Five Oaks ruling is far from clear

The Five Oaks case on capital losses has significant implications for the way
in which companies carrying captital losses are bought and sold, but the manner
of the judgment could also be a sign of the direction tax law is going in.

Special Commissioner John Avery Jones found that Five Oaks Limited and five
other companies could not claim pre-entry losses against tax, but only after
turfing out his original judgement and then contemplating the case for three
days before changing his mind.

The Special Commissioner ruled in favour of HM Revenue & Customs in the
end, basing his decision on what the intention of the person who drafted the law
would have been, rather than the actual – very complex – wording of the

‘I heard this case on a Wednesday, having previously read the lengthy
skeletons [of the arguments] in advance and I thought at the end of the hearing
that while the draftsman was supposed to have said the interpretation for which
Mr Gammie and Mr Ewart (for HMRC) contended, what he actually said was the
interpretation for which Mr Aaronson (for the taxpayer) contended.

‘I then wrote a draft decision in Mr Aaronson’s favour. But having thought
about it for a further three days, by the end of Saturday it finally dawned on
me what the draftsman was trying to say,’ Avery Jones explained in his decision.

Graham Aaronson, who argued the case for the taxpayer, said he expected this
to become a key issue in other tax cases as legislation became more complex and
difficult to penetrate.

‘Where we have very complex and technical legislation that leaves a gap, is
it up to a judge to fill that gap or does the gap remain because the draftsman
chose such a complex technique?’ Aaronson asked.

Judges, of course, are given scope to interpret what legislation was meant to
achieve. In 2000, following the Inco Europe case, the House of Lords decided
that judges could fill gaps that emerged in drafting legislation, but only if it
was obvious what the intention of the draftsman was.

But when it comes to intricate tax law on a financial instrument or capital
losses, as in the Five Oaks case, what is obvious and what is not is far from

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