UK tax avoidance cases: The UK substance-over-form principle following the recent judgments in Mayes and Tower MCashback

Sullivan & Cromwell LLP - July 5, 2011

The Court of Appeal and the Supreme Court have recently released decisions on two marketed tax avoidance schemes. Result – Taxpayer 1 : HM Revenue and Customs 1.

Viewed together, the two cases help delineate the scope of the so-called “Ramsay” substance-over-form doctrine developed by the UK courts in tax cases:

  • the principle is one of statutory construction: it is more relevant to some statutes than others;
  • the 2004 decision of the House of Lords in Mawson cannot be treated as Year Zero in applying the doctrine: the earlier cases (which go back to 1981) remain good law.

On a more practical note:

  • the courts remain hostile to artificial tax avoidance arrangements;
  • off-market terms act as a red flag;
  • as always, such arrangements must be implemented carefully;
  • certainty (whether for HMRC or the taxpayer) remains as far off as ever; in particular, a taxpayer putting in place a structure in one year is at risk of being affected by post-transaction changes in judicial thinking, if HMRC challenge the structure in the courts.