Funding for the entire transaction was provided by a finance house, on terms such that the money would inevitably pass round in a circle, and back into their hands again, within a few days, with interest.
Lord Wilberforce described the transactions in the Ramsay and Rawling cases with this colourful (if not necessarily scientifically accurate) simile: In each case two assets appear, like "particles" in a gas chamber with opposite charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain that prevents the taxpayer from supporting any real loss and whose gain is intended not to be taxable.
At the end of the series of operations, the taxpayer's financial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses, to the promoter of the scheme.In this case, the Burmah Oil group had suffered a genuine loss on the sale of an investment.
In the Ramsay case, Lord Wilberforce distinguished three ingredients of the schemes involved Wilberforce summed up the emerging principle It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions intended to operate as such, it is the series or combination which may be regarded.He ruled that in the particular facts of Ramsay [It would be] a faulty analysis, to pick out, and stop at, the one step in the combination which produced the loss, that being entirely dependent upon, and merely, a reflection of the gain.
[1]The core of the Ramsay Principle is to be found in the Burmah Oil case in this remark by Lord Diplock: 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 transaction (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 that, in the absence of those particular steps, would have been payable.More recent cases have tended to move away from a narrow focus on disregarding circular transactions and inserted pre-ordained steps with no commercial purpose.
A number of tax counsel have cited the following comments by Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35 with approval as an authoritative statement of the prevailing view of the judiciary on the application of legislation in tax avoidance cases: The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts.
The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.