A7.403 The Judiciary's response to tax avoidance

The Ramsay principle, Tower MCashback and purposive construction of statute

'Substance over form' has been a long standing principle of accounting treatment under UK GAAP. Tax legislation however, often looks to the legal form of a transaction rather then looking at the substance behind it or behind a series of transactions to determine the overall result. The extent to which a court is entitled to disregard the legal form of the transaction and to have regard to the underlying substance has evolved over time. The problem is well put in the following extract from a judgment of Lord Greene:

'In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted tax will be payable. If the other method is adopted, tax will not be payable... The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not. There have been cases in the past where what has been called the substance of the transaction has been thought to enable the court to construe a document in such a way as to attract tax¹.'

Several cases² over many decades, have tested the extent to which the legal form of a transaction can be ignored. In the Duke of Westminster³ case, the Duke executed deeds of covenant in favour of employees