1994 (2) TMI 310 - HC - Income Tax

Appeal Dismissed: Tax Clearances Revocation Upheld

Regina Versus Inland Revenue Commissioners

Matrix Securities Ltd. ('Matrix') appealed the refusal to declare the revocation of tax clearances by the Inland Revenue Commissioners invalid. The Court ... - Issues Involved:1. Revocation of Tax Clearances2. Capital Allowances Eligibility3. Full Disclosure Requirement4. Tax Avoidance Scheme5. Authority of Local Tax InspectorDetailed Analysis:1. Revocation of Tax Clearances:Matrix Securities Ltd. ('Matrix') sought a declaration that the Inland Revenue Commissioners could not revoke tax clearances given by letters dated 27 July 1993 and confirmed on 10 September 1993. The Court of Appeal, with Dillon and Noland L.JJ. (Roch L.J. dissenting), refused to make the declaration, and Matrix appealed.The judgment emphasized that the clearance given by the local tax inspector was based on inaccurate and misleading information provided by Matrix. The letter dated 15 July 1993 from Theodore Goddard to the inspector asserted a purchase price of lb95m for the relevant interest, whereas the real price offered by Matrix to the receiver was lb8m. This discrepancy led to the conclusion that the tax clearance was based on a fiscal price designed to exploit tax advantages rather than real expenditure.2. Capital Allowances Eligibility:Matrix's scheme involved investors in trust units financing construction in enterprise zones, aiming to claim capital allowances under the Capital Allowances Act 1990. The Act provides that an initial allowance is payable on actual or deemed expenditure. The scheme proposed by Matrix was designed to claim an initial allowance of lb38m based on a fiscal price of lb95m, despite the real expenditure being significantly lower.The judgment concluded that the scheme was a sophisticated tax avoidance mechanism, aiming to produce fiscal expenditure of lb95m while only incurring real expenditure of lb18m. The court emphasized that fiscal consequences must correspond to real consequences, and thus, the claim for an initial allowance of lb38m based on a pretended expenditure of lb95m must fail.3. Full Disclosure Requirement:The judgment highlighted the necessity for full disclosure when seeking advance clearance from the revenue. The letter from Theodore Goddard on 15 July 1993 did not disclose the real purchase price of lb8m offered to the receiver, which was critical information for the revenue to determine the eligibility for capital allowances.The court emphasized that full disclosure is essential for the revenue to make an informed decision. The failure to disclose the real price and the reliance on a fiscal price designed to exploit tax advantages constituted a breach of the requirement for full disclosure.4. Tax Avoidance Scheme:The judgment identified the South Quay trust as a tax avoidance scheme designed to plunder the Treasury of lb38m in initial allowances instead of the actual allowances of lb3.2m for the purchase price and lb4m for the Wimpey expenditure, totaling lb7.2m. The scheme involved circular, self-cancelling transactions, which were rejected in previous cases such as Black Nominees Ltd. v. Nicol, W. T. Ramsay Ltd. v. Inland Revenue Commissioners, and Ensign Tankers (Leasing) Ltd. v. Stokes.The judgment concluded that the scheme's primary objective was to maximize tax allowances for individual investors, which was not permissible under the law. The court emphasized that tax avoidance schemes must be construed as a whole, and the taxing statute must be applied to the real results achieved by the scheme.5. Authority of Local Tax Inspector:The judgment questioned the authority of the local tax inspector to provide clearance for such a complex scheme. The letter from the Financial Institutions Division of the Inland Revenue dated 6 May 1993 indicated that clearance for schemes involving a put option should be handled centrally by the Financial Institutions Division, not by local inspectors.The court concluded that Matrix should have directed their request for clearance to the Financial Institutions Division, given the complexity of the scheme and the presence of a put option. The local inspector's clearance was therefore not binding on the revenue, and the revenue was entitled to revoke the clearance based on the lack of full disclosure and the inspector's lack of authority.Conclusion:The appeal was dismissed, and the court held that the revenue was entitled to revoke the tax clearances given by the local inspector. The judgment emphasized the importance of full disclosure, the correspondence between fiscal and real expenditure, and the proper authority for granting tax clearances in complex schemes. Matrix was ordered to pay the costs of the revenue.