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Lynch v HMRC

This are a number of distinct features in this case, and it should be studied carefully by all who are interested in the courts’ approach to tax avoidance.

The taxpayer here took part in several rounds of a marketed avoidance scheme which was designed to produce a loss in the form of interest relief. It was however accepted by all parties that the interest relief claim failed because it was caught by the main benefit test.

The dispute was about the interest receivable element of the scheme. The taxpayer argued that the entire structure should be disregarded on Ramsay grounds and therefore no tax liability arose on the interest. HMRC disagreed and applied what the court called a ‘single transaction view’ under which it argued that the interest received (which took the form of a discount) should be treated separately. There was, it argued, no reason to disregard this taxable income because of the failure to obtain interest relief.

The tribunal agreed and accepted that a tax charge arose.