There's an interesting piece in Taxation this week about the Drummond case, recently before the Special Commissioners.

For those who don't know, the case is about the purchase, and rapid surrender, of a life assurance policy to generate a tax loss where there is no real economic loss. It is, in short, a classic tax avoidance scheme.

Jason Drummond is an internet entrepreneur, and had been getting a bit miffed about his tax bill, what with having all that money (his net worth has been put at more than £100m). So he asked KPMG to help him out.

The upshot was a tax scheme that, by buying a life assurance policy and then surrendering it created a loss for CGT purposes with no gain for tax purposes on the other side. Drummond lost for several reasons, but the Special Commissioner also made one interesting point about the tax scheme in general, says David Whiscombe of Berg Kaprow Lewis.

The commissioner argued that the fact that there were clear aspects to the scheme that made it pre-ordained meant that it must fail under the Ramsay principle. So because the facts showed that it was all a try-on meant that as a try-on it could be set aside.

What if the taxpayer was more subtle? In this case, instead of buying policies worth £2m which were worth £1.75m (the difference being the tax advisers' cut, essentially), they had paid £1.75m, and essentially separated everything out, in essence been craftier about it, would it work? A series of transactions, you say? Not at all.

Whiscombe says if a tax adviser only revealed the steps to a taxpayer as they went along, it might be acceptable: 'Can it truly be the case that the incidence of taxation can be different for a taxpayer to whom a scheme is revealed piecemeal, than for one who is kept for a period in delberate ignorance by his advisers.'

If I have understood the point correctly, the implications would surely worry the taxman. Were tax advisers to operate in a kind of 'this isn't a scheme' because you can't prove there's any pre-ordained construction as far as the taxpayer is concerned, would it work?

Would it not mean they were dodging the disclosure scheme, apart from anything else?

It would certainly raise a few eyebrows in court. 'No really,your honour, I had no idea that is what KPMG meant when they advised me to buy a life insurance scheme.'

It is an interesting thought, but ultimately any adviser doing it would surely be playing with fire. If the taxman, after all, could prove any pre-ordained connection between events that advisers claimed were not connected, the full force of the law would surely be enacted on the firm and the taxpayers concerned.

Read the case here.