bounty existed. The special commissioners indeed said that they regarded the transaction as a bona fide commercial transaction without any element of bounty. The taxpayer, therefore, succeeds on this point."

The reference to the finding of the commissioners is to paragraph 9(3)(c) of the case stated where, in a passage dealing with the arguments based on sections 434 and 457, they said:

"We regard it is a fair description of the transaction to say that it was a bona fide commercial transaction without any element of bounty 'Y'' notwithstanding that the benefits from it were largely to be derived from the tax advantages which the parties expected would accrue to them."

None of their Lordships in Plummer's case dealt expressly with a "fiscal nullity" argument. Nevertheless such an argument was foreshadowed by the Crown's printed case in the House of Lords, with a copy of which we have been supplied. It also appears to have been made in oral argument by counsel, for the Crown, although by no means in the forefront of its case: see [1980] A.C. 896, 900c, 904e--g. Nevertheless, for the reasons given below, it is irrelevant whether the "fiscal nullity" argument was presented to the House of Lords in Inland Revenue Commissioners v. Plummer.

For my part I have to confess that I do not find it easy to reconcile the decision in Plummer with the subsequent decision in Ramsay's case [1982] A.C. 300. Nevertheless that is not a difficulty which appears to have troubled the House of Lords in subsequent cases. In Ramsay itself Lord Wilberforce considered Plummer in the following passage, at page 324:

"Inland Revenue Commissioners v. Plummer [19801 A.C.896, this was a prearranged scheme, claimed by the revenue to be `circular'--in the sense that its aim and effect was to pass a capital sum round through various hands back to its starting point. There was a finding by the special commissioners that the transaction was a bona fide commercial transaction, but in this House their Lordships agreed that it was legitimate to have regard to all the arrangements as a whole The majority upheld the taxpayer's case on the ground that there was commercial reality in them: as I described them ...they amounted to `a covenant, for a capital sum, to make annual payments, coupled with security arrangements for the payments' and I attempted to analyse the nature of the bargain with its advantages and risks to either side., The case is no authority that the Court may not in other cases and with different findings of fact reach a conclusion that, viewed as a whole, a composite transaction may produce an effect which brings if within a fiscal provision."

Of the other Law Lords in Ramsay's case, only Lord Fraser of Tullybelton, at page 337, mentions Plummer and then only in passing as authority for the proposition that the Court is entitled and bound to consider a tax-saving scheme as a whole.

In Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [19811 54 T.C. 200, the House of Lords accepted that Ramsay's case marked a significant change in the approach adopted by the House to tax avoidance schemes. As Lord Diplock said, at p. 214:

"It would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate tax avoidance schemes to assume, that Ramsay's case did not mark a significant change in the approach adopted by this House in its judicial role to a pre-ordained series of transactions (whether or not they include the achievement of a legitimate commercial end) into which there are, inserted steps that have no commercial purpose apart from the avoidance of a liability to tax which in the absence of those particular steps would have been payable. The difference is in approach. It does not necessitate the overruling of? any earlier decisions of this House;..."

In the Burmah Oil case there was a certain ambiguity in the approach to Inland Revenue Commissioners v. Plummer. Immediately before the passage cited Lord Diplock had mentioned the fact that the decision of the Court of Session, whence had come the appeal to the House of Lords was "being reversed upon a ground (the Ramsay principle) that was never argued before them and at the time of the hearing which was after ...Plummer but before Ramsay's case had been determined by this House, may well have not been open to the Court of Session."

That certainly suggests that Lord Diplock considered that Inland Revenue Commissioners v. Plummer may well be inconsistent with Ramsay's case. Nevertheless he went on to say as quoted, that Ramsay's case did not necessitate the overruling of any earlier decisions of the House which clearly included Inland Revenue Commissioners v. Plummer. Lord Fraser of Tullybelton, 54 T.C. 200, 220, referred to Inland Revenue Commissioners v. Plummer only in the context of what he had said about it in Ramsay's case,' although he appears to have misinterpreted a passage from his speech in Ramsay's case [19821 A.C. 300, 337F, where he was clearly referring to the schemes under consideration in Ramsay as being a reference to the schemes in Plummer and Chinn v. Hochstrasser [1981] A.C. 533. Nevertheless there is nothing in Lord Fraser's speech to suggest that he considered that Inland Revenue Commissioners v. Plummer was inconsistent with Ramsay's case. None of the other Lords mentioned either Plummer or Ramsay.

Craven v. White [1989] A.C. 398, decided after the decision of the Commissioners in- this case, contains some helpful guidance on the jurisprudential basis of the Ramsay principle, Lord Oliver of Aylmerton with whose speech both Lord Keith of Kinkel and Lord Jauncey of Tullichettle expressly concurred, made it clear that the principle was one of statutory construction. He said in reference to Ramsay's case [19891 A.C. 398,504:

"Nor did it decide that the Court is entitled, because of the subject's motive in entering into a genuine transaction, to attribute to it a legal effect which it did not have. Both Lord Wilberforce and Lord Fraser f of Tullybelton emphasis the continued validity and application of the principle of Inland revenue Commissioners v,. Duke of Westminster [19361 A.C. 1, a principle which Lord Wilberforce described as a "cardinal principle". What it did decide was that that cardinal principle' does not where it is plain that a particular transaction is but one step in a connected series of interdependent steps designed to produce a single composite overall result, compel the Court to regard it as otherwise than what it is that is to say, merely a part of the composite whole. In the ultimate analysis, most, if not all, revenue cases depend upon a point of statutory construction, the question in each case being whether a particular transaction or a particular combination of circumstances does or does not fall within a particular formula prescribed by the taxing statute as one which attracts fiscal liability. As part of that process it is, of course, necessary for the Courts to identify that which is the relevant transaction or combination before construing and applying to it the statutory formula. Reduced to its simplest terms that is all that Ramsay did."

Lord Oliver continued at p. 505:

"What the case does demonstrate, as it seems to me, is that the underlying problem is simply one of the construction of the relevant statute and an analysis of the transaction or transactions which are claimed to give rise to the liability or the tax exemption."

And, at p. 506:

"Every case has to be determined on its own facts and every series of. transactions has to be examined and analysed to determine whether in truth, it constitutes a single composite and integrated whole entitling the Court, in construing the statute, to ignore the legal effect of individual steps because they are not and never were contemplated as other than part of a single whole."

In the course of his speech in Craven v. White Lord Oliver referred to Plummer with apparent approval. He said, at pp. 568, 569, 570:

"But it does not follow that because the Court, when confronted with a number of factually separate but sequential steps, is not compelled, in the face of the facts, to treat them as if each of them had been effected in isolation that all sequential steps must invariably be treated as integrated, interdependent and without individual legal effect. Indeed, Inland Revenue Commissioner v. Plummer [1980] AX. 896 was a case in which, although the transactions effected were integrated as part of a preconceived scheme which was commercially marketed and had no other conceivable purpose than that of saving tax, the construction of the statute compelled the acceptance of a fiscal result which accorded very iii with the true `substance' of the transactions taken as a whole."

In summary, therefore, notwithstanding my own reservations, the. House of Lords has at no time said that Inland Revenue Commissioners v. Plummer is inconsistent with Ramsay's case and is no longer good law; on the contrary, in Ramsay itself and in subsequent decisions Inland Revenue Commissioners v. Plummer has more than once been referred to with apparent approval.

In Mr. Moodie's case the commissioners relied on the final sentence of Lord Wilberforce's comments on Plummer in Ramsay, cited above, as entitling them to review the mark I scheme in the light of the Ramsay principle. On that approach they said that they could not "describe the annuity agreement as a commercial transaction in any relevant sense of that term," and that "the proper description of the annuity agreement is simply a device to secure a fiscal advantage". In Mr. Sotnick's case they went further and held, in the passage quoted above, that Plummer was no longer authority, on the application of the Ramsay principle which had not then emerged.

Hoffmann J. adopted a different approach to the argument that Inland Revenue Commissioners v. Plummer was binding on him. He said [1990] 1 W.L.R. 1084, 1088:

"But even a decision of the House of Lords is authority only for the question it actually decides. In the Plummer's case [1980] A.C. 896, the argument for the Crown was, first the payments were not an annuity because they were of a capital nature and, secondly that they had not been paid `wholly out of profits or gains' as section 52 requires: see the argument of Mr. Dillon Q.C., at pp. 900, 902. Both arguments were rejected. The argument for the payments being capital was simply that they had been paid out of the capital sum which the taxpayer had received for the annuity. In my judgment Plummer decides only that the payments are not on that account deprived of the character of being an `annuity or other annual payment'. Although it is clear from the dissenting speech' of Viscount Dilhorne that the self-cancelling nature of the scheme was appreciated by the House, no argument was based on the Ramsay principle, which had not yet `emerged'. Plummer cannot be authority for the proposition that the Ramsay principle does not apply to this scheme when the House never directed its mind to whether it did or not."

There are two decisions of this Court which make it clear that a decision can have binding effect as a precedent notwithstanding that some point may not have been argued. In Morelle Ltd. v. Waterworth [1955) 1' Q.B. 1 and Morelle Ltd. v. Walkeling [1955] 2 Q.B. 379, both in the Court of Appeal, it. had been held that a short unexpired residue of a term of years in land was within the scope of the Mortmain and Charitable Uses Act, 1888 (51 and 52 Vict. c. 42), that an assignment of the lease to a foreign company meant that the leasehold interest was automatically and immediately forfeited so as to vest in the Crown, and that the Crown thereby became subject to all the liabilities under the lease. In Attorney-General v. Parsons [1955] Ch. 664 the Crown sought in a similar case to contend that it was not liable on the covenants in the lease since (1) a damnosa hereditas might always be disclaimed: and (2) that it was not liable on the covenants until entry into possession. This Court held that, although those arguments were not raised in the Morelle cases, whatever might be the general validity of the arguments they were incompatible in their present application with the decision in those cases; and that, accordingly the Crown was liable on the covenants m the lease. In the more recent case in this Court of Duke v. Reliance Systems Ltd. [1988] A.C. 618, it was sought to distinguish an earlier decision of this Court in Roberts v. Cleveland Area Health Authority [1979] 1 W.L.R. 754 on the grounds that the Court did not brine to its attention a relevant Council Directive of the European Community. It was held that the fact that the previous decision of this Court might have been different if it had been referred to the Council Directive was not enough to establish that the decision had been made per incuriam and accordingly this Court was bound by that decision unless and until it was overruled by the House of Lords

Accordingly the House of Lords' decision in Inland Revenue Commissioners v. Plummer is binding on us as a matter of precedent and establishes that, on the facts of that case, the annual payments made by the taxpayer under the scheme did have the character of an "annuity or other annual payment" within section 52 of the Act. The judge was wrong in holding that Inland Revenue Commissioners v. Plummer was not a binding. precedent because the "fiscal nullity" argument was not mentioned in the speeches in that case. Mr. Parker for the Crown did not seek to contend that the judge was right in his reasons for declining to follow Plummer's case. Mr. Parker accepted that we are bound to apply the ratio decidendi of Plummer's case to the facts of these two appeals unless either (i) the House of Lords had overruled itself or (ii) there was a reasonable legal distinction between the current facts and those considered in Plummer, i.e. that Plummer is distinguishable on the facts. He further conceded before us that the House of Lords had not overruled Plummer's case, though he reserved the right to argue elsewhere that Plummer's case had been or should be, overruled.

So the issue before us finally came down to the comparatively narrow one: is Plummer's case distinguishable on the facts? We gave leave to the Crown to put in a respondent's notice so as to raise this issue Mr. Parker submitted that the main distinction between the facts of Plummer's case and those of the present appeals was the finding by the commissioners in Plummer's case quoted above that the transaction was a "bona fide commercial transaction", whereas in each of the instant appeals there was an express finding to the contrary. In Mr. Moodie's case the commissioners said: "We cannot describe the annuity agreement as a commercial transaction in any relevant sense of that term;" in Mr. Sotnick's case they said of the scheme: "we can find no commercial reality in it." However, in my judgment Mr. Thornhill for the taxpayers, had the answer to that submission when he said that the finding of a "bona fide commercial transaction" in Plummer's case related only to the argument under section 457 of the Act of 1970 and was there used in the context of a "bona fide commercial transaction without any element of bounty," the latter part of the phrase being the more significant. It is clear that all their Lordships in Plummer's case were fully alive to the fact that the sole reason for the mark I scheme was to avoid tax; indeed Lord Fraser of Tullybelton said [19801 A.C. 896, 928:

"The appellants contended that the definition [of ?settlement?] in section 454 (3) applied to all transactions that did not have a bona fide commercial reason, and that it applied to the present transaction, the, sole reason for which was to avoid tax."

If we were to hold that the finding about commercial reality in the present appeals constituted a relevant distinction between the facts of these cases and those in Plummer's case, it would be just such a fine distinction as was deprecated by Viscount Cave L.C. in Jones v. South West Lancashire Coal Owners' Association Ltd. [1927] A.C. 827, 830:

"My Lords, when a question of law has been clearly decided by this House, it is undesirable that the decision should be weakened or frittered away by fine distinctions..."

If Inland Revenue Commissioners v. Plummer cannot stand 'in the light of Ramsay's case, it is for the House of Lords to say so. It is not for lower Courts to try to distinguish Inland Revenue Commissioners v. Plummer out of existence.

The other distinctions of fact which Mr. Parker sought to draw between the present case and Inland Revenue Commissioners v. Plummer were even finer than that relating to "commercial reality" and I do not find it, necessary to consider them in detail. Although Inland Revenue Commissioners v. Plummer was only concerned with the mark I version of the scheme, Mr. Parker did not seek to argue that the differences between that and the mark II version as used by Mr. Sotnick were relevant for the purposes of distinguishing Mr. Sotnick's case from Inland Revenue Commissioners v. Plummer; indeed he sought to rely on the finding as to the total circularity of the movement of funds in Mr. Moodie's case, which was not the case in Mr. Sotnick's case and as to which there was no express finding in Plummer, as one of the grounds for distinguishing Mr. Moodie's case from Inland Revenue Commissioners v. Plummer.

In my judgment, therefore, Inland Revenue Commissioners v. Plummer is indistinguishable and we are bound by it to hold that the annuity payments made by the taxpayers pursuant to their respective schemes were annual payments within section 52.

In this Court that decision is conclusive of this appeal and it is unnecessary to consider the second main head of argument, namely if we were not bound, would the annuity payments not be treated as annual payments for fiscal purposes on the application of the Ramsay principle? That question was fully argued before us but the only purpose of our considering it (other than deference to the careful arguments presented to us) would be an attempt to assist the House of Lords should the case go further. But that attempt would-involve a consideration of the Ramsay principle, and in particular the extent of that principle if Inland Revenue Commissioners v. Plummer is not to be overruled. In my judgment, unless and until the House of Lords explains how Plummer and Ramsay are reconcilable, in order to answer the second question this Court would have to speculate as to the extent of the Ramsay principle in the light of Plummer, if not overruled I cannot see that we could offer any useful help to the House of Lords by embarking on so speculative an exercise.

I would allow these appeals and remit these two cases to the' commissioners for their further findings in the light of this decision.

SIR CHRISTOPHER SLADE, J.---For the reasons given in the judgment of Balcombe L.J. with which I entirely agree, I agree that the decision of the House of Lords in Inland Revenue Commissioners v. Plummer [1980] A.C. 896 is still binding on this Court and (however difficult it may be to reconcile with subsequent decisions of the House of Lords beginning with the Ramsay's case [1982] A.C. 300) is indistinguishable from the two cases before us on its material facts. It accordingly obliges us to allow these appeals.

Hoffman J. was of course right in saying that "even a decision of the House of Lords is authority only for the question it actually decides". In my judgment, however, with all respect to him, he was not right in saying that the decision of the House of Lords in Inland Revenue Commissioners v. Plummer decided "only" that the payments there in question were not deprived of the character of being "an annuity or other annual payment" merely because they had been paid out of the capital sum which the taxpayers had received for the annuity. The Plummer decision went further than that. It decided that on the facts of that case the payments in question did have the character of an "annuity or other annual payment" within section 52 of the Income and Corporation Taxes Act, 1970; otherwise the decision would necessarily have been in favour of the Crown. That was a fundamental feature of the decision. The fact that their Lordships in Inland Revenue Commissioners v. Plummer' heard no argument based on the Ramsay principle, and did not direct their minds to that principle, renders the Plummer decision no less binding on this Court.

Mr. Parker for the Crown has not attempted to submit that the House of Lords has overruled Inland Revenue Commissioners v. Plummer by any subsequent decision. The reference to that case in the subsequent decisions in Ramsay's case itself, the Burmah Oil case, 54 T.C. 200 and Craven v. White [1989] A.C. 398 suggest quite the contrary. Indeed, in Craven v. White at p. 506, Lord Oliver of Aylmerton accepted that the construction of the statute in Plummer "compelled" the acceptance of the fiscal result in favour of the taxpayer, even though this result "accorded very ill with the true `substance' of the transactions as a whole."

In these circumstances Mr. Parker had to found this argument in support of the judge's decision on the point raised in the respondent's notice, namely that "there is a reasonable legal distinction between the said case and the case therein in that the findings of fact made by the Commissioners herein are materially distinguishable from the findings of fact on which their Lordships based their decision in Plummer's case ...."For the reasons given by Balcombe L.J. 1 do not think they are materially distinguishable. I would merely mention one point Mr. Parker laid some stress, as did the judge, on the circularity of the schemes, which in the case of Mr. Moodie was total. No-express findings as to the circularity was made by the Commissioners in Inland Revenue Commissioners v. Plummer, though in all the essentials the scheme thereunder consideration was the same as Mr. Moodie's scheme. It is, however, apparent from Lord Wilberforce's speech in Ramsay's case [1982] AC. 300, 324, that the scheme in Inland Revenue Commissioners v. Plummer had, in his words, been "claimed by the revenue to be `circular'--in the sense that its aim and effect was to pass a capital sum round through various hands back to its starting point". The same point is reflected in the printed case on the appeal in Plummer's case. Their Lordships must clearly have had the point in mind.

On the hypothesis that we regard the Plummer decision as concluding these appeals in this Court, we were invited to proceed to express our opinion as to the legal position which would arise if, contrary to our view, Plummer's case were distinguishable from the cases before us on its facts and thus did not bind us. In the light of Craven v. White [1989] A.C. 398 it is common ground that on this hypothesis the issue would ultimately be one of construction of the relevant statutory provisions. On the same hypothesis, the Crown's submission in essence was that the Ramsay principle would entitle and oblige this Court to hold that, on the facts of the present cases, the alleged payment of the covenanted sums did not, on the true construction of section 52 of the Income and Corporation Taxes Act, 1970, have the character of "an annuity or other annual payment," on the grounds that there were no "payments" within the meaning of such provisions, just as on the facts of Ramsay, there was no "loss" within the relevant statutory provision. Viewing the schemes before us as a whole, as authority obliges us to do, it seems to me, without any reference to the Plummer decision, that the arguments in favour of saying that there were "payments" under the schemes in the statutory sense would be rather stronger than were the arguments in Ramsays's case in favour of the contention that there was a "loss" in the statutory sense. Presumably it was an equivalent line of thought which led the House of Lords apparently to regard the Ramsay, Burmah Oil and Craven v. White decisions as reconcilable with Plummer (or vice versa). I do not, however, think it would serve any useful purpose to embark on this further hypothetical exercise without the benefit of a fuller explanation and understanding of the reasons why their Lordships took this, view.

As things are, the principle of stare decisis in my judgment leaves this Court with no alternative but to allow these appeals.

McCOWAN L.J.--I agree.

Appeals allowed with costs. Leave to appeal granted on terms as to the taxpayers' costs.

Solicitors: Berwin Leighton; Solicitor of Inland Revenue.

M.B.A./1483/T??????????????????????????????????????????????????????????????????????????????????? Appeals allowed.