MacNiven v. Westmoreland Investments Ltd., [2001] 1 All ER 865 (HL)

In order to generate an interest deduction for accrued interest owing by an insolvent company ("WIL") to its shareholder (a pension fund) pursuant to a provision of the Corporation Taxes Act 1988 (U.K.) which required that interest be paid in order to be deductible, the pension fund lent money to WIL with WIL using the borrowed proceeds to pay the outstanding arrears of interest. In finding that this arrangement was effective, Lord Nicholls stated (at pp. 868-869) that "prima facie, payment of interest in s. 338 has its normal legal meaning, and connotes simple satisfaction of the obligation to pay ... . Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor".

In order to generate an interest deduction for accrued interest owing by an insolvent company ("WIL") to its shareholder (a pension fund) pursuant to a provision of the Corporation Taxes Act 1988 (U.K.) which required that interest be paid in order to be deductible, the pension fund lent money to WIL with WIL using the borrowed proceeds to pay the outstanding arrears of interest. In finding that this arrangement was effective, Lord Nicholls stated (at pp. 868-869) that "prima facie, payment of interest in s. 338 has its normal legal meaning, and connotes simple satisfaction of the obligation to pay ... . Leaving aside sham transactions, a debt may be discharged and replaced with another even when the only persons involved are the debtor and the creditor".

After noting that Aldous L.J. stated in British and Commonwealth Holdings plc v. Barclays Bank plc 1 All ER 381 at 395 that "the words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning", Lord Hoffmann stated (at p. 881) that "I would only add by way of caution that although a word may have 'a recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept".

Before declining to apply the Ramsay line of cases to find (as alleged by the Crown) that the taxpayer in fact did not make a "payment" of interest, Lord Hoffmann stated (at p. 882):

"Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, when asked what they mean, would say 'you had better ask a lawyer'."