TaxTMI 
TaxTMI 
TaxTMI 
1994 (2) TMI 310
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....klands Ltd. granted to W.W.L. a lease of the site of the three buildings for a term of 200 years. Construction of the buildings began. On 6 August 1989 the freehold reversion expectant on the determination of the term created by the 200 year lease was conveyed to W.W.L. but the lease was not merged in the freehold. On 1 October 1990 the 200 year lease and the freehold reversion were assigned and conveyed by W.W.L. to South Quay Ltd. ("S.Q.L.") for the sum of £28.1m. On the same day the benefit of the building contract with Wimpey was also assigned to S.Q.L. Sums amounting to £44m. were paid by S.Q.L. to Wimpey for the continued construction of the buildings. S.Q.L. incurred debts of about £60m. owed to a consortium of six banks which included Hill Samuel Bank Ltd. ("Hill Samuel"). That bank was entitled to 10 per cent. or about £6m. of the debts owed by S.Q.L. to the consortium. In May 1992 Cork Gully was appointed administrative receiver to S.Q.L. and the buildings now require a further £10m. to be expended in order to complete them and make them ready for letting. Matrix carried on business as organisers of Enterprise Zone Proper....
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.... shall have effect as if the words 'the actual expenditure or to' and 'whichever is the less' were omitted ; and (b) in any other case, that paragraph shall have effect as if the reference to the actual expenditure were a reference to the price paid on that sale." Both W.W.L. and S.Q.L. were traders for the purposes of section 10A(9). Neither of them could claim initial allowances under section 1 because their expenditure on the three buildings was not capital expenditure but an expense which they could bring into account in calculating their income liable to corporation tax. The receiver of S.Q.L. sought a purchaser of the interests of S.Q.L. in South Quay. That purchaser would be obliged to expend £10m. to complete the building and would be entitled under section 1 of the Act of 1990 to recover from the revenue the sum of £4m. being tax at 40 per cent. on the initial allowance of 100 per cent. of the actual expenditure. The purchaser would also be entitled under section 10A of the Act of 1990 to recover 40 per cent. of deemed expenditure equal to his purchase price. There might be some discount from the purchase price for the value of the land w....
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....ely £70m. This payment together with repayment of the loan of £10m. will be funded by the receipt of the purchase consideration on the sale. Newco will be a company incorporated and managed and controlled in Jersey. The shares in Newco will be owned by Matrix. " Paragraph 1.10 set out some of the terms of the Newco lease including payment of an annual rent of £5.7m. for the first 10 years and an option to the trustee on or after the expiration of the tenth year of the Newco lease to require Newco to surrender the Newco lease and take a long lease at a nominal rent for a premium of £64,125,000. By paragraph 1.16 when the investors decide to sell the property, Newco must surrender the Newco lease and pay a premium of £64,125,000 for the grant of a long lease for 500 years at a nominal rent. That long lease and the freehold must then be sold to a purchaser and the price paid by the purchaser is divisible as to 90 per cent. up to £34m. and as to 50 per cent. of the proceeds in excess of that figure to the trustee and as to the balance to Newco. Paragraph 1.11 explained that Newco's obligations under the Newco lease would be guaranteed by H....
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....ranted." Paragraph 3 was entitled "Confirmations" and was in these terms : "3. We would be most grateful if, on behalf of Matrix, the trustee and the investors, you would confirm that : 3.1 100 per cent. initial capital allowances will indeed be available to each investor in respect of his share of the purchase price of £95m. to be paid by the trustee to S.Q.L., less his share of the disallowable land element ; 3.2 sums paid in respect of rents under the Newco lease will constitute rental receipts (i.e., schedule A receipts from the letting of land as detailed in sections 15 and 355(4) of the Income and Corporation Taxes Act 1988) ; and 3.3 Investors will be entitled to claim interest relief, pursuant to section 354 of the Income and Corporation Taxes Act 1988, in respect of the interest payable by them on loans used to acquire their units. " By a letter dated 27 July 1993 the inspector wrote to Theodore Goddard saying : " Your letter of 15 July refers. "I confirm the items numbered 3.1, 3.2 and 3.3 on page 5 of the above letter are agreed. The precise figures for capital allowances to be agreed when the land element figures are to h....
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....bstantially the same as that envisaged in our earlier letter." The letter described seven changes which do not require comment save that in paragraph 7 the inspector was asked to : " note that the trust will now be entitled to 80 per cent. of the occupational rents throughout the lease which will be net of expenses and that the share of proceeds as described in paragraph 1.15 in our letter will be 80 per cent. of all proceeds. " The remaining 20 per cent. of the occupational rents and proceeds of sale will be enjoyed by Matrix. The letter dated 9 September 1993 asked the inspector to confirm that the clearances given in his letter of 27 July were still valid in the light of the information contained in the letter dated 9 September 1993 and the information memorandum and continued : " As mentioned to you, our clients intend to launch the trust on Monday 13 September. You have however kindly agreed to provide us with a response by Thursday, 9 September. " The letter dated 9 September 1993 and the information memorandum were delivered to the inspector on the morning of 9 September 1993 and the following day he replied in writing as follows : " T....
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.... price paid by a purchaser for the relevant interest. The letter dated 15 July from Theodore Goddard to the inspector asserted that the price to be paid by the trustee for the relevant interest was £95m. On this basis the initial allowance was £38m. The letter dated 19 August 1993 from Matrix to the receiver offered £8m. for the relevant interest. On this basis the initial allowance was £3.2m. and if a further £10m. were expended in completing the buildings there would be a further initial allowance of £2.5m. making a total of £5.7m. recoverable from the revenue. The result of this appeal depends on the resolution of the contradictions between the letter dated 15 July 1993 from Theodore Goddard to the inspector and the letter dated 19 August 1993 from Matrix to the receiver. By the information memorandum, investors liable to pay income tax at the highest rate of 40 per cent. were invited to apply for units in the South Quay Trust. The minimum application must be £25,000. The application must be accompanied by a cash payment of £325 for every £1,000 applied for. When the trustee has received £30,875,000 in cash from ....
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....remony at which Hill Samuel provide a draft for £5.7m. That draft will be handed by Hill Samuel to Hill Samuel (Jersey) in payment of the interest due from Hill Samuel to Hill Samuel (Jersey) on its loan of £64,125,000. Hill Samuel (Jersey) will hand the draft to S.Q.P.L. in payment of the interest due from Hill Samuel (Jersey) to S.Q.P.L. on its loan of £64,125,000. S.Q.P.L. will hand the draft to the trustee in payments of the basic rent. The trustee will return the draft to Hill Samuel, whence it came, in payment of the interest due from the investors to Hill Samuel on their loans of £64,125,000. These transactions will constitute an annual circle of self-cancelling payments of £5.7m. so long as the Newco lease is allowed to continue by the trustee. When the investors decide that the South Quay development shall be sold, the trustee will call for the surrender of the Newco lease and for the payment by S.Q.P.L. of a premium of £64,125,000 for the long lease. Hill Samuel will provide a draft for £64,125,000 and hand that draft to Hill Samuel (Jersey) in repayment of the loan of that amount from Hill Samuel (Jersey) to Hill Samuel. The dra....
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....el is appointed the attorney of the trustee and the investors to require the Newco lease to be surrendered and the premium of £64,125,000 to be paid and received. In addition Hill Samuel is entitled to set off rent against interest. After the final circle has been completed the trustee and S.Q.P.L. will convey and assign the South Quay development to a purchaser in fee simple freed from the long lease. The purchase price will be divided as to 80 per cent. to the trustee for the investors and as to 20 per cent. to Matrix. It is now possible to resolve the contradiction between the letter dated 15 July 1993 to the inspector which refers to a price of £95m. for the relevant interest and the letter dated 19 August 1993 to the receiver which refers to a price of £8m. The price of £8m. in the letter dated 19 August 1993 from Matrix to the receiver is the real price, being the consideration for the sale by the receiver and the purchase by the trustee of the relevant interest, namely the freehold and the 200-year lease of the South Quay development and will be expenditure on the relevant interest which entitles the investors to an initial allowance of £3.2m....
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....tarts. The South Quay trust is a tax avoidance scheme because it aims to produce fiscal expenditure of £95m. and real expenditure of only £18m. ; see Commissioner of Inland Revenue v. Challenge Corporation Ltd. [1987] A.C. 155, 168. The courts have long since insisted that fiscal consequences correspond to real consequences. Every tax avoidance scheme involves a trick and a pretence. It is the task of the revenue to unravel the trick and the duty of the court to ignore the pretence. In the present case the principal trick employed consisted of circular, self-cancelling payments of £64,125,000. The pretence was that the investors were expending £64,125,000. The trick of circular, self-cancelling payments with matching receipts and payments was rejected in each of the following cases : Black Nominees Ltd. v. Nicol [1975] 50 T.C. 229 ; W. T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A. C. 300 (see also [1979] 1 W.L.R. 974, 979 C.A.) ; Eilbeck v. Rawling [1982] A.C. 300 (see also [1980] 2 All E.R. 12, 21, C.A.) ; Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [1981] 54 T.C. 200 ; Moodie v. Inland Revenue Commissioners [1993] 1 W.L.R. 266 and Ensi....
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....itors and counsel. In addition Matrix will receive 20 per cent. of the South Quay development which may ultimately be worth £100m. or more. Once a tax avoidance scheme has been identified, the scheme must be construed as a whole and the taxing statute must be applied to the results in fact achieved by the scheme. Applying the Act of 1990, the Matrix scheme as a whole will result in relevant actual expenditure of £10m. and relevant deemed expenditure of £8m. The claim to initial tax allowance of £38m. based on a pretended expenditure of £95m. must fail. The letter dated 15 July 1993 was inaccurate and misleading. The revenue are therefore entitled to withdraw the clearance obtained as a result of that letter and the appeal must be dismissed. Matrix must pay the costs of the revenue of these proceedings and before the House. Lord Griffiths. In this case a local tax inspector made a bad mistake. He gave clearance to a scheme proposed by Matrix Securities which Lord Templeman has exposed as a manifestly impermissible tax avoidance scheme. Although the letter of 15 July 1993 in which Matrix put the scheme to the inspector was not expressed as clearly as i....
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....h circumstances. Lord Jauncey of Tullichettle. My Lords, the issue in this appeal is whether the revenue are entitled to revoke tax clearances given to Matrix by a local tax inspector in respect of a proposed enterprise zone property unit trust of which Matrix were the sponsors. The clearances related to the eligibility of unit holders to receive a 100 per cent. initial allowance under the Capital Allowances Act 1990 in respect of expenditure on buildings forming the proposed trust property. The relevant history of the proposed trust property which consisted of land at South Quay, Marsh Wall Development, in the Isle of Dogs (Docklands) Enterprise Zone is summarised in the speech of my noble and learned friend, Lord Templeman, which summary I gratefully adopt. Matrix had sponsored other Enterprise Zone Property Unit Trusts ("E.Z.P.T.s") in Swansea and Dudley in the early part of 1993 and in the early summer of 1993 they became interested in the purchase of S.Q.L.s. interest in the trust property. To this end they approached the receivers of S.Q.L. and by letter of 19 August 1993 offered them the net sum of £8m. for the purchase of South Quay stating that the offer ....
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....sey) Ltd. which would in turn subparticipate them to Newco. Therefore, on receipt of the £72,125,000 reverse premium Newco would lend £64,125,000 to Hill Samuel (Jersey) Ltd., who would in turn lend it back to Hill Samuel. Newco would deal with the remaining £8m. by placing £5.5m. on deposit with Hill Samuel (Jersey) and by paying £2.5m. to Hill Samuel in respect of a guarantee of Newco's obligations under the 99-year lease. (5) Rent of £5.7m. was to be paid under the 99-year lease by Newco to the trustees, which rent was payable to the investors. However, as the investor's units were charged to Hill Samuel, the bank would use the rents to meet the interest payments of £5.7. which were due to the bank in respect of the loans to the investors. (6) Intended as one of the attractions of the scheme were the "exit arrangements" which were embodied in the 99-year lease. It was provided that after a period of 10 years, or earlier, in certain circumstances the trustees could require Newco to take a long sub-lease carved out of the 198-year lease for a premium of £64,125,000 payable by Newco to the trustee, together with ....
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....he consideration which relates to the land element. 3.3 The sums paid in respect of rents under the proposed leases (and if necessary, bank guarantees) will constitute Schedule A receipts from the letting of the land, as detailed in sections 15 and 355(4) of the Income and Corporation Taxes Act 1988 ; . . . " By letter of 26 February 1993 Mr. Fairley replied as follows : " I refer to your faxed letter of 23 February and to our subsequent telephone conversation. You have asked for three confirmations : 3.1 This matter is being handled centrally by my Head Office. I have submitted the papers and await a response. 3.2 and 3.3 On both of these I can confirm the position provided of course that the final arrangements do not differ from those contained in the draft proposals." Mr. Fairley reconfirmed the matter by a faxed letter of 5 March 1993. In the case of the Dudley E.Z.P.T., Messrs. Theodore Goddard, by letter of 15 March, similar to that of 23 February sought confirmation that 100 per cent. initial allowances might be made in respect of the purchase price of the property less the land element. This confirmation was forthcoming on the same day. On 6 Ma....
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.... the relevant parts of the letter of 9 September and the information memorandum are set out in the speech of my noble and learned friend, and I gratefully adopt his account thereof. It will, however, be noted that neither in that letter nor in the memorandum was there any reference to the offer by Matrix of 19 August 1993 to purchase the property at South Quay for £8m. Thereafter, in the light of the two confirmations given by Mr. Fairley, Matrix proceeded to implement the scheme and incurred expense of approximately £1m. On 8 October 1993 Mr. M. Templeman, the Director of the Revenue's Financial Institutions Division, wrote to Messrs. Theodore Goddard in the following terms : " Dear Sirs, " Matrix South Quay Trust " 1. We have recently noticed press reports about the Matrix South Quay Trust and we have considered the letter of 15 July 1993 which you wrote to the inspector at Piccadilly District. We have also considered carefully the reply he sent you on 27 July 1993 and we have concluded that, on the facts available, he should not have given you assurances in the terms he did. We think that we should take the first opportunity of letting you k....
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....x's appeal was dismissed by a majority of the Court of Appeal, Dillon and Nolan L.JJ., Roch L.J. dissenting. In his affidavit Mr. Fairley stated that he knew that he had no authority to approve the scheme which was a matter for head office. He disclosed that he had not paid much attention to the details in paragraphs 1 and 2 of the letter of 15 July since he regarded this as the province of the head office specialist. However, he forgot to send the papers to head office. He further stated that he did not consider at all the memorandum sent with the letter of 9 September and, once again, forgot to send the papers to head office. Notwithstanding these remarkable revelations, Mr. Fairley proffered no comprehensible explanation as to why he had given the clearances in his letter of 27 July. I turn now to the law applicable to this appeal which raises, first, the issue of whether the conduct of the revenue in seeking to revoke the clearances constituted unfairness amounting to abuse of power and, secondly, the general applicability of the Act of 1990 to the scheme. In Reg. v. Inland Revenue Commissioners, Ex parte Preston [1985] A.C. 835, in which the circumstances were very diff....
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....rial had not been made by the taxpayer prior to the making of the representation. In Reg. v. Inland Revenue Commissioners, Ex parte M.F.K. Underwriting Agents Ltd. [1990] 1 W.L.R. 1545, Bingham L.J., after referring to the publication by the revenue to the world of a formal statement said, at page 1569 : " But where the approach to the revenue is of a less formal nature a more detailed inquiry is in my view necessary. If it is to be successfully said that as a result of such an approach the revenue has agreed to forgo, or has represented that it will forgo, tax which might arguably be payable on a proper construction of the relevant legislation it would in my judgment be ordinarily necessary for the taxpayer to show that certain conditions had been fulfilled. I say 'ordinarily' to allow for the exceptional case where different rules might be appropriate, but the necessity in my view exists here. First, it is necessary that the taxpayer should have put all his cards face upwards on the table. This means that he must give full details of the specific transaction on which he seeks the revenue's ruling, unless it is the same as an earlier transaction on which a ruli....
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....39; were omitted ; and (b) in any other case, that paragraph shall have effect as if the reference to the actual expenditure were a reference to the price paid on that sale. " In terms of paragraph (a) of this subsection, it would appear that it might be possible to obtain an allowance which exceeded the actual expenditure on the construction of a building provided that the net price paid for the relevant interest exceeded that sum. However, it is abundantly clear from these provisions that capital allowances are to be made only in respect of real expenditure or real purchase prices paid for the relevant interest. "Relevant interest" is defined in section 20(1) : " (1) Subject to the provisions of this section, in this Part, 'the relevant interest' means, in relation to any expenditure incurred on the construction of a building or structure, the interest in that building or structure to which the person who incurred the expenditure was entitled when he incurred it. " Laws J. considered that Matrix failed to make full disclosure in as much as it neither sent to Mr. Fairley a copy of the letter of 6 May 1993 from the Financial Institutions Divi....
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....tated that the receivers of S.Q.L. after borrowing £10m. to pay Wimpey to complete the work under the construction contract and granting to Newco a 99-year lease, would sell the property to the trustees for £95m. paying out of said sum the £10m. loan and the reverse premium of £70m., or thereby. One does not need to be a mathematical genius to infer from these paragraphs that the receiver would ultimately be left with no more than £15m. How then is the figure of £95m. payable to the receivers in terms of the scheme to be reconciled with Matrix' offer to them of £8m. ? Neither the letter of 9 September 1993 nor the accompanying memorandum of information attempts to answer this question. My Lords, the figure by reference to which a capital allowance is available under section 10A(9)(a) is the net price paid for the relevant interest which, by virtue of section 20, means the interest in the building to which the person who incurs the expenditure was entitled when (the emphasis is mine) he incurred it. In this case that would have been the interest of S.Q.L. as freeholders and under the 200-year lease before the receivers granted the 99-ye....
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....e unidentified letter then I consider that he should have gone on to draw the attention of Mr. Fairely to the contents thereof. There was some argument to the effect that the letter of 15 July should, having regard to the terms of the letter of 6 May, have been sent to the Financial Institutions Division at Head Office and not to the local tax inspector. Had there been evidence to suggest that Mr. Fairley was known to Matrix prior to 15 July to be incompetent and suffering apparently from a degree of amnesia, it may well be that disclosure to him might per se have failed to constitute full disclosure. However, there was no such evidence. The letter of 15 July enclosed a copy for reference to specialists, if required, and I consider that Matrix at that date were entitled to assume that Mr. Fairley was a reasonably competent inspector of taxes who would refer any matter which was beyond his competence or authority to those officers of the revenue who had the necessary skills and powers. However, the letter of 6 May 1993 is important in as much as it expresses doubts as to whether expenditure on a put option qualifies for relief under section 1 of the Act of 1990 and warns that in t....
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....ed to consider the actual consequences for tax purposes which the proposed scheme would have given rise to if implemented. It is the statutory function of the revenue to collect the taxes which Parliament has legislated are to be payable. The tax liability which any given transaction attracts can only be determined by the courts after the transaction has been carried through. But the financial viability of many transactions depends upon its tax repercussions. Therefore taxpayers frequently need to know the tax consequences of a transaction before carrying it through. To meet this need, the revenue are prepared in certain circumstances to give advance assurances as to the tax repercussions of a transaction so that the parties can proceed with confidence. This practice is of the greatest benefit to taxpayers and it would not be in the public interest to discontinue it. It is now established that, in certain circumstances, it is an abuse of power for the revenue to seek to extract tax contrary to an advance clearance given by the revenue. In such circumstances, the taxpayers can by way of judicial review apply for an order preventing the revenue from seeking to enforce the tax legis....
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....as included a "put option" viz. "the exit arrangements" summarised in the speech of my noble and learned friend, Lord Jauncey of Tullichettle. In earlier drafts of the scheme the exit arrangements were defined as a put option. Before any clearance was sought by Matrix or its solicitors in relation to the present scheme, they were aware of the letter dated 6 May 1993 from the Financial Institutions Division of the Revenue to the Chairman of the Enterprise Zone Property Unit Trust Association which reads : " We have had further inquiries from some of your members about this and so I thought it would be as well to restate our position. Our view remains that a unit trust scheme acquiring property which includes a put option may not satisfy the test in regulation 4(2) of the 1988 Regulations. Furthermore, we also have doubts that expenditure on a put option qualifies for relief under section 1 Capital Allowances Act 1990. This is the view we seek to apply consistently in this area. We are aware, however, of a recent instance where assurances were given locally which conflict with that view. We felt bound by those assurances in the circumstances of that particu....