NIM04011 - Class 1: Avoidance - Ramsay principle

WT Ramsay Ltd v IRC [1982] AC300

The Ramsay principle has evolved as a judge-made antidote to some of the more extreme highly artificial methods of avoidance. It can apply both to circular, self-cancelling schemes and “linear” schemes where the composite transaction achieves a legitimate commercial end (such as the transfer of an asset, or payment of a sum of money, by A to B) but artificial steps are inserted into the transaction which have no purpose apart from tax (and NIC) avoidance.

In other words there must be no practical likelihood that the employee will not realise the asset on pre-arranged terms if the inserted steps are disregarded and the payment recharacterised as a payment of money. It may not be enough if there is a real possibility that the employee will retain the asset, for example as an investment.