The Westminster Principle.

It was a long held principle (the Westminster principle) of general application to all taxing statutes that a taxpayer can deliberately arrange his affairs in such a manner as to avoid or minimise the payment of tax. This resulted in a great number of tax avoidance schemes by the use of highly complex and artificial transactions.

Subsequent Developments and the Ramsay Principle

In the light of this development, the House of Lords in two leading cases, W.T. Ramsay Ltd v IRC and Eilbeck v Rawlingredrew the boundaries of the Westminster principle to exclude a series of linked transactions which, if looked at individually, may appear to haven some substance but when considered as part of the whole series appear to be no more than bogus.

These two cases were concerned with artificial  pre-planned transactions whereby the subject property returned in substance to the same hands, but at the same time denuded itself of tax liabilities on the way.

In the light of the above cases, the question one may pose is whether a genuine commercial transaction through a circuitous rather than a direct route in which the property is passed into different hands would be equally unsuccessful in avoiding tax.

The question was indeed considered in Furniss (Inspector of Taxes) v Dawsonin which the court at first instance and on appeal held that the Ramsay principle was applicable to circular transactions and that it was still possible to apply the Westminster principle: a taxpayer is entitled to effect a genuine transaction by whatever means he chose so as to avoid or minimise his tax liability provided that each step in the transaction had a real legal effect.

However, the House of Lords, on a further appeal, rejected this approach holding that a pre-ordained series of transactions, regardless of the achievement of any legitimate commercial purpose, could not be employed to avoid tax if that was in substance the reason for carrying out the transaction in that particular way. Thus, it seems that if the Westminster principle is to apply at all it will be limited to a single step transaction.

The Ramsay principle was further considered in three consolidated appeals in Craven v White, IRC v Bowater Property Developments and Baylis v Gregory,all of which involved multiple step transactions. The House of Lords dismissed the appeals holding that the Ramsay principle applies to pre-ordained series of transactions in which the intermediate transaction serve no purpose other than tax mitigation.

However, it was observed where a person can carry out a transaction in two different ways, of which one will not result in the payment of tax, he is at liberty to choose that which will be to his advantage; the courts will not frustrate every transaction involving successive steps deliberately undertaken for the purpose of saving tax; and a transaction is not to be struck down simply because it was entered into with the objective of minimising a tax liability. It is not for the courts to make a moral judgment on a transaction.

Tax Incidence. The economic effects and, therefore, the equity of most taxes cannot be fully understood because of the difficulty of knowing where the ultimate burden will fall. Even the so- called direct taxes, e.g., income tax, do not escape this problem. Income tax has indirect consequences as the tax rate will influence a taxpayer’s decisions to work, save and invest.

The formal incidence of a tax must be distinguished from its effective incidence. The formal incidence falls on those who have the legal responsibility to pay the tax, while the effective incidence identifies those who ultimately bear the burden of the tax as a result of its imposition. The formal incidence of a tax is generally irrelevant to its effective incidence.

No single tax is a perfect indicator of one’s ability to pay. In view of this, most countries try to diversify their tax systems. Most people link the concept of ability to pay with income.

This assumption is in retreat having regard to the inequities associated with modern income tax systems. The property tax has also been criticised, especially in the USA and the UK. Tax specialists have argued for a comprehensive system of taxation on consumption expenditures, but public acceptance has been lacking.

No single tax is acceptable by all, since its incidence (burden) falls more heavily on some than on others. To a certain extent, the full impact of a tax is diminished by exemptions, exceptions, reliefs and other loopholes in the tax system due partly to humanitarian concerns for those who might be overburdened by the tax and partly to political pressure and administrative inefficiency or ability to deal with the complex tax structure.

Hence, the imposition of a wide variety of taxes can spread out the inequities and mitigate their impact.