[2011] UKFTT 95 (TC)

TC00972

Appeal number: TC/2009/9861

Income tax – tax avoidance scheme - chargeability of interest income under s 18 ICTA 1988 - relief under the accrued interest provisions of Chapter II of Part XVII ICTA 1988 - deductibility of a payment under the manufactured interest provisions of schedule 23A ICTA  1988

FIRST-TIER TRIBUNAL

TAX 

	Mr NICHOLAS BARNES	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	Judge Peter Kempster 									Mr John Agboola						
					
Sitting in public at 45 Bedford Square, London WC1 on 14 to 17 June 2010

Mr Rex Bretten QC (instructed by NT Advisers LLP) for the Appellant

Mr Malcom Gammie QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This case involved a tax avoidance scheme designed to achieve an income tax saving by exploiting a perceived mismatch in the legislation governing two complicated matters: first, the accrued interest provisions of Chapter II of Part XVII of the Income and Corporation Taxes Act 1988 (“TA 1988”); and secondly, the manufactured interest provisions of schedule 23A TA  1988.  The Appellant (“Mr Barnes”) is one of a number of taxpayers who have participated in the scheme, named “Project Corbiere” or “WhiteBox”, and his appeal has (by Directions issued on 10 August 2009) been designated as a lead case under Tribunal Procedure Rule 18.    
The assessment and the appeal
2.	Mr Barnes submitted his self-assessment income tax return for the tax year 2004-05 on 17 September 2005.  It included a claim for a deduction of £1.2 million in computing his income tax liability, giving rise to a tax repayment of £473,239.66.  It made a full disclosure of his use of the tax avoidance scheme.  On 30 November 2005 he wrote to the Respondents (“HMRC”) with some amendments to his return.  
3.	On 20 January 2006 HMRC opened an enquiry into the return, pursuant to s 9A Taxes Management Act 1970 (“TMA”).  HMRC declined to make the repayment of tax until completion of their enquiry.  HMRC made requests for extensive information in connection with their enquiry, all of which were met by Mr Barnes’ advisers, Dominion Fiduciary Services Group (“Dominion”) and NT Advisers LLP (“NT Advisers”).   On 11 December 2008 HMRC issued a closure notice pursuant to s 28A TMA, amending the return so as to reduce the deduction (stated in the letter to be £12 million but the parties accepted this was a typographical error for £1.2 million) to Nil, resulting in a payment (rather than a repayment) due of £6,760.34.  Mr Barnes appealed to the Tribunal against the closure notice on 21 April 2009 and HMRC accept that as a valid appeal.  
The hearing
4.	The Tribunal took evidence from the following four witnesses for Mr Barnes.  Mr Barnes himself adopted two witness statements dated 4 December 2009 and 27 May 2010, and gave sworn oral evidence.  Mr Ben Cooke (at the relevant time managing director of Dominion in Jersey) adopted two witness statements dated 4 December 2009 and 27 May 2010, and gave sworn oral evidence.  Mr Matthew Jenner (at the relevant time with NT Advisers) adopted three witness statements dated 4 December 2009 (two) and 27 May 2010, and gave sworn oral evidence.  Mr Stuart Gower (at the relevant time an employee of SG Hambros Bank in Jersey) adopted three witness statements dated 4 December 2009 (two) and 7 June 2010, and gave sworn oral evidence.       
The facts
5.	In February 2005 Mr Barnes and some of his work colleagues met with Mr Jenner of NT Advisers who provided them with details of a tax loss plan called Project Corbiere (“the Scheme”).  In outline, a taxpayer would borrow by way of stock loan a significant amount of gilts very shortly before the gilts went ex-div; the stock lender would require cash collateral as security for the stock loan but the funds would be made available to the taxpayer by a bank loan, secured against the borrowed gilts; the gilt coupon would be received by a custodian, who would remit those monies to the stock lender; finally, shortly after the dividend had been received, the borrowed gilts would be returned to the lender.  The details of the Scheme are described later in this decision. 
6.	The Scheme had been devised in 2004 by Mr Jenner and colleagues.  It was originally used by a particular individual client, but then broadened to be used by a number of taxpayers.  Mr Jenner put it to Dominion, whose London office shared premises with NT Advisers.  Dominion, working with Mr Jenner, put together a packaged arrangement, collaborating with persons they had worked with on other transactions.  The banking and other financial resources necessary for the Scheme would be provided by the Société Générale Group, in particular SG Hambros Bank & Trust Limited in Jersey (“Hambros”) and Société Générale Bank & Trust in Luxembourg (“SocGen”).  A suite of proforma documentation was drafted, in conjunction with Hambros’ and SocGen’s legal advisers, and leading counsel’s opinion obtained concerning the technical effect of the Scheme.  Dominion put the Scheme to a number of clients and contacts.  Mr Cooke described Dominion’s role as being the project manager. There were several rounds of implementation of the Scheme each with a number of participants; they took place between July 2004 and February 2005, with Mr Barnes participating in the February 2005 round.  The February 2005 round consisted of 39 participants.  In all there were around 100 participants.  
7.	On 8 February 2005 Mr Barnes signed an engagement letter with Dominion whereby Dominion would provide to Mr Barnes tax consulting services in connection with the Scheme.  Mr Barnes, via Mr Jenner, informed Dominion that he wished to shelter income of £1.2 million in the tax year 2004-05.  As will be seen, the essence of the Scheme is that the participant should obtain a tax deduction for a sum equal to the amount of the coupon payment on the borrowed gilts.  There was in the market an issue of gilts (UK Treasury Gilts 8.75% 2017) with an ex-div date of 16 February 2005.  Grossing-up the (biannual) coupon on those gilts, Mr Jenner calculated that in order to generate £1.2 million of tax shelter Mr Barnes would need to borrow gilts with a nominal value of £27,428,571; those gilts would have a market value of over £38 million. 
8.	The stock lending market in gilts is effectively an institutional market and a deal size of £27 million nominal would not be available.  Instead, a larger stock loan was put together and then subdivided among the various participants in the February 2005 round of the Scheme, including Mr Barnes.  We now describe the structure and documentation employed in the February 2005 round of the Scheme.
Documentation prior to 16 February 2005
9.	In April 2004 Hambros had acquired or established a British Virgin Islands company called Clement View Limited (“CVL”).  The directors were Hambros staff based in Jersey including Mr Gower.  In July 2004 the shareholder and directors authorised CVL to enter into stock loans or repos.  The purpose of CVL was to stand between the stock lender and the participants in the Scheme, so that a large amount of gilts borrowed by CVL could then be subdivided between the participants.  
10.	In July 2004 CVL had entered into an agreement (“the Global Securities Lending Agreement”) with Cantor Fitzgerald Limited providing for the parties to enter into repurchase transactions and buy-and-sell-back transactions in securities and financial instruments.  This was in a market standard TBMA/ISMA form. 
11.	On 8 February 2005 Mr Barnes had signed in escrow a set of the suite of Scheme documentation (described below) and signed a letter of authority to Dominion to put dates, amounts and “any other issues” into the documents; to change dates already typed in the documents; and “in [Dominion’s] absolute and sole discretion” release the documents from escrow.  This escrow letter contained a paragraph relating to the repayment of the gilt borrowing:
“I note that I can repay any stock loan of securities with other securities issued by the same issuer.  I further note that the some [sic] documents assume that I will repay such a stock loan with the same type of gilts.  At this time, I believe I will repay such a stock loan in that manner but I note that there is no requirement for me to do so and as such I reserve the right for me to make a final decision on how I repay the stock loan at the relevant time.  I, therefore, hereby make all my relevant instructions in this letter subject to my right to decide at the relevant time how such a stock loan is repaid.  For the avoidance of doubt I shall inform you if I change my mind and if you do not hear from me to the contrary before the repayment of such a stock loan is due you may act on my current wishes.”
Documentation on 16 February 2005
12.	On 16 February 2005 the latest round of the Scheme swung into action – as Mr Bretten put it, the starting pistol was fired.  Mr Jenner in his evidence explained that because potential participants had signed documents in advance, it was necessary to confirm with them that they still wished to participate; some individuals did change their minds and dropped out; also, a person who had failed to deposit funds for the fees would not be a participant; only on the evening of 15 February was the final list known.  Mr Gower in his evidence explained that the staff at Hambros were well versed in what paperwork needed to be executed; they were in constant telephone contact with Dominion on the relevant days.  Mr Jenner in his evidence explained that as there had been six previous rounds everyone knew what they were doing, even with 39 separate sets of transaction documentation.  The escrow documents signed by Mr Barnes (paragraph 11 above) were released.
13.	Cantor Fitzgerald (by this time called BGC International), CVL and Hambros entered into a letter agreement pursuant to the Global Securities Lending Agreement for a gilts loan transaction with the following pertinent details:
(1)	Purchase date - 16 February 2005
(2)	Purchased securities - £909,611,428 UK Treasury Gilts 8.75% 2017
(3)	Purchase price - £1,279,632,260.80 
(4)	Buyer – CVL
(5)	Seller – BGC International
(6)	Repurchase date – 17 February 2005
(7)	CVL to pay stated fees and funding costs to BGC International
(8)	CVL and Hambros each irrevocably undertake to transfer or procure the transfer to BGC International of all income paid or deemed to be paid (including, without limitation, any coupon payments) in respect of the purchased securities immediately following receipt of such income.
14.	So CVL borrowed £1.3 billion worth of gilts with redelivery the next day, and an obligation to pay to the lender any coupon received.  The gilts went ex-div on 16 February and the coupon was paid on 25 February.  Mr Cooke in his evidence explained it was not a foregone conclusion that a sufficient quantity of suitable (in terms of amount and coupon date) gilts would be available at any particular time; that was one reason why there were several rounds of implementation of the Scheme; if insufficient gilts had been available then participants may have been scaled-down in that round; he recalled there was one occasion when it had not proved possible to source in the market an appropriate block of gilts, and that intended round had been pulled and the participants deferred to the next round.  
15.	Mr Barnes entered into an agreement (“the Stock Lending Agreement”) with CVL providing for the parties to enter into stock loan transactions against transfer of collateral.  This was broadly in a market standard ISLA form, save for some important bespoke changes.  The following are the pertinent details:
(1)	CVL lends securities to Mr Barnes (clause 3).
(2)	Mr Barnes provides collateral to CVL simultaneously with CVL’s delivery of the securities to Mr Barnes (clause 5.1).  The collateral is cash in Sterling of not less than the market value of the loaned securities (paragraph 1.2 of schedule).
(3)	“Where income is paid in relation to any loaned securities … [Mr Barnes] shall, on the date of the payment of such income, … pay and deliver by way of a payment that is representative of a periodical payment of income a sum of money or property equivalent to the type and amount of such income that … [CVL] would have been entitled to receive had such securities not been loaned to [Mr Barnes] …” (clause 6.1 – headed Manufactured Payments).  
(4)	CVL pays stated interest to Mr Barnes on the cash collateral (clause 7.2).  Mr Barnes pays CVL stated rates by reference to the value of the loaned securities (clause 7.1).
(5)	“[Mr Barnes] shall procure the redelivery of near equivalent securities to [CVL] … on termination of the loan.” (clause 8.1).
(6)	Near equivalent securities are defined (in clause 2.1) as “securities (a) issued by the same issuer as the loaned securities; and (b) insofar as the nominal value is concerned, having at least 100.01% of the nominal value of the amount of the loaned securities; and (c) insofar as the redelivery market value is concerned, the redelivery market value must be at least equal to the redelivery market value that the loaned securities have on the redelivery date of such near equivalent securities.”  
(7)	The cash collateral is repaid simultaneously with the redelivery of the near equivalent securities (clause 8.4).
16.	By a letter agreement between Mr Barnes and CVL, Mr Barnes pursuant to the Stock Lending Agreement borrowed £27,428,571 (nominal) 8.75% Treasury 2017 securities against cash collateral of £38,586,239, with repayment date 17 February 2005.
17.	In order to be in a position to redeliver 100.01% nominal value of the loaned securities (see paragraph 15(6) above) – the significance of which will be explained later – Mr Barnes instructed Hambros to buy on his behalf £2,742.86 nominal gilts of the same issue (“the Margin Gilts”), which cost £3,947.85.
18.	Mr Barnes entered into an agreement (“the Bank Loan Agreement”) with SocGen, governed by Luxembourg law.   The following are the pertinent details:
(1)	The advance date is effectively 16 February and repayment is due on the termination date of 17 February.
(2)	The maximum facility is £39,771,428.
(3)	The purpose of the loan is for cash collateral in relation to the Stock Lending Agreement.
(4)	Mr Barnes is to provide security for the loan by providing “security over the rights, title and interest in certain contracts and certain assets held by [Hambros] … for or to the order of [Mr Barnes] in accordance with the [First Security Agreement – see below].”
19.	The same parties also executed a comfort side letter confirming that SocGen’s only role was as lender and that Mr Barnes did not hold SocGen responsible for any tax advice given to him.
20.	In his evidence Mr Barnes stated he was conscious that participation in the Scheme would require him to incur a very large bank borrowing for the short term cash collateral; he became comfortable that there was no material exposure because both counterparties (Hambros and SocGen) were in the same group; he considered his only real exposure was in relation to fees.  In his evidence Mr Jenner stated the participants would have taken the view that if SocGen/Hambros were happy with the counterparty risk, then they should have no problem.  In his evidence Mr Gower stated there was inevitably some counterparty risk – even if only to a “Lehman event”.
21.	In his evidence Mr Jenner stated that the two limits on the size of a round of participation were the amount of suitable gilts available in the market (see paragraph 14 above) and the amount SocGen was willing to lend; the latter was never a problem.
22.	Mr Barnes entered into an agreement (“the Custody Agreement”) with Hambros, governed by Jersey law.   In short, this appointed Hambros as custodian in relation to the borrowed gilts and coupons thereon.  
23.	Mr Barnes entered into an agreement (“the First Security Agreement”) with SocGen, governed by Jersey law.   In short, this gave SocGen security for the cash loan by creating a security interest over Mr Barnes’ rights under the Custody Agreement.   
24.	Mr Barnes entered into a tripartite agreement (“the Second Security Agreement”) with CVL and SocGen, governed by Jersey law.  In short, this gave CVL subordinated security for Mr Barnes’ obligations under the Stock Lending Agreement by creating a security interest (subordinated to the First Security Agreement) over Mr Barnes’ rights under the Custody Agreement.   
25.	There were several formal notices delivered between the parties, pursuant to the terms of the agreements described above.  The amount drawn down under the Bank Loan Agreement was £38,586,239.  That completes the description of the 16 February documents.
Documentation on 17 February 2005
26.	On 17 February 2005 a fax from Mr Barnes to Hambros was sent (this was also one of the pre-prepared documents signed earlier and held in escrow) dealing with the unwinding of the gilts borrowing, the collateral and the SocGen loan.  The gilts borrowing is called “the Loan” and the fax states, so far as relevant:
“   The terms of the Loan are such that repayment is due by me on the date detailed on the attached schedule.  I note that repayment can be made by me with any British government gilt-edged securities provided the nominal value of such gilts is at least 100.01% of the Original Nominal Value (as defined on the attached schedule) and certain other requirements are satisfied as set out in the Loan.
After careful consideration, of the financial consequences (taking into account my investment strategy which incorporates the Loan), I have decided to repay the Loan using the gilts detailed on the attached schedule in the amounts noted next to each particular gilt that is ticked.  I note that I currently hold such gilts in my custody account (of which you are custodian) and/or my normal account with your bank (with number [bank account number]).  I believe that together these holdings are sufficient to meet my obligations to CVL under the Loan.
I therefore hereby irrevocably authorise you (both as the custodian of my custody account and otherwise) to immediately carry out the transactions to repay CVL under the terms of the Loan (of which you are aware) provided that in return CVL returns to me the Cash Collateral.
I further hereby irrevocably authorise you to immediately transfer the cash that is to be returned to me by CVL to [SocGen] by way of repayment of my loan with them.
Finally, I hereby irrevocably authorise you to make payments out of the account detailed above to cover all costs and fees in respect of the Loan and my loan with [SocGen].”
Documentation after17 February 2005
27.	The above describes all the transactions undertaken on 16 & 17 February 2005.  Moving ahead to 25 February, the coupon on the gilts (both the borrowed gilts and the Margin Gilts) was received in the amount of £1,200,120.  Mr Barnes now had an obligation under the Stock Lending Agreement to make a payment (a manufactured interest payment) to CVL of £1,200,000.  This was not paid directly from the coupon receipt; instead, another loan was taken from SocGen for £1.2 million; this was deposited into a separate account of Mr Barnes at Hambros; the manufactured interest payment of £1.2 million was paid to CVL from that separate account; and the new loan was repaid to SocGen out of the coupon proceeds – all on 25 February 2005.  These transactions were effected by or pursuant to faxes from Mr Barnes to SocGen and Hambros.  That completed the transactions required by the Scheme.
The Hambros documents
28.	In evidence before the Tribunal were photocopies of the following documents:
(1)	Hambros transaction advices to Mr Barnes in respect of:
(a)	Stock movement advice for receipt of £27,428,571.41 gilts.
(b)	Contract note for purchase of the Margin Gilts.
(c)	Stock movement advice for delivery of £27,428,571.41 gilts.
(d)	Coupon advice for receipt of £1,200,120 gilt coupon.
(2)	Hambros account statements showing inter alia:
(a)	15 February - Initial cash balance received from Mr Barnes (£61,200.00).
(b)	16 February - Debit to purchase the margin Gilts (£3,947.85).
(c)	16 February - Credit loan from SocGen (£38,586,239.97).
(d)	16 February - Debit collateral (£38,586,239.97).
(e)	17 February - Credit repayment of collateral (£38,586,239.97).
(f)	17 February – Debit repayment of loan from SocGen (£38,586,239.97).
(g)	25 February – Credit gilt coupon (£1,200,120). 
(h)	25 February – Credit “intra day loan” from SocGen (£1,200,000).
(i)	25 February – Debit “manufactured interest payment” (£1,200,000).
(j)	25 February – Debit repayment of “intra day loan” from SocGen (£1,200,000).
Finding of fact as to the Scheme documentation
29.	In their statement of case HMRC put Mr Barnes to proof of all the transactions undertaken as part of the Scheme.  Mr Gammie for HMRC cross-examined all the witnesses extensively concerning the Scheme documentation.  The only discrepancy that came to light was that the Hambros stock movement advice note in relation to the redelivery of the borrowed gilts showed a value date of 17 February but a “trade date” of 16 February 2005.  Challenged on this Mr Gower stated that this must have been a manual data input error; the transactions were done in blocks and the redelivery must have taken place on 17 February, as shown on the account statements; the bank received many complaints about incorrect dates being entered on statements; the bank was clear on its instructions as to redelivery of the gilts and a number of such instructions were all processed on 17 February, as instructed.  The Tribunal asked Mr Gammie to put directly to the witness any point concerning the discrepancy that HMRC might wish to argue when presenting their case, in order that the witness could address it.  Mr Gammie very properly stated that the only point he intended to make in relation to the stock movement advice was that it indicated that everyone knew in advance exactly what transactions were to be executed on the relevant dates.  The Tribunal accepts the witness’s explanation of the discrepancy.  The Tribunal makes a finding of fact that all the transaction documents were executed as stated on the face of those documents and were implemented in accordance with their terms.    
The Fees
30.	The only pertinent matter arising from the factual evidence not covered above relates to the fees paid.  Dominion’s engagement letter dated 8 February 2005 makes provision for a “non-contingent fee for the implementation of the [Scheme in] an amount equal to 5.1% of the sheltered amount.  However, we shall reduce the fee … by an amount equal to any external costs and financing costs that you are charged directly by third parties as part of the [Scheme] …”.   The sheltered amount is then defined as being the amount of the manufactured interest payment.  So in Mr Barnes’ case the fee was expected to be £61,200 (being 5.1% of £1.2 million), to include banking costs.  
31.	The opening funds transfer to Mr Barnes’ Hambros account was £61,200 (paragraph 28(2)(a) above) and in his witness statements Mr Barnes stated, “These funds were to cover all fees payable on the [Scheme] transactions and to enable [Hambros] to purchase [the Margin Gilts] …”.   The Hambros bank statements show various payments to CVL and Dominion, and a small interest credit, leaving a small credit balance (less than £200) at 31 March 2005, at the close of the Scheme transactions.  Both Mr Jenner and Mr Cooke stated in their evidence that the fees would be split between Dominion and NT Advisers, after accounting for the banking costs incurred to Hambros and SocGen; there would have been a calculation of the fees, and their allocation, for each participant; Mr Jenner recalled there may have been a small error in the calculation of the fee in relation to Mr Barnes.  Mr Barnes in his evidence stated that as long as the total charges did not exceed the 5.1% fee agreed then he had no concerns about the make-up.     
32.	The Tribunal finds as a fact that the 5.1% fee paid by Mr Barnes for implementation of the Scheme included not only the charges of Dominion and NT Advisers, and the banking charges of Hambros and SocGen, but also the purchase price of the Margin Gilts.
Summary of Scheme steps
33.	Before moving to the legal arguments, we summarise the pertinent steps in the transactions:
(1)	16 February:
(a)	Mr Barnes borrows from SocGen sufficient funds for the collateral (approximately £38.6 million).
(b)	The funds are deposited with Hambros (on behalf of CVL) as collateral.
(c)	Mr Barnes borrows gilts from CVL (approximately £27.4 million nominal).
(d)	Mr Barnes buys the Margin Gilts (£2,742.86 nominal)
(2)	17 February:
(a)	Mr Barnes redelivers to CVL “near equivalent securities”, comprising the borrowed gilts plus the Margin Gilts.
(b)	CVL releases the collateral to Mr Barnes.
(c)	Mr Barnes repays the loan to SocGen.
(3)	25 February:
(a)	Mr Barnes receives the gilt coupon (£1,200,120)
(b)	Mr Barnes borrows £1.2 million from SocGen.
(c)	Mr Barnes pays the manufactured interest payment to CVL (£1.2 million).
(d)	Mr Barnes repays the £1.2 million loan from SocGen.

 The Law – Mr Barnes’ contentions
34.	In outline, the tax treatment argued for by Mr Barnes is that although the gilt coupon of £1.2 million constituted interest income taxable on him, he was relieved from any liability by the accrued income rules (ss 710 to 728 TA 1988); furthermore, his payment of the manufactured interest payment to CVL gave rise to a deductible of £1.2 million under the manufactured interest rules (sch 23A TA 1988), available for offset against his other income. 
35.	In this decision notice legislation is cited as in force in the tax year 2004-05.
36.	Mr Bretten for Mr Barnes submitted the following legal analysis by way of a number of propositions.
37.	First Proposition:  Mr Barnes was the person (and the only person) chargeable to income tax (under Case III of Schedule D) on the interest of £1.2 million paid on 25 February 2005 in respect of the borrowed gilts, and he was so chargeable on the whole amount of that interest – ss 18 and 59(1) TA 1988.
38.	Section 1(1) TA 1988 states (so far as relevant):
“Income tax is charged in accordance with the Income Tax Acts on (a) all amounts which, under those Acts, are charged to tax under any of Schedules A, D and F (set out in sections 15, 18 and 20) …”
Section 18 TA 1988 states (so far as relevant):
“(1) The Schedule referred to as Schedule D is as follows.  Tax under this Schedule shall be charged in respect of … (b) all interest of money, annuities and other annual profits or gains not charged under Schedule A or under ITEPA 2003 as employment income, pension income or social security income, and not specially exempted from tax.
(2) Tax under Schedule D shall be charged under the Cases set out in subsection (3) below, and subject to and in accordance with the provisions of the Tax Acts applicable to those Cases respectively.
(3) The Cases are … Case III: tax in respect of … (c) income from securities which is payable out of the public revenue of the United Kingdom or Northern Ireland …”
Section 59(1) TA 1988 states (so far as relevant):
“…income tax under Schedule D shall be charged on and paid by the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged.”
39.	Mr Bretten submitted that the coupon was clearly Case III income that had been paid into Mr Barnes’ Hambros bank account; it was shown on the bank statement as received on 25 February and was used to repay the loan from SocGen received earlier that day.  So Mr Barnes received the monies and was entitled to them free of all liens etc, under the terms of the Stock Loan Agreement.  He took the monies with full beneficial ownership and he was the only person chargeable under s 59.  Thus Mr Barnes is the person chargeable on the £1.2 million.   
40.	Second Proposition:  The accrued income scheme rules did not operate to apportion that interest, and the consequent Schedule D Case III charge, between the transferor (CVL) and the transferee (Mr Barnes); therefore those provisions did not reduce Mr Barnes’ chargeability to income tax in respect of the interest received by him on the borrowed gilts – s 713(2), (4) & (6) TA 1988.
41.	Section 710 TA 1988 states (so far as relevant):
“(1) This section has effect for the interpretation of sections 711 to 728. …
 (2) “Securities” does not … include shares in a company but … includes any loan stock or similar security— (a) whether of the government of the United Kingdom, any other government, any public or local authority in the United Kingdom or elsewhere, or any company or other body; and (b) whether or not secured, whether or not carrying a right to interest of a fixed amount or at a fixed rate per cent of the nominal value of the securities, and whether or not in bearer form. …
 (4) Securities are to be taken to be of the same kind if they are treated as being of the same kind by the practice of a recognised stock exchange or would be so treated if dealt with on such a stock exchange.
(5) “Transfer”, in relation to securities, means transfer by way of sale, exchange, gift or otherwise …
(6) Where an agreement for the transfer of securities is made, they are transferred, and the person to whom they are agreed to be transferred becomes entitled to them, when the agreement is made and not on a later transfer made pursuant to the agreement; and “entitled”, “transfer” and cognate expressions shall be construed accordingly.
(7) A person holds securities— (a) at a particular time if he is entitled to them at the time; (b) on a day if he is entitled to them throughout the day or he becomes and does not cease to be entitled to them on the day.
(8) A person acquires securities when he becomes entitled to them. …”

42.	Section 711 TA 1988 states (so far as relevant):
“(1) This section has effect for the interpretation of sections 710 and 712 to 728.
(2) An interest payment day, in relation to securities, is a day on which interest on them is payable; and, in a case where a particular payment of interest may be made on one of a number of days, the interest is for the purposes of this subsection payable on the first of those days.
(3) … the following are interest periods in relation to securities—   
(a)     the period beginning with the day following that on which they are issued and ending with the first interest payment day to fall;   
(b)     the period beginning with the day following one interest payment day and ending with the next to fall. …
(5) Securities are transferred with accrued interest if they are transferred with the right to receive interest payable on—   
(a)     the settlement day, if that is an interest payment day; or   
(b)     the next (or first) interest payment day to fall after the settlement day, in any other case;
and they are transferred without accrued interest if they are transferred without that right. …”
43.	Section 712 TA 1988 states (so far as relevant):
“(1) This section has effect to determine, for the purposes of sections 711 and 713 to 728, the settlement day in relation to a transfer of securities.
(2) Where the securities are transferred in accordance with the rules of a recognised market, the settlement day is the day on which the transferee agrees to settle or, if he may settle on one of a number of days, the day on which he settles; and, where they are transferred otherwise, subsections (3) to (5) below apply.
(3) Where the consideration for the transfer is money alone, and the transferee agrees to pay the whole of it on or before the next (or first) interest payment day to fall after an agreement for transfer is made, the settlement day is the day on which he agrees to make the payment or, if payment may be made on one of a number of days, or on a number of different days, the latest of them to fall.
(4) Where there is no consideration for the transfer, or the transfer is a transfer by virtue of sections 710(13), 715(3), 717(8), 720(4), 721, 722, 722A and 724(1A), the settlement day is the day on which the securities are transferred.
(5) In any other case, the settlement day is such day as an inspector decides; and the jurisdiction of the General Commissioners or the Special Commissioners on any appeal shall include jurisdiction to review such a decision of the inspector.”

44.	Mr Bretten submitted:
(1)	It was accepted that it was essential that Mr Barnes could rely on the accrued income scheme provisions in order to obtain relief from taxability on the gilt coupon, which was otherwise his income under s 59.
(2)	The gilts were securities for the purposes of s 710(2).
(3)	There was a transfer of the securities on 16 February.  There was no significance that the transfer was pursuant to a loan agreement; the extending words “or otherwise” in s 710(5) covered a loan, and the fact that s 727 (discussed below) was necessary to exclude stock lending from certain other provisions made it clear that stock lending did constitute a transfer of the securities.
(4)	The interest payment day for the purpose of s 711(2) was 25 February.
(5)	The settlement day for the purpose of s 711(5) was 16 February.  The securities were transferred with the right to receive the interest paid on 25 February, so they were “transferred with accrued interest” for the purposes of s 711(5). 
(6)	 There was nothing in s 711 stating that a transfer of securities is to be ignored if effected for tax avoidance purposes.
(7)	It is of the essence of a stock lending transaction that the transfer of the securities is linked to or composite with the redelivery of those securities; that does not prevent there being good transfer for the purposes of s 711.
45.	Section 713 TA 1988 states (so far as relevant):
“(1) Subject to sections 714 to 728, this section applies whether the securities in question are transferred before, on or after 6th April 1988; and in this section references to a period are references to the interest period in which the settlement day falls.
(2) If securities are transferred with accrued interest—   
(a)     the transferor shall be treated as entitled to a sum on them in the period of an amount equal to the accrued amount; and   
(b)     the transferee shall be treated as entitled to relief on them in the period of the same amount. …
(4) In subsection (2) above “the accrued amount” means—   
(a)     if the securities are transferred under an arrangement by virtue of which the transferee accounts to the transferor separately for the consideration for the securities and for gross interest accruing to the settlement day, an amount equal to the amount (if any) of gross interest so accounted for; and   
(b)     in any other case, an amount equal to the accrued proportion of the interest applicable to the securities for the period. …
(6) In this section—   
(a)     the accrued proportion is A/B … where—   
A is the number of days in the period up to (and including) the settlement day, and   
B is the number of days in the period.”
46.	Section 714 TA 1988 states (so far as relevant):
“(1) Subsection (2) below applies if a person is treated as entitled under section 713 to a sum on securities of a particular kind in an interest period, and either—   
(a)     he is not treated as entitled under that section to relief on securities of that kind in the period; or   
(b)     the sum (or total sum) to which he is treated as entitled exceeds the amount (or total amount) of relief to which he is treated as entitled under that section on securities of that kind in the period.
(2) The person shall be treated as receiving on the day the period ends annual profits or gains whose amount is (depending on whether subsection (1)(a) or (1)(b) above applies) equal to the sum (or total sum) to which he is treated as entitled or equal to the amount of the excess; and the profits or gains shall be chargeable to tax under Case VI of Schedule D for the chargeable period in which they are treated as received.
(3) Subsection (4) below applies if a person is treated as entitled under section 713 to relief on securities of a particular kind in an interest period, and either—   
(a)     he is not treated as entitled under that section to a sum on securities of that kind in the period; or   
(b)     the amount (or total amount) of relief to which he is treated as entitled exceeds the sum (or total sum) to which he is treated as entitled under that section on securities of that kind in the period.
(4) The person shall be entitled to an allowance whose amount is (depending on whether subsection (3)(a) or (3)(b) above applies) equal to the amount (or total amount) of relief to which he is treated as entitled or equal to the amount of the excess; and subsection (5) below shall apply.
(5) Any amount to which the person is entitled by way of interest which—   
(a)     falls due on the securities at the end of the interest period, and   
(b)     is taken into account in computing tax charged for the chargeable period in which the interest period ends,
shall for the purposes of the Tax Acts be treated as reduced by the amount of the allowance; but if the period is one which does not end with an interest payment day, he shall be treated as becoming, in the next interest period, entitled under section 713 to relief on the securities of an amount equal to the amount of the allowance.”
47.	Mr Bretten submitted:
(1)	The period relevant for s 713(1) is the six months period containing 16 February.  
(2)	Section 713(2) makes a statutory allocation to the transferor (CVL) of “an amount equal to the accrued amount”, and grants a relief of the same amount to the transferee (Mr Barnes).  Section 714 establishes a calculation of an amount that is attributed to a person and characterised as Schedule D Case VI income.  It is not the case that the interest itself (or part thereof) is allocated to another person; rather an entitlement to an item of Case VI income is deemed.
48.	Third Proposition:  The accrued income scheme rules confer on Mr Barnes an entitlement to relief (by way of an allowance) in determining his liability for income tax on the interest which he had received and in respect of which he was chargeable (pursuant to ss 18 and 59 TA 1988) – s 714(3), (4) & (5) TA 1988.
49.	Mr Bretten submitted that the amount attributable to the transferor is charged under Case VI of Schedule D -- the "residual case" in s 18 (3) - and may be a figure determined on an aggregate basis and after netting off relief. The relief conferred on the transferee is in respect of the interest to which he was entitled -- which relief might itself have been determined on an aggregate basis and after netting off amounts attributed to him. That relief does not take the form of modifying the charging provisions of s 59; it operated by conferring upon the transferee entitlement to an allowance reducing the amount taken into account in "computing tax charged". It is a relief which reduces the amount of the taxpayer's liability to tax, but it does not affect the position that the whole amount of the interest received by him was charged to tax under s 18, nor that he was the person upon whom the tax was charged under s 59.
Fourth Proposition:  Section 727 TA 1988 did not apply to exclude s 713(2) since (i) s 263B(1) Taxation of Chargeable gains Act 1992 (“TCGA 1992”) was not in terms in point as the gilts were not specifically identifiable but were held in a pooled account; and (ii) the requirements of s 263B(6) were not satisfied as the quantity of gilts required to be re-delivered and actually re-delivered was not the same as the quantity of the gilts lent.
50.	Section 727 TA 1988 states (so far as relevant):
“(2) Where securities are transferred in circumstances such that by virtue of section 263B(2) of the 1992 Act (capital gains tax exemption) any disposal and acquisition are disregarded for the purposes of capital gains tax, sections 713(2) and (3) and 716 shall not apply.”
51.	Section 263B TCGA 1992 states (so far as relevant):
“(1) In this section “stock lending arrangement” means so much of any arrangements between two persons (“the borrower” and “the lender”) as are arrangements under which—   
(a)     the lender transfers securities to the borrower otherwise than by way of sale; and   
(b)     a requirement is imposed on the borrower to transfer those securities back to the lender otherwise than by way of sale.
(2) Subject to the following provisions of this section and section 263C(2), the disposals and acquisitions made in pursuance of any stock lending arrangement shall be disregarded for the purposes of capital gains tax.  …
(5) References in this section, in relation to a person to whom securities are transferred, to the transfer of those securities back to another person shall be construed as if the cases where those securities are taken to be transferred back to that other person included any case where securities of the same description as those securities are transferred to that other person either—
(a)     in accordance with a requirement to transfer securities of the same description; or
(b)     in exercise of a power to substitute securities of the same description for the securities that are required to be transferred back.
(6) For the purposes of this section securities shall not be taken to be of the same description as other securities unless they are in the same quantities, give the same rights against the same persons and are of the same type and nominal value as the other securities.”

52.	Mr Bretten submitted:
(1)	It was accepted that it was critical that the provisions of s 713(2)(b) TA 1988 were not excluded by the operation of s 727(2) TA 1988.
(2)	Section 263B(1) TCGA 1992 is a definition provision and the words “those securities” in s 263B(1)(b) should be read very narrowly.  Gilts are fungible assets, traded in large volumes through custodian facilities.  There being no specific identification of the securities, there was only a description of the assets in a given transaction – it was akin to money in a bank account.  So s 263B could not apply unless the extended definition in subsections (5) & (6) applied.  The redelivery obligation in clause 8 of the Stock Lending Agreement and the definition of “near equivalent securities” in clause 2 thereof emphatically demanded transfer back of a different quantity of securities; these included the Margin Gilts, calculated at 0.01% of the loaned gilts, and this had been executed; while the excess of redelivery over loan was admittedly small, it could not be swept away or recharacterised – they were not “the same quantities” and thus failed the test in subsection (6).  Thus, the Stock Loan Agreement did not impose upon Mr Barnes a requirement to transfer back to CVL "those securities" as mentioned in s 263B(1)(b).
(3)	There was no warrant for excluding the 0.01% margin required by paragraphs 2.1 and 8.1 of the stock loan agreement for the purposes of s 263B(6) by characterising the margin as a return or fee paid to CVL for its services - as contended by the Respondents.
(4)	The margin requirement cannot be disregarded under the principle applied by the Court of Appeal in Astall v RCC [2010] STC 137, as that requirement had "a reality beyond the printed page" - see Arden LJ at para [46]. The repayment obligation was not a cosmetic – it really was carried out on the stated terms.
Fifth Proposition:  Mr Barnes being chargeable to income tax in respect of the whole amount of the interest of £1.2 million received by him on the gilts, the requirements of para 3(2A) of sch 23A TA 1988 were satisfied in relation to the whole of that amount.  Thus in computing his total income for the tax year 2004-05 Mr Barnes was entitled to deduct the manufactured interest payment of £1.2 million made by him to CVL on 25 February 2005.

53.	Schedule 23A TA 1988 states (so far as relevant):
“1(1) In this Schedule …   
“interest manufacturer” has the meaning given by paragraph 3(1) below;   
“manufactured dividend”, “manufactured interest” and “manufactured overseas dividend” shall be construed respectively in accordance with paragraphs 2, 3 and 4 below, as shall references to the gross amount thereof; …    
“securities” includes any loan stock or similar security;   
“transfer” includes any sale or other disposal; …    
“United Kingdom securities” means securities of the government of the United Kingdom, of any public or local authority in the United Kingdom or of any company or other body resident in the United Kingdom, but does not include United Kingdom equities. …
3(1) This paragraph applies (subject to paragraph 3A below) in any case where, under a contract or other arrangements for the transfer of United Kingdom securities, one of the parties (an “interest manufacturer”) is required to pay to the other (“the recipient”) an amount (“the manufactured interest”) which is representative of a periodical payment of interest on the securities.
(2) For the relevant purposes of the Tax Acts, in their application in relation to the interest manufacturer—   
(a)     the manufactured interest shall be treated, except in determining whether it is deductible, as if it—   
(i)     were an annual payment to the recipient, but   
(ii)     were neither yearly interest nor an amount payable wholly out of profits or gains brought into charge for income tax;   
(b)     the gross amount of that deemed annual payment shall be taken—   
(i)     to be equal to the gross amount of the interest of which the manufactured interest is representative; and   
(ii)     to constitute income of the recipient falling within section 1A; and   
(c)     an amount equal to so much of the gross amount of the manufactured interest as is not otherwise deductible shall be allowable as a deduction against the total income or, as the case may be, total profits of the interest manufacturer, but only to the extent that—   
(i)     it would be so allowable if it were interest, or   
(ii)     so far as not falling within sub-paragraph (i) above, it falls within sub-paragraph (2A) below.
(2A) An amount of manufactured interest falls within this sub-paragraph if and to the extent that the interest manufacturer—   
(a)     receives the periodical payment of interest on the securities which is represented by the manufactured interest, or receives a payment which is representative of that periodical payment of interest, and is chargeable to income tax on the periodical payment or representative payment so received; ...”

54.	Mr Bretten submitted:
(1)	The relevant gilts were UK securities within paragraph 1 (1).
(2)	Under the Stock Loan Agreement the Appellant was required to pay to CVL an amount which was representative of a periodical payment of interest on those securities, within paragraph 3 (1).
(3)	The Appellant was an "interest manufacturer" within paragraph 3 (1) and the payment of £1.2 million made by Mr Barnes to CVL on 25 February 2005 was "manufactured interest".
(4)	The requirements of subparagraph (2A) are satisfied as regards the £1.2 million interest paid on 25 February 2005 in respect of the gilts which had been lent to Mr Barnes by CVL since under ss 1, 18 and 59 TA 1988, Mr Barnes had received that interest payment, and he was chargeable to income tax in respect of the whole amount received.
(5)	The fact that the manufactured interest was paid out of borrowed monies was irrelevant – the statute was not concerned with the source of the funds.  
(6)	Sections 713 and 714 did not apply to reduce the amount of the periodical payment which Mr Barnes received and in respect of which he was chargeable to income tax. Those provisions gave relief (by way of the allowance) in computing the income tax liability consequent upon that charge - for the reasons given in paragraph 49 above.
(7)	Mr Barnes was chargeable on the gross amount of the interest, albeit that he was charged on only the net amount.  A taxpayer may have numerous sources of income chargeable under various schedules and cases, and be able to claim reliefs and allowances to reduce his or her liability; the amount of tax payable is a very different proposition from the chargeability of the various income streams.  It was not legitimate to substitute “charged” for “chargeable”, as contended by HMRC. 

55.	Sixth Proposition:  A “composite transaction” approach does not produce an analysis different from the foregoing propositions, since that analysis itself addresses a single transaction (ie the stock loan) which conventionally carried with it as part of its terms (i) entitlement to the coupon on 25 February 2005; (ii) the re-delivery obligation; and (iii) the manufactured payment obligation.
56.	Mr Bretten submitted:
(1)	It was accepted that each and every one of the transactions upon which Mr Barnes relied was part of a preordained series and that series had no purpose other than tax avoidance.
(2)	Notwithstanding that, the transactions could not be set aside as a sham: see Snook v London and West Riding Investments Ltd [1967] 2 QB 786, at 802 per Diplock LJ.  There was no basis in law for otherwise disregarding them as contended by the Respondents.    
(3)	The transactions were carried out pursuant to agreements based largely on industry standard documentation.  The form and economic substance of the transactions was the same as expected from the industry standard documentation; a repo transaction is by its nature self-cancelling.  The fact of a tax avoidance purposes does not (absent specific anti-avoidance provisions) result in the legislation being construed differently or having a different effect - Proudman J in Mayes v R & C Comrs. [2010] STC 1,  at paragraph [34]:
“The fact that a payment is tax-motivated and even circular does not by itself entitle the court to ignore it. It can only be ignored (absent sham) if there is some indication in the statute that circular payments are not to count.”
(4)	 It was acknowledged that it may legitimately be argued that it cannot have been the intention of Parliament that the legislation should operate so that the Appellant should both escape liability in respect of the interest received by him and be entitled to a deduction for the whole amount of the representative payment made by him, and that the "purposive" rule in Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 (“BMBF”) should be applied to prevent such result.  But, notwithstanding the attractiveness of such argument, it was submitted that all rules of construction (purposive or otherwise) must be applied within the constraints of the terms of the statute, and that the "purposive''  construction rule cannot displace the effect of provisions which are clear and permit of only a particular meaning. That this was the correct approach was authoritatively demonstrated by R. & C. Comrs. v Bank of Ireland Britain Holdings Ltd [2008] STC 253 at para [39] (per Henderson J):
''This does not appear to be a fiscally sensible end result, and if I could see my way to a construction of the legislation that avoided it, and did not give rise to further anomalies, I would be disposed to adopt it.  However, I can see no answer to Mr Gardiner' s simple argument that the language of s.730A is clear and unambiguous, and in those circumstances consideration of possible anomalies takes the matter no further" 
Similarly in the Court of Appeal in that case, R & C Comrs. v Bank of Ireland Britain Holdings Ltd [2008] STC 398 at paras [43] to [45] (per Collins LJ): 
''The starting point is that the ordinary meaning of the words plainly points to the payment of interest being treated as paid to the interim holder. What is treated as a payment of interest is the difference between the sale price and the repurchase price “on a deemed loan from the interim holder.”  The 'interim holder' is the person to whom the “original owner” has transferred the securities: s.730(1)(a). The section does not contemplate, or deal with, the case where there has been an assignment.
It is true that in this case a tripartite scheme has been devised which takes advantage of a mismatch between the two sets of sections. The mismatch is that s.730A refers to the interim holder as such, ie the person to whom the securities are originally transferred, and s.737A refers to the relevant person, namely the person from whom the transferor is required, or has the right, to buy back the securities. But I do not consider that there is any legitimate process of interpretation which will solve the Revenue's problems.
In argument [counsel for HMRC] accepted that he was in effect arguing that the words "to the reseller' or "to the relevant person' (as defined in s.737A(6)(a) should be inserted in s.730A(2)(a) so that it would read that the difference was to be treated as a payment of interest to the reseller (or relevant person). I see no legitimate basis for reading any such words into the subsection. It would amount to an unprincipled process of legislative gloss"
And also, Mayes at paragraph [44] (per Proudman J): 
"I am thrown back on the wording of Ch. II Part XI1I of the Taxes Act.  Again, for the reasons I have already given, I find that a purposive construction does not enable the court to disregard the additional payment of premiums and the partial surrender constituted by steps 3 and 4. This is legislation which does not seek to tax real or commercial gains. Thus it makes no sense to say that the legislation must be construed to apply to transactions by reference to their commercial substance.”  
(5)	The correct approach is as set out in BMBF at para [36] (per Lord Nicholls):
''[Some earlier cases] gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded, But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and, secondly, to decide whether the transaction does so."  
That approach was adopted by Proudman J in reaching her decision in Mayes (at para [47]):
“In summary it seems to me that Ch. II Pt XII1 of the Taxes Act adopts a formulaic and prescriptive approach. No overriding principle can be extracted from the legislation, or from the authorities, that some types of transaction should be ignored in the application of the chapter. To say that there is no premium and no partial surrender, that these steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self-cancelling nature of the transaction was no different from and no more extreme than that in MacNiven"  

The Law – HMRC’s contentions
57.	Mr Gammie for HMRC put forward HMRC's case on two bases. First, on a purposive construction of the relevant legislation the Scheme, viewed realistically, was ineffective to produce the outcome for which Mr Barnes contended. This first approach assumed that each step in the Scheme had the legal effect for which Mr Barnes contended, but was part of a composite transaction by reference to which the relevant legislation fell to be construed and applied. The Scheme was properly to be regarded as a composite transaction: once put in train there was no realistic or genuine commercial possibility that the Scheme would not run its course to its conclusion as the parties intended.
58.	Second, that each step in the Scheme was in effect precontracted so that the legal effect of each step and the application of the relevant legislation to the Scheme should be determined on that basis, with the result that the Scheme did not have the legal effect for which Mr Barnes contended. 
First Approach – General
59.	Mr Gammie submitted that Mr Bretten had candidly accepted that there was a tax avoidance scheme. If the Scheme worked as claimed, then an individual taxpayer could entirely eliminate his or her income tax charge for the tax year in question. The witness evidence was that the Scheme was marketed only to high net worth individuals but that choice appeared to be steered by the potential for fee income. In fact, if correct, anyone could eliminate their 2004-05 income tax liability if they were willing to pay a fee to the organisers of the Scheme. That was such a startling result that the Tribunal must be satisfied that Parliament had left a gaping hole in the 2004-05 tax legislation, and that there was no other interpretation possible but to give rise to that situation.
60.	Lord Hoffmann in MacNiven v Westmoreland Investments Ltd [2001] STC 237 had stated that legislation must be construed in respect of a particular transaction. When the Scheme was looked at as a whole it did not produce the concept that the legislation pointed to. In both WT Ramsay Ltd v IRC [1981] STC 174 and Furniss v Dawson [1984] STC 153 the transactions undertaken by the taxpayers did meet all the requirements set down by the relevant legislation; however, in both cases it was held that one must look at the situation as a whole to determine whether it was what the legislation truly considered, rather than taking a step-by-step approach that ticked various boxes.
61.	Mr Gammie submitted that under this first approach HMRC had three objections to Mr Barnes’ contentions.
First Approach – “Entitlement”
62.	HMRC’s first objection under the first approach was that entitlement to the relevant securities was an essential statutory concept in the accrued income scheme, but Mr Barnes could not show that he had an entitlement to the gilts. 
63.	Entitlement must be more than just mere legal entitlement; the gilts were all held under nominee arrangements, so entitlement must have some deeper meaning. In the context of an admitted pre-ordained scheme one must take a broad view of the matters. HMRC considered that the Scheme had a considerable overlap with that considered in the Tribunal in Berry v HMRC [2009] UKFTT 386 (TC).  That involved a different scheme and different legislation, but it was based on buying gilts at 4.45 pm and selling them at 5.15 pm on the same day, and the Tribunal in that case concluded that this conferred insufficient entitlement in the context of the relevant legislative provisions. The current Scheme had several parallels with Berry: the bank involved was also Hambros; it was a preordained purchase and sale of gilts in the same way, in the same marketplace; and the “ownership” was for a brief period only. 
64.	While HMRC accepted that every stock loan includes an obligation to repay the stock some point, usually someone is borrowing those securities for some particular purpose. That conferred the essence of being entitled to the securities. In Berry the outcome was that there was a short period of time when no one was entitled to the securities. In the current case there was not an ordinary market stock loan transaction; instead, a preordained tax motivated transaction was undertaken and one must look at the transactions for what they were and what they truly achieved.
65.	Entitlement in the context of s 710 must be given a wide practical meaning which requires the Tribunal to have regard to the whole of the series of transactions which are intended to have a commercial unity. This was supported by the House of Lords in IRC v Scottish Provident Institution [2005] STC 15 (“SPI”); Lord Nicholls (at para [19]):
“That depends upon what the statute means by 'entitlement'. If one confines one's attention to the Citibank option, it certainly gave Citibank an entitlement, by exercise of the option, to the delivery of gilts. On the other hand, if the option formed part of a larger scheme by which Citibank's right to the gilts was bound to be cancelled by SPI's right to the same gilts, then it could be said that in a practical sense Citibank had no entitlement to gilts. Since the decision of this House in [Ramsay] ... it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the court to have regard to the whole of a series of transactions which were intended to have a commercial unity. Indeed, it is conceded by SPI that the court is not confined to looking at the Citibank option in isolation. If the scheme amounted in practice to a single transaction, the court should look at the scheme as a whole.”
66.	It was clear, and had been accepted by Mr Barnes, that the series of transactions comprising the Scheme was undoubtedly intended to have commercial unity in the sense referred to by the House of Lords in SPI. Each step in the Scheme was predetermined and was carried out as intended so that there was no realistic or genuine commercial possibility that anything else would happen. Having regard to the Scheme as a whole and construing the concept of "entitlement" in the practical manner envisaged by the House of Lords in SPI, Mr Barnes never became entitled to the gilts under the Scheme. He borrowed and returned the gilts under the Scheme on a basis that allowed the scheme provider to make a series of entries in accounts opened in Mr Barnes’ name, but there was nothing else of any practical substance or real effect to the booking of the gilts in his account by reference to which he could claim to have become entitled to the gilts within the meaning of s 710.
67.	This conclusion is entirely consistent with the House of Lords decision in Ramsay as explained in the subsequent decisions of the House of Lords up to and including the decisions in MacNiven and BMBF. Under the current Scheme, once the movement in the gilts from CVL's account to Mr Barnes’ account on one day is put in the context of the Scheme under which it is predetermined that the movement will be reversed the next day, it can be seen that Mr Barnes was in reality entitled to nothing and that the Scheme produced no relevant outcome for income tax purposes.
68.	SPI indicates that the question of "entitlement" to particular securities is not answered solely by reference to the single step represented by the movement of the gilts from CVL's account into Mr Barnes’ account, and must be put in the broader framework or context of an arrangement under which it was predetermined that the same gilts would be moved back from Mr Barnes’ account to CVL’s account the following day.  In that context, the borrower could not be treated as being entitled to the gilts.  
69.	Mr Gammie for HMRC cited the following passages as authority:
(1)	Lord Wilberforce in Ramsay (at p 180):
“If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded; to do so is not to prefer form to substance, or substance to form. 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 that series or combination which may be regarded.”
(2)	Lord Brightman in Furniss (at p 166):
“... in my opinion the rationale of the new approach is this. In a pre-planned tax saving scheme, no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim. In a contractual case the fiscal consequences will naturally fall to be assessed in the light of the contractually agreed results. ... Ramsay says that the fiscal result is to be no different if the several steps are preordained rather than pre-contracted.” 
(3)	Lord Nicholls in MacNiven [2001] STC 237 at para [2]:
“Ramsay brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at a prearranged tax avoidance scheme as a whole. It matters not whether the parties' intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.”

70.	Mr Barnes was in reality entitled to nothing, and the Scheme produced no relevant outcome for income tax purposes.  Mr Gammie accepted that the transactions were not “shams” within the sense used in Snook, but overall they did not have any effect for tax purposes.  
First Approach – the stock lending disregard
71.	HMRC’s second objection was that, even if Mr Barnes was entitled to the securities, then the transaction was taken out of the accrued income scheme by s 727 TA 1988 because it fell within s 263B TCGA 1992.
72.	In relation to s 263B, looking at the transaction for what it truly was, Mr Barnes was required to return what he had borrowed the previous day. In reality there was no possibility of Mr Barnes substituting other gilts, and that had been as good as conceded by Mr Barnes. The Stock Lending Agreement allowed redelivery of “near equivalent securities”; HMRC argued that this was a meaningless insertion in the documentation which did not have “a reality beyond the printed page” (see Astall at paragraph [46]), but even if it had any significance than there was no need to pay any regard to it - see SPI and Astall. The margin requirement made no true difference; Mr Barnes was still required to redeliver the borrowed securities. Also, the 0.01% margin was an integral part of the fee paid for the planning -- this was clear from the engagement letter with Dominion. This was just an element of dressing up and in no way changed the nature of the character of the transaction.
73.	In purposively construing s 263B, regard must be had to the reality of the arrangements in question.  See Moses LJ in Prudential plc v Revenue and Customs Commissioners [2009] STC 2459 at para [12]:
“The statutory question is whether the two 'front-end' payments were made in consideration of RBS and GSI entering into their respective currency contracts. Mere incantation by the parties of the words of statutory qualification does not produce the desired fiscal effect. A payment does not come within s 151(1)(b) merely because the parties say it does.”
74.	In reality the same gilts were lent and repaid as always intended. The possibility that something else might be done to repay the stock loan could be ignored - it was clear from the evidence that that was not a realistic possibility. Furthermore, the requirement to transfer securities representing 100.01% necessarily encapsulates a requirement to transfer securities representing 100% of the securities lent, the balance effectively representing part of the stock lender’s fee or profit on the transaction.
First Approach – the manufactured interest payment
75.	HMRC’s third objection was that, turning to the manufactured interest payment provisions, the deduction available to the taxpayer is not the amount of the gross interest receipt, but instead only the net amount of interest on which he is chargeable. Paragraph 3(2A)(a) of sch 23A TA 1988 is clear that a deduction for the manufactured interest payment provisions is only available "if and to the extent that” Mr Barnes "is chargeable to income tax on the” interest.
76.	The legislation referred to “chargeable to income tax”, and the case law was clear that the use of the words "charged" and "chargeable" must be interpreted give a sensible result.  It was clearly not a sensible result to provide a deduction for the gross amount rather than the net amount on which Mr Barnes was chargeable.  Parliament intended Mr Barnes to be chargeable on the net amount of interest and to get a deduction for that net amount, not a deduction for the gross amount on which he was never chargeable.  
77.	If Mr Barnes was entitled to interest of £1.2 million on the gilts and s 713 is not excluded by s 727(2), Mr Barnes is nevertheless only chargeable to income tax in respect of the interest net of the relief to which he is entitled under ss 713 and 714. In this respect, it is clear that under the Income Tax Acts, what is charged to tax in this case is the interest and not the person (see s 18). Mr Barnes is chargeable as the person in receipt of or entitled to the interest. The purpose and effect of the accrued income scheme is to allocate interest on relevant securities (charged to income tax under s 80 and Case III of Schedule D) between the persons entitled to the securities during the course of a particular interest period. The amount of interest in respect of which each relevant person is chargeable to income tax is then the sum identified under the accrued income scheme. In the case of the person not entitled to or in receipt of the actual interest, this is the sum identified and charged under Schedule D Case VI by virtue of s 714(2). In the case of the person entitled to or in receipt of the actual interest, this is the amount of the actual interest reduced by the allowance under s 713, with the result that that person (i.e. Mr Barnes) is only chargeable to income tax to the extent of the actual interest net of the allowance, and not the gross amount of interest to which he was entitled or received.
78.	So in the current case the deduction under the manufactured interest payments provisions is the actual interest net of the allowance and not the full amount of the interest subject to a deduction for the allowance granted to him under s 713.
Second Approach
79.	HMRC’s alternative approach was that it was necessary to consider whether, as a legal matter, Mr Barnes' transactions had the legal effect for which he contended.
80.	HMRC contended that the contractual documentation must be construed as a package. As well as the process of objective construction of the contractual documents, one must also consider external evidence, including the conduct of the parties in a situation in which it is said that the parties’ written agreements do not reveal everything about what they had agreed and where such evidence is needed to get to the truth. The result of so doing may not be to strike down every element of the parties’ agreement but to show that aspects of their agreement are not as they claim. On the basis of external evidence, the Tribunal may say that the agreements on which the parties rely to regulate their legal rights and obligations should not be taken at face value and must be read in the light of some other agreement that the documents do not reflect.  In the present case all the evidence supports the proposition that the Scheme was executed as planned in the sense that each of the agreements comprising the Scheme was executed on the relevant date and in the relevant order, and that each step of the Scheme was effected as planned. HMRC’s contention, however, is that NT Advisors and Dominion agreed to create a product known as Project Corbiere which they would sell to any taxpayer prepared to purchase it. The product in effect incorporated the agreement of all concerned to enter into and implement the product in the requisite manner and the product was sold to taxpayers, including Mr Barnes, as a package on that basis.
81.	The Scheme was designed to have effect for tax purposes on the basis that each element of the package should be looked at individually and operate "step by step" and that the legal rights and obligations arising between the parties should be determined accordingly, without regard to the other elements of the package and the manner in which the package was constructed and sold. In effect, however, the Scheme was not just "predetermined" but was "precontracted". Once Mr Barnes had agreed to acquire the scheme and had signed the package of scheme documents on 8 February 2005, a process was initiated that had been preagreed amongst those in whose hands Mr Barnes had entrusted the implementation of the Scheme. Accordingly, each agreement and each step, and in particular the legal consequences that they entailed, falls to be determined on that basis. On that basis Mr Barnes never became entitled to the gilts on 16 February 2005 because there was already in place an agreement between all those involved in the Scheme's implementation that the gilts would be returned to CVL on 17 February 2005.
82.	The witness testimony was clear that everyone knew exactly what was to happen and there was a well trodden path established from the earlier rounds of implementation of the Scheme. In reality there was just a filling in of blanks in the standard package of documents and a set of escrow documents was released, closed and brought into effect.
Consideration and conclusions
83.	We consider in turn the two approaches adopted by HMRC in their challenge to the Scheme (see paragraphs 57 and 58 above).
HMRC’s first approach
84.	First we look at the transactions undertaken step-by-step and apply the relevant legislation, purposively construed.
On whom is income tax charged under ss 18 and 59 TA 1988?
85.	We consider it is a basic premise of a stock loan transaction that interest and dividends arising on the securities belong to the borrower; that is why such transactions contain an obligation on the borrower to make a compensatory payment to the lender calculated by reference to the interest and dividends received by the borrower. So the borrower is the person to whom the income belongs and thus is taxable on that income and, absent any other statutory provisions, he would be taxable on the full amount even though contractually required to account for that receipt (or an amount in lieu thereof) to the lender. It is for that very reason that the manufactured interest payments code was introduced almost 20 years ago. The fact that Parliament chose to enact the manufactured interest payment code demonstrates purposively that, in the absence of such provisions, all income arising on the borrowed securities would be taxable on the borrower. Accordingly, we conclude that – on this step-by-step basis – income tax would be charged on Mr Barnes on the £1.2 million interest receipt on the borrowed gilts, pursuant to ss 18 and 59 TA 1988.
Does the accrued income scheme apply?
86.	We conclude that the gilts loan undertaken by Mr Barnes falls within the provisions of ss 710 to 712 TA 1988. The gilts were “securities” within s 710(2) and there was a “transfer” within s 710(5).  On a step-by-step analysis, Mr Barnes was the transferee and became entitled to the securities for the purpose of the accrued income scheme.
87.	The purpose of the accrued income scheme legislation (which has been in force for almost a quarter of a century) is clear. Without these special rules, a person selling a security immediately before it goes ex div would avoid paying tax on the interest which had accrued to the date of sale, even though the amount of that interest is part of the sale price. The purchaser of the security, on the other hand, would be taxable on the whole of the interest even though most of it had accrued before the purchase date, while it was still in the ownership of the vendor. The purpose of the legislation is to tax each party on that part of the interest which accrued during that party’s ownership of the security, rather than looking just to the date of cash payment of the interest. There are then parallel statutory provisions (citation) which adjust the amount of the purchase price, for both parties, to reflect the adjustment for the accrued income.  
88.	The legislation does not split the Case III income between the parties. Instead, it taxes the transferor under Case VI on the apportioned amount (s 714(2)) and grants a "relief" (s 713(2)(b)) to the transferee by way of an "allowance" (s 714).
Is the accrued income scheme excluded by s 727 TA 1988?
89.	This turns on whether s 263B(6) TCGA 1992 applies to Mr Barnes’ borrowed gilts. The same issue of gilts was borrowed and redelivered, so we conclude that the requirement in subsection (6) that the redelivered securities "give the same rights against the same persons and are of the same type and nominal value as the [borrowed] securities" is satisfied.  Thus the point in issue reduces to whether the redelivered securities were "in the same quantities" as the borrowed securities.  
90.	It was an essential part of the Scheme that clause 2.1 of the Stock Lending Agreement was drafted so as to fail deliberately that test by requiring redelivery of 100.01% of the borrowed securities.  
91.	We do not accept HMRC's contention that the requirement to redeliver the Margin Gilts should simply be ignored. That requirement was not one that, to quote Arden LJ in Astall, had no reality beyond the printed page. On the contrary, that requirement was executed and carried through by the parties to the Stock Lending Agreement.  
92.	HMRC also argue that the Margin Gilts were merely part of the fees paid by Mr Barnes for participation in the Scheme. We have found as a fact that the 5.1% fee paid by Mr Barnes included the purchase price of the Margin Gilts (see paragraph 32 above).  However, we do not consider this has any bearing on the test in subsection (6). The Margin Gilts were purchased using money supplied by Mr Barnes – albeit he saw it as writing a cheque for the fees for the Scheme - and they were transferred to CVL pursuant to the Stock Lending Agreement. Therefore, we do not consider it correct to ignore somehow the Margin Gilts or reclassify them as anything other than (part) satisfaction of the borrower's redelivery obligations under the Stock Lending Agreement.  
93.	Further, although the "excess "redelivery obligation was very small, we consider that a purposive construction of the manufactured interest payment provisions does not support HMRC's contention that the Margin Gilts should be ignored.  Subsection (6) is drafted restrictively deliberately to confine the generally beneficial effects of the manufactured interest payment provisions to normal commercial stock lending transactions.  The requirement in the legislation for the redelivered securities to be of the same quantity should be read restrictively. While the quantity of the redelivered securities was very close (100.01%) to that of the loaned gilts, it was not the same quantity. To adopt an approach which says, in effect, that “the same quantity” means “the same or very close to the same quantity” would run contrary to what we perceive to be the purpose of the legislation.  
94.	Accordingly, s 727 does not exclude the operation of the accrued income scheme.
What is the effect of the manufactured interest payment provisions?
95.	We conclude that the transactions fall within the relevant provisions in schedule 23A TA 1988. The borrowed gilts were UK securities within paragraph 1(1); Mr Barnes was an "interest manufacturer" within paragraph 3(1); and the payment of £1.2 million made by Mr Barnes to CVL on 25 February 2005 was "manufactured interest".  
96.	The purpose of the manufactured interest payment provisions is to give a tax treatment that reflects the economic transaction between the parties. The manufactured payment is taxed on the recipient but a corresponding relief is given to the payer. However, the legislation gives a specific restriction in paragraph 3 (2A).  The point in issue concerns paragraphs 3(2)(c) and 3(2A)(a) of schedule 23A. Running these provisions together and omitting unnecessary words they read:
“[An] amount equal to so much of the gross amount of the manufactured interest [the £1.2 million receipt] as is not otherwise deductible shall be allowable as a deduction against the total income ... of the interest manufacturer [Mr Barnes], but only to the extent that—   
(i)     it would be so allowable if it were interest, or   
(ii)     so far as not falling within sub-paragraph (i) above, ... if and to the extent that the interest manufacturer [Mr Barnes] ... receives the periodical payment of interest on the securities which is represented by the manufactured interest [the £1.2 million receipt] ... and is chargeable to income tax on the periodical payment [the £1.2 million receipt] ... so received; ...”  
97.	If the payment falls within subparagraph (i) then there is no restriction on deductibility. But if instead (as it is agreed is the case for Mr Barnes) it falls instead within subparagraph (ii) then there is a restriction “if and to the extent that ... [Mr Barnes] ... is chargeable to income tax on the ... payment of interest ...”.   
98.	We agree with the Special Commissioners’ view in Prudential Assurance Co Ltd v Bibby [1999] STC (SCD) 153 (at para [34]) that: 
“It is clear to us, from Whitney v IRC [1926] AC 37, 10 TC 88, from R v Kensington Comrs, ex p Aramayo (1915) 6 TC 613 and from the many other statutory provisions to which we were referred, that the expression 'chargeable to tax' has no fixed meaning and that its meaning in a particular section needs to be determined from the context.”  

99.	    After careful consideration we conclude that the relevant words in subsection (6) should not be read as referring to the gross Case III income (chargeable under ss 18 and 59) without the relief/allowance granted by ss 713 and 714. Rather, those words limit the manufactured interest payment deduction to the amount of the interest income left chargeable after the s 714 allowance. It is clear from s 714 (5) that the intention is that the "interest is reduced”.  The purpose of subparagraph (ii) is to limit the deduction against the interest manufacturer’s total income to the amount that would otherwise be taxable on him.  Thus the deduction that is available under paragraph 3(2A)(a) is the net amount that is left chargeable to income tax after taking the relief/allowance under ss 713 and 714.   
Conclusion on the first approach
100.	The end result taking each transaction step-by-step and applying a purposive construction to the relevant legislation is that Mr Barnes obtains the relief/allowance under ss 713 and 714 (so that little or none of the £1.2 million interest receipt is chargeable on him) but any deduction under schedule 23A is restricted to the amount (if any) of the interest after the relief/allowance under ss 713 and 714.
HMRC’s second approach
101.	Turning to HMRC's second approach – that each step in the Scheme was precontracted - Mr Gammie for HMRC emphasised that if the Tribunal found in favour of HMRC under the first approach then it would be unnecessary to consider the second approach. We agree, but we do consider that it is part of the function of the first-tier tribunal to make findings of fact that may be relevant to HMRC's second approach, in case that should need to be considered on a higher appeal.
102.	We make the following findings of fact from the evidence presented at the hearing:
(1)	The Scheme was a designed and marketed tax avoidance scheme.
(2)	The Scheme had no commercial purpose, other than the intended obtaining of a fiscal benefit.
(3)	The parties intended that each of the steps and transactions comprising the Scheme would be carried out and executed exactly as envisaged from the outset. There was a standard set of documentation which had been used on several occasions by many taxpayers. In the February 2005 round there were some 39 participants, each undertaking near identical transactions all with Hambros and SocGen as the counterparties.  This all took place over two consecutive days, and any departure from the agreed plan would not have been feasible without derailing the Scheme.
(4)	Once Mr Barnes had decided to participate in the Scheme his only real involvement was to sign in escrow a set of the documentation and to pay the agreed fee. In particular, despite the wording in the letter described at paragraph 11 above, there was no realistic possibility that the gilt loan could be unwound other than by redelivery of the exact securities borrowed and then held by Hambros as custodian (plus the Margin Gilts, which only featured for the tax technical reasons already explored above). It is all but inconceivable that on the morning of 17 February Mr Barnes could have decided to unwind the gilts loan by arranging a delivery of £39 million worth of alternative "near equivalent securities ".  There was no practical possibility that Mr Barnes could do anything with the borrowed gilts other than return them the following day - and that was the definite intention of all the parties from beginning to end.

Decision
103.	For the reasons given in paragraph 100 above, the appeal is dismissed.
104.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

	Peter Kempster

TRIBUNAL JUDGE
RELEASE DATE: 31 January 2011