TaxTMI 
TaxTMI 
1994 (2) TMI 310
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....March 1989 South Docklands 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 GBP28.1m. On the same day the benefit of the building contract with Wimpey was also assigned to S.Q.L. Sums amounting to GBP44m. were paid by S.Q.L. to Wimpey for the continued construction of the buildings. S.Q.L. incurred debts of about GBP60m. 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 GBP6m. 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 GBP10m. to be expended in order to complete them and make them ready for letting. Matrix carried on business as organisers of Enterprise Zone Property Unit Trusts whe....
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.... 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 GBP10m. to complete the building and would be entitled under section 1 of the Act of 1990 to recover from the revenue the sum of GBP4m. 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 which formed the....
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....ogether with repayment of the loan of GBP10m. 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 GBP5.7m. 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 GBP64,125,000. By paragraph 1.16 when the investors decide to sell the property, Newco must surrender the Newco lease and pay a premium of GBP64,125,000 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 GBP34m. 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 Hill Samuel Bank. Paragraph 1.12 said that a facilit....
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....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 GBP95m. 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 hand from the relevant valuer." On 19 August 1993 Matrix wrote to the receiver as follows : ....
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....o 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 : " The various alterations made to the draft exhibited to me in July do not affect the substance of my letter of ....
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.... that the price to be paid by the trustee for the relevant interest was GBP95m. On this basis the initial allowance was GBP38m. The letter dated 19 August 1993 from Matrix to the receiver offered GBP8m. for the relevant interest. On this basis the initial allowance was GBP3.2m. and if a further GBP10m. were expended in completing the buildings there would be a further initial allowance of GBP2.5m. making a total of GBP5.7m. 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 GBP25,000. The application must be accompanied by a cash payment of GBP325 for every GBP1,000 applied for. When the trustee has received GBP30,875,000 in cash from investors in respect of applications for GBP95m. of units, the trustee will purchase the South Quay development. The information memorandum offers 95 million South Q....
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....(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 GBP64,125,000. 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 GBP64,125,000. These transactions will constitute an annual circle of self-cancelling payments of GBP5.7m. 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 GBP64,125,000 for the long lease. Hill Samuel will provide a draft for GBP64,125,000 and hand that draft to Hill Samuel (Jersey) in repayment of the loan of that amount from Hill Samuel (Jersey) to Hill Samuel. The draft will be handed on by Hill Samuel (Jersey) to S.Q.P.L. in repayment of the loan from S.Q.P.L. to Hill Samuel (Jersey) of GBP64,125,000. S.Q.P.L. will hand the draft to the trustee in payment of the premium of GBP64,125,000 for the long lease. The trustee will ....
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....ustee 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 GBP95m. for the relevant interest and the letter dated 19 August 1993 to the receiver which refers to a price of GBP8m. The price of GBP8m. 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 GBP3.2m. The price of GBP95m. in the letter dated 15 July 1993 from Theodore Goddard on behalf of Matrix to the inspector is the fiscal price, being a figure fixed by Matrix to enable the investors to claim a tax advantage of GBP38m. without expending GBP95m. on the relevant interest. If the fiscal price h....
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.... 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 GBP64,125,000. The pretence was that the investors were expending GBP64,125,000. 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 Ensign Tankers (Leasing) Ltd. v. Stokes [1992] 1 A.C. 655. In Inland Revenue Commissioners v. Fitzwilliam @ [1993] 1 W.L.R. 1189 the majority failed to take into account the nature and effect of the transaction regarded as a whole. The authorities disclose that unacceptable tax avoidance schemes exhibit several similar or identical characteristics. A scheme may of course include ....
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....penditure of GBP10m. and relevant deemed expenditure of GBP8m. The claim to initial tax allowance of GBP38m. based on a pretended expenditure of GBP95m. 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 it might have been, I have no doubt that if the inspector had read it carefully he would have realised either that it was a tax avoidance scheme or at the very least it should be considered by the specialist division of the Inland Revenue before clearance was given. In either case he should not have given his clearance. The scheme involved a valuable put option. Matrix knew that the specialist division was not prepared....
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....0 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 GBP8m. for the purchase of South Quay stating that the offer would involve a series of transactions which were "necessary to preserve tax allowances available on the buildings and would be required for any capital allowance based tax scheme . . ." The word "preserve," as will become apparent, was somewhat of a euphemism. In the meantime, Matrix and their legal advisers had been devising a scheme which it was hoped would be attractive to investors and would also satisfy the revenue as to i....
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....co 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 GBP5.7. 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 GBP64,125,000 payable by Newco to the trustee, together with a nominal rent. This premium would then be used to repay to Hill Samuel the loans to the investor. Hill Samuel would repay to Hill Samuel (Jersey) Ltd. their loan of GBP64,125,000 and Hill Samuel (Jersey) Ltd. would, in turn, repay to Newco the loan of that sum which Newco had made out of the reverse premium received in respect of the lease. In the event of a sale by Newco of its interest under either the 99- year lease or any longer lease which it had been required to take under the exit arrangements, 80 per cent. of the net proceeds of an....
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....ly 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 May 1993 an officer of the Financial Institutions Division of the revenue wrote to the Chairman of the Enterprise Zone Property Unit Trust Association in the following, inter alia, terms : " We have had further enquiries 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....
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.... 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 know that the board cannot undertake not to challenge certain aspects of the scheme if it proceeds. " 2. There are three main reasons why we think the inspector was wrong to give those assurances. " 3. First, it appears to us that investors will not incur expenditure for capital allowances purposes to the extent that their investments are funded by the Hill Samuel loan facility. In substance these loans may fall within the scope of the decision of the House of Lords in Ensign Tankers (Leasing) Ltd. v. Stokes. [1992] 1 A.C. 655. ....
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....andum 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 different from those of the present appeal, my noble and learned friend, Lord Templeman, said, at p. 864 : " The court can only intervene by judicial review to direct the commissioners to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that the 'unfairness' of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power by the commissioners. " He said, at pages 866-....
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.... 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 ruling has already been given. " My Lords, I have no doubt that Bingham L.J. was absolutely correct in stating that in the circumstances posited the taxpayer must put all his cards face upwards on the table. I have equally no doubt that this is the sort of case which Bingham L.J. had in mind. However, before considering whether Matrix had done what was required of it, it is necessary to look at the relevant provisions of the Capital Allowances Act 1990, as amended by the Finance (No. 2) Act 1992, section 70, Schedule 13, paragraph....
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.... 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 Division, nor informed him specifically that there might be a question as to whether the scheme involved a put option element. Further, Matrix failed to mention the GBP8m. agreed as the price of S.Q.L.'s interest and they should have put the matter to the Financial Institutions Division given, in particular, the put option element in the scheme. In the Court of Appeal Dillon L.J. concluded that the fact that Matrix had approached the inspector rather than the Financial Institution's Division did not of itself justify the revenue in....
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....trix' offer to them of GBP8m. ? 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-year Newco lease. It would appear that it was for that interest that Matrix were prepared to pay GBP8m. In determining what was the net price by reference to which any allowance would be available the revenue would, in the present case, require not only to have regard to the figure of GBP95m. but also to consider whether, and if so to what extent, that sum was properly attributable to the relevant interest. The fact that Matrix was prepared to purchase the receiver's interest in the property for GBP8m. would have been a vital piece of information to the revenue in performing....
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....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 the future the Financial Institutions Division will continue to apply the law as they see it. Notwithstanding the foregoing warning Matrix chose to proceed with a scheme which included a put option and on the basis of a clearance which did not bear to have been given with the authority of the Financial Institutions Division. They cannot now complain that revocation of such a clearance would be unfair to them. It is of great advantage to taxpayers and their advisers that the revenue should continue to implement the practice described in their statement of 18 October 1990 to "continue where practical to inform pract....
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....tain 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 legislation in a sense contrary to the assurance given : Reg. v. Inland Revenue Commissioners, Ex parte Preston [1985] A.C. 835. But the courts can only restrain the revenue from carrying out its duties to enforce taxation obligations imposed by legislation where the assurances given by the revenue make it unfair to contend for a different tax consequence, as a result of which unfairness the exercise of its statutory powers by the revenue would constitute an abuse of power : see per Lord Templeman, at page 864G. It is further established that if the tax- payer, in seeking advance clearance, had not made a full disclosure....
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.... 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 particular case, but will continue to apply the law as we see it in other cases. " The letter therefore makes it clear that, for the future, advance clearances given at local level relating to schemes which contain a put option would not bind the revenue but that they would, notwithstanding any such clearance, continue to apply the law as the revenue saw it to be. In those circumstances, I find it hard to understand how it came about that on 15 July 1993 Matrix's solicitors (who knew of the contents of the letter of 6 May) addressed their request for clearance of a scheme which, to their knowledge, contained a put option not t....