20 December 2008

Tax avoidance: Ben Nevis v. CIR (2)

Scalpel or sledgehammer?  Judges in the Supreme Court are divided on how anti-avoidance rules in tax law should apply.
While the general anti-avoidance provision in tax law is expressed broadly, says the Supreme Court, its purpose cannot be to strike down arrangements which involve no more than appropriate use of specific provisions.  What amounts to an “appropriate use” of a specific tax provision can be difficult to discern.
Two judges, a minority in the five-judge Supreme Court, were more cautious.  In their view, it is too wide to determine appropriate use by looking at the scheme of the Act as a whole.  Instead, they look at statutory tax allowances as little mini-codes within tax legislation.  If the use (or misuse) of a specific tax provision falls outside its intended scope in the scheme of the Act, then its use is not authorised within the meaning of the specific provision.
The effect of this subtle twist is that the tax authorities could simply disallow a new tax dodge as not being within the scope of a claimed statutory provision, without needing to use the heavy sledge hammer which is the blanket anti-avoidance rule.
The Trinity tax case centred on depreciation claimed on a capital asset: a licence paid to use land for forestry.  The High Court disallowed the depreciation claimed as a deduction.  The Court of Appeal and the Supreme Court both allowed the deduction, but then set aside the tax benefits under the general anti-avoidance rules in tax law.
Ben Nevis v. Commissioner of Inland Revenue – Supreme Court (19.12.08)
03.09.002