“ First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case….It did not in Ramsay . Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not 'no business effect' . If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied. In the instant case the inserted step was the introduction of [IoM] as a buyer from the [taxpayers] and as a seller to [the third party]. That inserted step had no business purpose apart from the deferment of tax, although it had a business effect….” 231. However, as set out in detail below, the House of Lords and the Supreme Court have been at pains to clarify that the view that the composite approach embodies a new jurisprudence governed by special rules of its own is a misconception. They have set out clearly that (a) Ramsay itself does not set out any such special principle, and (b) in Furniss and the other relevant cases, the courts were not laying down any such special principle or interpreting Ramsay as doing so. MacNiven and BMBF 232. In MacNiven v Westmoreland Investments Ltd[2003] 1 AC 311 (“ MacNiven ”), the House of Lords held that a debtor made a payment of interest within the meaning of the relevant statute which entitled him to a deduction or repayment of tax notwithstanding that it was funded by monies borrowed for that purpose from the creditor himself and was made solely to reduce the debtor’s liability to tax. The House of Lords said that the purpose of requiring interest to be “paid” is to produce symmetry; it gives a right to a deduction in respect of any payment which gives rise to a corresponding tax liability for the recipient (or which would do so if the recipient is a taxable entity.) As the payment was accepted to have had this effect, it answered the statutory description. 233. In reviewing the Ramsay line of cases, Lord Nicholls emphasised that in Ramsay “the House did not enunciate any new legal principle” but rather highlighted that, “confronted with new and sophisticated tax avoidance devices, the courts’ duty is to determine the legal nature of the transactions in question and then relate them to the fiscal legislation….” (at [1]). He noted, at [2] to [5] that Ramsay brought out the following three points, in particular: (1) When seeking to attach a tax consequence to a transaction, the court may have regard to the overall effect of a series or combination of transactions intended to operate as such and: “ .. Courts are entitled to look at a pre-arranged tax avoidance scheme as a whole. It matters not whether the parties’ intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force”. (2) That does not mean that transactions or relevant steps are to be treated as “shams” nor does it require going “behind a transaction for some supposed underlying substance”
“For instance, if the scheme has the apparently magical result of creating a loss without the taxpayer suffering any financial detriment, is this artificial loss a loss within the meaning of the relevant statutory provision ?” 234. Lord Nicholls, therefore, specifically endorsed the composite approach. He then referred with approval, at [6], to the comments of Lord Steyn and Lord Cooke of Thorndon in Inland Revenue Commissioners v McGuckian[1997] 1 WLR 991 (“ McGuckian ”) at 1000 and 1005 respectively. He noted that they said that this approach (as Lord Nicholls had described it, including the composite approach) “is an exemplification of the established purposive approach to the interpretation of statutes” and “an application to taxing Acts of the general approach to statutory interpretation whereby, in determining the natural meaning of particular expressions in their context, weight is given to the purpose and spirit of the legislation”. 235. At [7], he cautioned that the observations on the Ramsay approach in some later decisions should be read in the context of the particular statutory provisions and sets of facts under consideration and that they: “cannot be understood as laying down factual pre-requisites which must exist before the court may apply the purposive, Ramsay approach to the interpretation of a taxing statute. That would be to misunderstand the nature of the decision in Ramsay .” 236. Whilst he “readily accepted”, at [8], that the factual situation described by Lord Brightman in Furniss is one where, typically, the Ramsay approach will be “a valuable aid” which may well often have the effect he set out, it really is just an aid and: “This is not an area for absolutes. The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case. Further, as I have sought to explain, Ramsay did not introduce a new legal principle. It would be wrong, therefore, to set bounds to the circumstances in which the Ramsay approach may be appropriate and helpful. The need to consider a document or transaction in its proper context, and the need to adopt a purposive approach when construing taxation legislation, are principles of general application. Where this leads depends upon the particular set of facts and the particular statute …..” (Emphasis added.)
“The point to hold onto is that something may be real for one purpose but not for another”
“If the statutory language is construed as referring to a commercial concept, then it follows that steps which have no commercial purpose but which have been artificially inserted for tax purposes into a composite transaction will not affect the answer to the statutory question. When Lord Brightman said that the inserted steps are to be "disregarded for fiscal purposes", I think that he meant that they should be disregarded for the purpose of applying the relevant fiscal concept.” 242. He emphasised at [49] that this formulation “is not a principle of construction” but is “rather a “statement of the consequences of giving a commercial construction to a fiscal concept”
“ it is first necessary to construe the statutory language and decide that it refers to a concept which Parliament intended to be given a commercial meaning capable of transcending the juristic individuality of its component parts. But there are many terms in tax legislation which cannot be construed in this way. They refer to purely legal concepts which have no broader commercial meaning. In such cases, the Ramsay principle can have no application. It is necessary to make this point because, in the first flush of victory after the Ramsay , Burmah and Furniss cases , there was a tendency on the part of the Inland Revenue to treat Lord Brightman's words as if they were a broad spectrum antibiotic which killed off all tax avoidance schemes, whatever the tax and whatever the relevant statutory provisions.” 243. He noted, at [50], that the distinction between commercial and legal concepts has also been drawn in other areas of legislation and noted “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”. 244. He also approved the comments in the McGuckian case which Lord Nicholls referred to and suggested, at [56], that particular attention should be paid to the way Lord Cooke of Thorndon dealt with the criteria stated by Lord Brightman in Furniss. He said that: “if the ultimate question is always the true bearing of a particular taxing provision on a particular set of facts, the limitations [in Furniss ] cannot be universals. Always one must go back to the discernible intent of the taxing Act ” and that he suspected that “the advisers of those bent on tax avoidance...do not always pay sufficient heed to the theme in the speeches in the Furniss case...to the effect that the journey's end may not yet have been found”. (Emphasis added.) 245. Lord Hoffmann concluded, at [58] and [59], by again referring to the distinction between legal and commercial concepts: “The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts…If a transaction falls within the legal description, it makes no difference that it has no business purpose. Having a business purpose is not part of the relevant concept… Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries on this topic.” 246. In the later cases, such as BMBF , the House of Lords clarified that Lord Hoffmann’s words are not to be interpreted as meaning that there is an a priori assumption that statutory concepts should be classified into legal or commercial ones before a Ramsay approach can be applied. As set out below, in BMBF Lord Nicholls referred to Ribeiro PJ’s comments in Arrowtown , at [37] and [39]. Ribeiro PJ said that he did not think that Lord Hoffmann “actually intended to lay down a mechanistic test based on a “commercial”/“legal” dichotomy for pre-determining whether a particular provision is or is not susceptible to a Ramsay approach” and that: “ the “valuable insights” that Lord Hoffmann was acknowledging [as regards Lord Brightman’s comment in Furniss ] were all centred on the proposition that the Ramsay doctrine has at its core the purposive interpretation of statutes applied to facts viewed realistically and untrammelled by “limitations” which might be thought to arise out of Lord Brightman’s formulation. Such an approach strikes me as the antithesis of a mechanistic use of the “commercial”/“legal” dichotomy as a straitjacket limiting construction of the relevant statute…” [as Ribeiro PJ thought was reinforced by Lord Hoffmann’s comments at [50]]. BMBF 247. If any further clarification were needed on the effect of the decision in Ramsay Lord Nicholls provided this in giving the unanimous judgment of the House of Lords BMBF in what is now widely regarded as the definitive word on this topic. 248. BMBF concerned whether a Barclays group company, BF, could claim capital allowances under theCapital Allowances Act 1990 (“ CAA ”) which it asserted it was entitled to under a finance leasing transaction. In summary, as set out in detail at [3] to [17] of the decision in BMBF : (1) BF was a UK market leader in providing asset-based finance whereby typically it provided capital for the purchase of an asset for use by its customer in return for a series of periodic payments secured upon the assets: (a) BF purchased a gas pipeline from an Irish entity, BGE, for£91 million and leased it back to BGE. BF borrowed the funds for the purchase price from Barclays Bank at a fixed commercial rate. (b) BGE had constructed the pipeline largely with finance provided by a consortium of banks. The price of£91 million corresponded to that borrowing. (c) BGE sub-leased the pipeline to, and made arrangements with, a newly formed UK subsidiary, BGE UK, for its operation. (d) The lease to BGE was for a period of over 30 years for rents with an escalating profile and on terms typical of a finance lease, including that the rents were subject to adjustment if certain assumptions were to prove incorrect. The assumptions were based around the premise that BF would obtain allowances on the expected basis on£91 million and thereby achieve a particular level of tax saving. The sublease was on similar terms to the lease but the rents were not subject to this adjustment mechanism. BGE UK assumed direct liability to pay the rent to BF but with adjustments to the payment arrangements where the rental adjustment mechanism was triggered. (2) There was no dispute that BF would ordinarily be entitled to allowances on the basis it incurred the purchase price on acquiring the asset for the purposes of its finance leasing trade. Nor was it disputed or perceived to be unacceptable tax avoidance that the basic premise of a finance leasing transaction, as it was put by one of BF’s witnesses is that “lessors pass on the value of the capital allowances available to them in respect of the asset being financed to the customer. The customer gets the use of the asset concerned and pays rent at a rate which reflects the margin required by the Bank and the reduced funding cost to the Bank of providing lease finance as a result of the tax deferral benefit available.”
“to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose ”. 250. He noted that until Ramsay , however, revenue statutes were “remarkably resistant to the new non-formalist methods of interpretation”
“ those two features - literal interpretation of tax statutes and the formalistic insistence on examining steps in a composite scheme separately - [which] allowed tax avoidance schemes to flourish.” 251. He described Ramsay , at [29], as having “liberated the construction of revenue statutes from being both literal and blinkered”
“ to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description…however one approaches the matter, the question is always whether the relevant provision of statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in [ MacNiven ], para 8: "The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case."” (Emphasis added.)
“ It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in [ Arrowtown at [35]]…” (as set out at [214] above). 254. He said, at [37] and [38], that the need to avoid sweeping generalisations about disregarding transactions undertaken for the purpose of tax avoidance was shown by MacNiven which, in his view, shows: “the need to focus carefully upon the particular statutory provision and to identify its requirements before one can decide whether circular payments or elements inserted for the purpose of tax avoidance should be disregarded or treated as irrelevant for the purposes of the statute.” 255. In the same passage, he commented on Lord Hoffmann’s approach in MacNiven as not “an unreasonable generalisation” but said: “we do not think that it was intended to provide a substitute for a close analysis of what the statute means. It certainly does not justify the assumption that an answer can be obtained by classifying all concepts a priori as either "commercial" or "legal". That would be the very negation of purposive construction: see Ribeiro PJ in Arrowtown at paras 37 and 39….” [see [246] above] 256. In turning to applying these principles to the facts of BMBF , Lord Nicholls said, at [39], that BMBF , like MacNiven , illustrates the need for a close analysis of what, on a purposive construction, the statute actually requires. In that context, he considered that the “object of granting the allowance is to provide a tax equivalent to the normal accounting deduction from profits for the depreciation of machinery and plant used for the purposes of the trade”
“Consistently with this purpose, the relevant provision requires that a trader should have incurred capital expenditure on the provision of machinery or plant for the purposes of his trade. When the trade is finance leasing, this means that the capital expenditure should have been incurred to acquire the machinery or plant for the purpose of leasing it in the course of the trade. In such a case, it is the lessor as owner who suffers the depreciation in the value of the plant and is therefore entitled to an allowance against the profits of his trade.” 257. At [40] he held that the statutory requirements he had described are “in the case of a finance lease concerned entirely with the acts and purposes of the lessor”
“if the lessee chooses to make arrangements, even as a preordained part of the transaction for the sale and lease back, which result in the bulk of the purchase price being irrevocably committed to paying the rent, that is no concern of the lessor. From his point of view, the transaction is exactly the same. No one disputes that [BF] had acquired ownership of the pipeline or that it generated income for [BF] in the course of its trade in the form of rent chargeable to corporation tax. In return it paid£91m . The circularity of payments which so impressed Park J and the special commissioners arose because [BF], in the ordinary course its business, borrowed the money to buy the pipeline from Barclays Bank and Barclays happened to be the bank which provided the cash collateralised guarantee to [BF] for the payment of the rent. But these were happenstances. None of these transactions, whether circular or not, were necessary elements in creating the entitlement to the capital allowances.” 260. BMBF sets out very clearly the effect of the decision in Ramsay (including as regards the composite approach) and the correct approach to be adopted in construing tax legislation. This has been recognised in many subsequent decisions including the latest decisions on this topic in UBS and Rangers . Scottish Provident 261. The decision in Scottish Provident Institution v Inland Revenue Commissioners [2004] UKHL TC 76 538 (“ Scottish Provident ”) was released on the same day as that in BMBF by the same panel as in BMBF . The case concerned a scheme designed to take advantage of a change in the law governing the taxation of gains and losses made by mutual life offices on the grant or disposal of options to buy or sell gilts. Under the scheme: (1) The life office, SPI, granted Citibank the option to buy a quantity of gilts from it at a “strike price” of 70, well below their anticipated market value at the time the option was exercised, in return for a premium. Under the law then in force, the premium was exempt from tax. (2) After the law had changed, Citibank exercised the option, requiring SPI to sell the gilts to it at a loss. Under the law then in force, the loss was allowable for tax purposes. In order to ensure that no real loss could be suffered by either party, the scheme also provided for Citibank to grant an option to SPI, entitling it to buy a matching quantity of gilts from the bank at a strike price of 90, calculated so that the overall movements of money between the parties were equivalent. (3) It was anticipated that both options would be exercised, but there was a possibility that they might not be. In the event, both options were exercised, and neither gilts nor money changed hands. 262. Lord Nicholls set out, at [18], that whether SPI was entitled to treat the loss suffered on the exercise of the option granted to the bank as an income loss essentially depended on whether the option gave the bank an “entitlement” to gilts within the meaning of the relevant statute. At [19], he noted that if attention was confined to that option, it “certainly gave [the bank] an entitlement, by exercise of the option, to the delivery of gilts” but “if the option formed part of a larger scheme by which [the bank’s] right to the gilts was bound to be cancelled by SPI’s right to the same gilts, then it could be said that in a practical sense [the bank] had no entitlement to gilts”
“ Since the decision of this House in [Ramsay] it has been accepted that the language of a taxing statute will often have to be given a wide practical meaning of this sort which allows (and indeed requires) the Court to have regard to the whole of a series of transactions which were intended to have a commercial unity. Indeed, it is conceded by SPI that the Court is not confined to looking at the Citibank option in isolation. If the scheme amounted in practice to a single transaction, the Court should look at the scheme as a whole. [Counsel] for SPI, accepted before the Special Commissioners that if there was “no genuine commercial possibility” of the two options not being exercised together, then the scheme must fail.” 263. Lord Nicholls continued, at [20] and [21], to note that the taxpayer’s counsel submitted that “even if the parties intended that both options should be exercised together…the Court could treat them as a single transaction only if there was “no practical likelihood” that this would not happen”
“If the chance of the price movement occurring was similar to an outsider winning a horse race we consider that this, while it is small, is not so small that there is no reasonable or practical likelihood of its occurring; outsiders do sometimes win horse races.” 264. Lord Nicholls noted, at [21], that the test of “no practical likelihood” derived from the speech of Lord Oliver of Aylmerton in Craven v White [1989] A C 398, at page 514. However, he thought there was a distinction between that case and Scottish Provident . In Craven v White “important parts of what was claimed by the Revenue to be a single composite scheme did not exist at the relevant date” (see Lord Oliver (at page 498)); there was an uncertainty about “whether the alleged composite transaction would proceed to completion which arose, not from the terms of the alleged composite transaction itself, but from the fact that, at the relevant date, no composite transaction had yet been put together” ([22]). On the other hand, in Scottish Provident : “…the uncertainty arises from the fact that the parties have carefully chosen to fix the strike price for the [option granted to SPI] at a level which gives rise to an outside chance that the option will not be exercised. There was no commercial reason for choosing a strike price of 90. From the point of view of the money passing (or rather, not passing), the scheme could just as well have fixed it at 80 and achieved the same tax saving by reducing the Citibank strike price to 60. It would all have come out in the wash. Thus the contingency upon which SPI rely for saying that there was no composite transaction was a part of that composite transaction; chosen not for any commercial reason but solely to enable SPI to claim that there was no composite transaction. It is true that it created a real commercial risk, but the odds were favourable enough to make it a risk which the parties were willing to accept in the interests of the scheme.” 265. At [23], Lord Nicholls held that it would “ destroy the value of the Ramsay principle of construing provisions” such as those in issue as referring to the effect of composite transactions : “if their composite effect had to be disregarded simply because the parties had deliberately included a commercially irrelevant contingency, creating an acceptable risk that the scheme might not work as planned. We would be back in the world of artificial tax schemes, now equipped with anti -Ramsay devices. The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.” 266. At [24], he concluded, therefore, that the Special Commissioners erred in law in finding that “there was a realistic possibility of the options not being exercised simultaneously meant, without more, that the scheme could not be regarded as a single composite transaction”
“the courts treated every element of a composite transaction which had an individual legal identity (such as a payment of money, transfer of property, or creation of a debt) as having its own separate tax consequences, whatever might be the terms of the statute” (citing Lord Steyn in McGuickan at p 999).” 269. He continued, at [62], that the significance of the Ramsay case was “to do away with both those features”
“First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute. Thus, in Ramsay itself, the terms “loss” and “gain”, as used in capital gains tax legislation, were purposively construed as referring to losses and gains having a commercial reality. Since the facts concerned a composite transaction forming a commercial unity, with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction…..” (Emphasis added.)
“Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.”
“ the court considered the overall effect of the composite transaction, and concluded that, on the true construction of the relevant statute, the elements which had been inserted without any purpose other than tax avoidance were of no significance. But it all depends on the construction of the provision in question. Some enactments, properly construed, confer relief from taxation even where the transaction in question forms part of a wider arrangement undertaken solely for the purpose of obtaining the relief. The point is illustrated by the decisions in [ MacNiven ] and [ BMBF ] itself.” (Emphasis added.)
“In the first place, the approach described in [ BMBF ] and the earlier cases in this line of authority has nothing to do with the concept of a sham, as explained in Snook. On the contrary, as Lord Steyn observed in McGuckian at p 1001, tax avoidance is the spur to executing genuine documents and entering into genuine arrangements. Secondly, it might be said that transactions must always be viewed realistically, if the alternative is to view them unrealistically. The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven and [BMBF], then other transactions, although related, are unlikely to have any bearing on its application .” (Emphasis added.)
“ extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party . The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it.” (Emphasis added.)
“While the relevant provision of the New Zealand statute was worded differently from the United Kingdom legislation, the latter, by its emphasis on emoluments arising from a taxpayer’s employment, adopts a similar concept of the tax charge. It supports the view which I have reached that a charge to income tax on employment income can arise when an arrangement gives a third party part or all of the employee’s remuneration.” 280. He said, at [51], that it was also necessary to decide whether under the PAYE provisions there had been a “payment” of emoluments/earnings from which deductions were required. In that context he considered that misplaced reliance on “judicial glosses” in earlier cases on the meaning of the term “payment”
“ In summary, (i) income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee; (ii) focusing on the statutory wording, [none of the relevant provisions]…. (except section 62(2)(b)), provide that the employee himself or herself must receive the remuneration; (iii) in this context the references to making a relevant payment “to an employee” or “other payee” in the PAYE Regulations fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged by the employee, for example by assignation or assignment; (iv) the specific statutory rule governing gratuities, profits and incidental benefits in section 62(2)(b) of ITEPA applies only to such benefits; (v) the cases, to which I have referred above, other than Hadlee , do not address the question of the taxability of remuneration paid to a third party; (vi) Hadlee supports the view which I have reached; and (vii) the special commissioners in Sempra Metals (and in Dextra ) were presented with arguments that misapplied the gloss in Garforth and erred in adopting the gloss as a principle so as to exclude the payment of emoluments to a third party. Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect…..” 282. Applying the legislation to the facts Lord Hodge held, at [64], that the relevant provisions for the taxation of emoluments/earnings were and are “drafted in deliberately wide terms to bring within the tax charge money paid as a reward for an employee’s work”
“No taxpayer can, by way of assignment, escape assessment of tax on income resulting from his personal activities…”
“language used by parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants, that the exercise of construction is, essentially, one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.” 290. Mr Goldberg submitted that the approach in the Rainy Sky case has been approved by the Supreme Court in Wood v Capita Insurance Services Ltd[2017] UKSC 24 . I note that prior to the decision in that case, there was some debate about the respective importance of what Lord Hodge (who gave the leading judgment in Wood v Capita ) referred to as “textualism” and “contextualism” in interpretation. Lord Hodge said that both approaches have a role and it is not a case of one approach or the other. He set out, at [10], that the court’s task is to ascertain “the objective meaning of the language which the parties have chosen to express their agreement” and noted that it has: “long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning…” 291. He continued that it is affirmed in the cases that “the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations” is of relevance. He noted, however, that when in Investors Compensation Scheme Ltd v West Bromwich Building Society[1998] 1 WLR 896 Lord Hoffmann (at pages 912-913) reformulated the principles of contractual interpretation, “some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past”
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) …Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, [the background] includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification….” 293. At [11], Lord Hodge said the following as regards interpretation as “a unitary exercise”: “where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause….and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest… Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.” 294. He said, at [12], that this unitary exercise involves “an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated” and to his mind: “once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each”. 295. He concluded, at [13], that “textualism” and “contextualism” are not “conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation”
“Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance......The iterative process, of which Lord Mance spoke in Sigma Finance Corpn (above), assists the lawyer or judge to ascertain the objective meaning of disputed provisions.” 296. Mr Goldberg said that, applying this approach to the construction of the relevant documents, it is highly relevant that the evidence establishes that the Members knew that the individual shares belonged to PSCL and to nobody else. As a matter of business common sense, as is consistent with clause 12.2 of the 2011 LLP Agreement, the Members were told that the individual shares were given to PSCL and not to them, and that while held by PSCL as Special Capital they were subject to PSCL’s absolute and sole discretion. 297. Mr Chacko did not dispute the relevance of the caselaw set out above. He said that it must be borne in mind that it is clear from that caselaw that, in construing contractual provisions, it is not permissible to have regard to the parties’ subjective views on the meaning of those provisions, especially when expressed many years after the conclusion of the relevant contractual arrangements. 298. As noted, Mr Chacko emphasised that, in HMRC’s view, PSCL was not free to use the deferred share it received as it wished and, in effect, had only a “theoretical discretion” for the reasons he had already set out. He submitted that the limited discretion it had under the 2011 LLP Agreement was subject to the orthodox and well-established principle of contract law that, where a contract confers a discretion on one of the contracting parties which may adversely affect the interests of the other party, as set out in Lewison on the Interpretation of Contracts, 6th edn, ch.14 at 11: “it will usually be implicit that the discretion must be exercised honestly and rationally and for the purpose for which it was conferred…. Accordingly, if a contract confers an apparently unfettered discretion, that discretion must not be exercised capriciously or unreasonably.” 299. Mr Chacko noted that the principle has been explained most recently by the Supreme Court in Braganza v BP Shipping[2015] 1 WLR 1661 (“ Braganza ”) in considering a term in an employment contract that provided the chief engineer on board a vessel with a death in service benefit save where his death had resulted from his own wilful act. In holding that a term of good faith should be implied into the relevant term in the employment contract, Baroness Hale of Richmond said the following, at [18]: “ Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given .” 300. At [19], Baroness Hale continued to indicate that the standard of review generally adopted by the courts to the decisions of a contracting party should be no more demanding than the standard of review adopted in the judicial review of administrative action. Rather the question is whether it should be any less demanding. In that context she considered, at [20] to [31], whether an implied term should include both limbs of the “Wednesbury reasonableness” test referring to Associated Provincial Picture Houses Ltd v Wednesbury Corporation[1948] 1 KB 223 (see [306] for a description of the two limbs of that test). Having set out a detailed review of the cases at [20] to [31], she said that she thought both limbs were applicable but it was not necessary to form a definitive view “given that the question may arise in so many different contractual contexts, it may well be that no precise answer can be given”
“ It must be exercised in good faith and rationally and not perversely: see Clark v Nomura International plc[2000] IRLR 766 (" Nomura ") as approved in Horkaluk v Cantor Fitzgerald International[2005] ICR 402 . In Nomura , Burton J rejected the tests of capriciousness on the one hand, and absence of reasonable or sufficient grounds on the other. He considered that the correct test was one of irrationality or perversity (of which capriciousness would be a good example), adding that this meant “that no reasonable employer would have exercised his discretion in this way”
“…An employee must establish, at least, a prima facie case of irrationality, before an employer is required to justify his decision. For example, an employee would be able to rely upon a refusal to pay an award, despite the success of his department, or a significantly lower award than one awarded to comparable fellow employees. It is likely that such cases can only be met by a sustainable explanation from the employer. The need to provide reasons arises, not to give the right to challenge content, but because, without any explanation, the employee is likely to succeed. In short, in cases which do not rely upon a breach of the implied duty of trust and confidence, the absence of reasons is only of evidential significance. The absence of reasons is not dispositive of the issue of rationality.””
“the question for the court is not whether the outcome for the claimant is objectively reasonable but whether the decision-making process is lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with the contractual purpose. Further it seems to me following Braganza that the court needs to consider the two limbs of the test: whether the right matters have been taken into account in reaching the decision and secondly even though the right things have been taken into account, the result is so outrageous that no reasonable decision maker could have reached it.” 307. Mr Chacko submitted that: (1) In all the circumstances, the implication of a term that PSCL would exercise its discretion to make reallocations of Special Capital in good faith and rationally, by taking account of ExCo’s recommendation and of the Remuneration Policy, is necessary for the commercial efficacy of the relevant provision in the 2011 LLP Agreement. There was plainly an imbalance of power between the individual Members and PSCL and, for that matter, ExCo who had to make a recommendation for PSCL to make reallocations of Special Capital before PSCL could exercise its discretion to do so. On the appellants’ own case, in deciding whether to follow a reallocation recommendation by RemCom and, if so, how much to re-allocate, PSCL faced a conflict of interest between it and the Members because the alternative was for it to retain that capital itself. (2) Without such an implied term, the Members would have had no means of redress if, for example, PSCL had: (a) in bad faith reallocated all its Special Capital to one Member; (b) arbitrarily reallocated its Special Capital by drawing lots; or (c) irrationally ignored RemCom’s recommendations, for example, by reallocating Special Capital only to researchers and not to fund managers. However, in the light of the evidence, for it to act in that way would be commercially absurd. It is quite clear that Mr Odey and Mr Stewart, thought they had to exercise their role as directors of PSCL responsibly. (3) On that basis, if PSCL had failed to exercise its discretion in accordance with this principle, it would have been in breach of the 2011 LLP Agreement and the relevant Member would have been entitled to sue for damages. (4) It is not correct that the Remuneration Policy had no contractual effect noting the following: (a) Under the 2011 LLP Agreement the members delegated the general management of Odey to ExCo and ExCo had the power to adopt and vary the Remuneration Policy. (b) The appellants’ witnesses appeared to consider that the Remuneration Policy had binding effect and considered it to be important because it was of interest to potential clients. (c) The Remuneration Policy governed employee bonuses which were presumably provided for under a contract of employment (albeit the awards were discretionary). (d) The phrase in the Remuneration Policy that: “It is not intended this award process including deferral arrangement should be contractual” is simply an acknowledgement that ExCo/RemCom had enormous discretion over the Awards; Members had no entitlement to any particular amount but once ExCo/RemCom had exercised their discretion to make an Award the terms of the Remuneration Policy were intended to govern that Award. Moreover, whether the Remuneration Policy had binding effect or not is not to be determined solely by such a statement; it is to be decided in all the circumstances. 308. Mr Chacko said that, in any event, the Remuneration Policy was not something Odey could simply ignore. He considered that is readily apparent from the statement in it that: “The above represents the default position. Any substantial variation will need justification or agreement between the partner concerned and RemCom.” 309. Finally, Mr Chacko added that: (1) It is not HMRC’s case that the Members would inevitably receive reallocations of Special Capital. HMRC accept that they would not do so if the relevant conditions were not satisfied and that the witnesses believe that that there was a possibility that Odey could call on the Special Capital or that it could be lost due to insolvency. (He said that it is not clear from the terms of the 2011 LLP Agreement that their belief is correct but, in his view, their belief shows that the witnesses thought Odey rather than PSCL was in control of the Special Capital). (2) The fact that it was possible Members may not receive a reallocation subject only to the specified conditions does not detract from HMRC’s analysis that the individual shares were allocated to the Members in full in the first place (or the other points made above). The important point is that there was no general discretion for PSCL to refuse to make reallocations of Special Capital if all the indicated conditions were satisfied. It was a central feature of the Remuneration Policy and the documents and process under which Awards were made that the only conditions for a reallocation to be made were that the relevant Member remained as such at the relevant time and Odey had sufficient capital for regulatory purposes. Mr Pearey, Mr Odey and Mr Stewart accepted that these were the only conditions for an Award to be fulfilled and that Members understood that to be the case. There was no suggestion that the Members were told that they might receive nothing, even if those conditions were satisfied. Mr Stewart said that PSCL could not have refused to make a reallocation of Special Capital unless it had a good reason to do so. In fact, the scheme operated as Mr Odey described it and, as all those involved expected, as a transparent system of staggered payment. Whenever any sum went to PSCL, it was promptly used to acquire Special Capital in Odey and then reallocated to the relevant Member according to the proposed timetable/vesting schedule, unless, as was also in line with the Remuneration Policy, the Member had left Odey. (3) In any event, the current state of the Ramsay case law enables the tribunal to assess the tax consequences of these arrangements on the basis of an intended series of steps, even if there is no contractual requirement that means each step will occur. In other words, an expectation that a series of steps are going to be taken, can suffice for those steps to be viewed as a preordained series of transactions (see Trustees of the Morrison 2002 Maintenance Trust v HMRC[2019] STC 400 (at [53])). In this case, the allocation of the deferred share to PSCL, contribution of the deferred share by PSCL to Odey as Special Capital and the reallocation of Special Capital by PSCL to the relevant Members are all “supposed to follow on from each other, even if there is no right forcing PSCL to play its role”
“(1) Income tax is charged…on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act… (2) Subsection (1) does not apply to annual payments. (3) Subsection (1) does not apply to income that would be charged to income tax under or as a result of another provision but for an exemption. (4) The definition of “income” in section 878(1) does not apply for the purposes of this section….” (Emphasis added.)
“The receipt must: (1) have the nature of “annual profits”
“All property held or created by the Partnership which has been paid for by the Partnership or contributed to the Partnership by any Member or has otherwise accrued to the Partnership is owned by the Partnership absolutely and the Members have not individual right to that property ( save as specifically provided herein in relation to Special Capital ) other than through their entitlement to Capital Shares…..”
“Is there an obligation?” and the answer can only be “yes” or “no”
“54. Mr Prosser’s primary argument was that it was not enough that a person receives something for tax to be chargeable. That argument, as we see it, breaks down into four elements: (i) the receipt must have the character of income (a word we use as an umbrella term to include the profits or gains to which case VI refers); (ii) it must be the recipient’s income ; (iii) it must have a source; and (iv) there must be a sufficient link between the source and the recipient . Mr Ghosh did not dispute those propositions as propositions; the substance of the disagreement between the parties centres on elements (ii) and (iv) ...” (Emphasis added.)
“the crucial question ... is: does the payment to be made by the husband in the present case constitute income in the wife’s hands?... the wife, although she has the benefit of the expenditure, is not entitled to the money as such. She does not choose the institution and has no say in the application of the money. These considerations lead me to the conclusion that the sum payable by the husband is an expenditure of his income and does not constitute the income of the wife.” (2) The UT commented, at [58], that while the wife indirectly benefited from the husband’s expenditure she did not in substance receive the money in such a manner that it could be regarded as her income. They noted that the appellant argued that the recipient of the shares was in a similar position to the wife in that (a) neither had a right to receive the payment/issue of shares, even though there was an obligation on the borrower, or the husband in that case, to pay/issue the shares and (b) neither had a means of enforcing payment/the issue of the shares; they amounted to a gift in the recipient’s hands. (3) In Stedeford v Beloe , it was held that an annual pension paid by the warden and council of Bradfield College, acting under powers conferred on them by the college statutes, to the former headmaster of the college was not taxable income in his hands. The statutes empowered them to apply certain moneys to such purposes as, in their absolute discretion, they may deem to be for the benefit of the college including the payment of any pension to any person who had held the office of headmaster but laid upon them no obligation to do so. At [58] and [59], the UT cited the following comments of Viscount Dunedin (at 390) and Lord Warrington (at 391): “Now it must be a real profit under Schedule D, and it has been held again and again that a mere voluntary gift is not such a profit because it is not, in the true sense of the word, income. It is merely a casual payment which depends upon somebody else’s good will….[Viscount Dunedin] This question can, in my opinion, be answered in only one way. Here each payment is wholly voluntary. The case is only an instance of a succession of voluntary payments, each of which is voluntary and none of which need necessarily be continued.” [Lord Warrington] 348. The UT continued, at [60], to note that they were referred to other cases in which a “purely voluntary and also non-enforceable payment” was still regarded as taxable income, such as Calvert (Inspector of Taxes) v Wainwright[1947] KB 526 (as regards a tip to a taxi driver) and the Falkirk Ice Rink case (as regards a voluntary contribution to trading profits to keep the taxpayer’s ice rink open for curling). They noted that it was argued these cases were not relevant because the payments under consideration in Spritebeam had been made and received in the context of the taxpayer’s trade, and the absence of a legal right to enforce them was irrelevant. 349. At [61] to [67] the UT set out details of a number of cases they were referred to involving trustees: (1) In Drummond v Collins (Inspector of Taxes)[1915] AC 1011 (“ Drummond ”), as Lord Loreburn explained, an American gentleman left by his will a large sum of money to trustees upon trusts which “tied up his property with a view to its accumulation for a long time, and created a somewhat complicated series of interests”
“I do not assent to the proposition that a voluntary payment can never be charged, but it is enough to say that these were not voluntary payments in any relevant sense. They were payments made in fulfilment of a testamentary disposition for the benefit of the children in the exercise of a discretion conferred by the will. They were the children’s income, in fact.” (4) The UT noted, at [64], that Lord Parker, too, spoke in the language of interests and entitlements rather than enforceable legal rights and: “The word entitlement can be limited to the right to receive rather than the right to enforce payment. In Lord Parker’s view it did not matter that the mother was not a beneficiary and could not control the property, although control is often the badge of enforceability of a legal right.” (5) The UT did not set this out, but to explain further Lord Parker said, at page 539 to 540, that the monies transmitted from America were “certainly profits and gains arising from property” and the property from which they arose was, “equally clearly, a foreign possession within the meaning of Case VI”
“it is enough for Case 5 to apply that the person to be assessed has such an interest in the property as to entitle him to the profits or gains in question. The infants had in my opinion such an interest. Though they might be incapable, because of their age, of giving a receipt for the money, it is in my opinion none the less clear that the money in question was as soon as the Trustees had exercised their discretionary trust held in trust for these infants as beneficiaries……” (6) At [65], the UT noted that both Drummond and Stedeford v Beloe were referred to in Lindus & Hortin v IRC (1933) 17 TC 442, where it was contended that payments of capital to a beneficiary under a will (the testator’s daughter) were to be regarded as voluntary payments. However, Finlay J appeared to have no difficulty in holding that such a payment was taxable as income in the hands of the daughter. (7) At [66], they referred to Cunard’s Trustee . In that case under the terms of a will there was power to supplement income with capital to ensure the comfort and maintenance of the beneficiary (the sister of the deceased). The Court of Appeal held that the payments were income of the recipient which were taxable as annual payments (under schedule D case III). Having carefully considered the terms of the will, Lord Greene MR said the following at 132: “The payments, therefore, in my opinion, were properly made and at the moment of payment became income of the recipient…...[ her] title to the income arose when the trustees exercised their discretion in her favour and not before. At that moment a new source of income came into existence . The payments came to [the recipient] under the express terms of the will….” (Emphasis added.)
“It was suggested, however, that the Rule does not extend to mere voluntary payments. But the payments here were of a totally different character. They were not voluntary in any relevant sense, but were made in the exercise of a discretion conferred by the will out of a fund provided for the purpose by the testatrix. It is true, of course, that the trustees had an absolute discretion whether to make a payment or not. But the question whether they should do so is one which they were bound to take into their consideration. They could not refuse to consider whether the income of the estate was sufficient to give [the beneficiary] the required degree of comfort and the fact that, after examining that matter, they might come to the conclusion that it was sufficient, does not, in my opinion, give to a payment, if and when made, the character of a voluntary payment in any relevant sense.” (9) The UT did not cite the remainder of the passage but it continues as follows: “The money when received by [the beneficiary, was received by her through the joint operation of the will and the exercise of their discretion by the trustees. This very question was considered …in the case of Lindus & Hortin …..There as here the trustees had a discretion to supplement the income of a tenant for life out of capital. This discretion was absolute and it was argued there, as here, that the payments were not income because there was a discretion on the part of the trustees, and there was no right in the beneficiary to claim them. I am in agreement with the decision of Finlay J on this point….” 350. At [68] the conclusion the UT drew from the above authorities was that: “ it is immaterial that the recipient cannot enforce payment; what matters is whether there is an obligation on the payer to pay . Thus in Stedeford there was no obligation on the governors to make any payment; they could have refrained at any time from making further payments, and neither the former headmaster nor anyone else could have compelled them to continue. By contrast, in the trustee cases the beneficiaries, individually, could not enforce the payment of any particular sum to themselves; but the trustees were under an enforceable obligation to exercise their discretion and make a payment to one or more of the beneficiaries as circumstances required . In Drummond , for example, the payments were not voluntary payments in any relevant sense because the payments were made on the basis of the trustees’ duties arising under the testamentary trust. In the present case, the right to payment may not have been enforceable by the Share Recipient but it was not voluntary either; the Borrower was under a contractual duty to the Lender to allot and issue shares to the Share Recipient. Thus we conclude, in relation to issue (ii), that the shares were income in the Share Recipient’s hands.” (Emphasis added.)
“...a source of income is either (a) some personal activity of the taxpayer, or (b) some property over which he has rights, or (c) a combination of both”. (b) The observation of Viscount Haldane in National Provident Institution v Brown at p 84: “There was imposed under the Schedules no collection of taxes distinct from each other, but simply one tax [income tax] with standards for assessment which varied according to the sources from which the taxable income was derived. [The Income Tax Act 1853 ] ... was an Act to impose income tax on annual profits or gains arising from property or from some occupation”, and (c) The schedules themselves. (2) It was further submitted that the property-activity categorisation determined the necessary connection between the taxpayer and the source. If an activity then the taxpayer must carry it on, and if property, then the taxpayer must have the legal right to enforce it. In Spritebeam , the argument was that the source was property in the form of the shares but the recipient of the shares had no right to compel enforcement of an issue of shares (see [73]). 352. The UT noted, at [80], that the rule is merely that the taxpayer cannot be taxed on receipts if he does not have the necessary connection with the source. Once the connection has been identified, it is necessary to look behind the receipts in the tax year in question to see if the source of income continues or has ceased. But that necessity says nothing about the nature of the connection which must be demonstrated. 353. They explained, at [81], that HMRC took the view that it was the recipient of the share’s status as a counterparty to an absolute obligation of the borrower to pay interest on the loan (an obligation satisfied by the issue of the shares) that was relevant as demonstrated by a comparison between Drummond and Stedeford v Beloe as follows: “In the former, the will which permitted the payment to be made also limited the class of persons who would be entitled to any payment made pursuant to it to the named beneficiaries. The beneficiaries, therefore, by virtue of that status, were entitled to the payment, had a sufficient connection to the source, and were liable to tax on the income. By contrast, in the latter, the payment was made pursuant to the college statutes, under which only the College was a beneficiary. It could therefore not be said that the former headmaster was entitled to the payment by reference to that instrument. He had no identifiable source of the income beyond the College’s generosity, but a voluntary payment of that kind was not taxable.” 354. The UT continued, at [82], to explain further that it was argued by HMRC that: “the source of the Share Recipient’s income was the Loan Agreement, in which it was the named beneficiary. It was entitled to receive the shares, by reason of its being so named, even if it did not have the capacity to enforce that entitlement itself: it was in a similar position to that of the beneficiaries in Drummond v Collins but not in an analogous position to that of the former headmaster. Although, in Cunard’s Trustee , the court was addressing the question whether the payments were or were not voluntary, what Lord Greene said (see para 67 above) was equally relevant to the question whether there was a connection between the recipient and a source. The source in that case was “the joint operation of the will and the exercise of their discretion by the trustees.”
“ The required connection between taxpayer and source need not be limited to legal rights but can include the situation where the payment is made pursuant to any legal duty owed by the payer . That proposition is consistent with what was said by Lord Greene in the passage we have set out at para 67 above, in which the focus was on the payer’s obligation to the recipient, and not on the recipient’s ability to enforce it. In our view Mr Prosser’s approach in saying that the Share Recipient must have a legal right to have the shares issued and allotted to it is, as we have said, too narrow. The Borrower had an absolute and unconditional obligation to allot and issue the shares to the Share Recipient, that obligation was in no sense voluntary and we consider this obligation to be a sufficient legal basis to constitute the necessary connection between the Share Recipient and the Loan Agreement. The fact that the Borrower might have failed (although in fact it did not) to issue the shares, thus breaching its obligation, does not give the issue of the shares the character of a voluntary payment.”
“….the circumstance that, so to speak, an inducement for the favourable terms which he there got was the fact that he had rendered an important service to them, does not prevent it, to my mind, from being a contract in respect of services rendered. After all one has to consider what he was paid for. He was paid this sum, because he had an enforceable right to get it, and that enforceable right was based on this, that he had got a contract in respect of which, for certain services to be rendered by him specified in the contact, he was to be entitled to remuneration.” (3) As the UT, therefore, noted at [30], the Judge, therefore, “upheld the assessment holding that it was a case in which, induced very probably by the voluntary service, the parties chose to enter into a contact for remuneration in respect of services”. 359. At [31], the UT set out details of a case falling on the other side of the line: Bradbury (HM Inspector of Taxes) v Arnold (1957) 37 TC 14. In that case: (1) The taxpayer had a controlling interest in a company which arranged ice shows and reviews. The company proposed to put on an ice show in a theatre in London. Major Martineau was a keen ice skater and wanted to be involved in the production. (2) The company had assets and activities other than ice shows so it was not practicable to transfer part of the interest in the company to the taxpayer. (3) It was agreed that Major Martineau would pay the taxpayer£9,000 in return for a half share in the profits of the show. (4) The Inland Revenue assessed the sum as taxable under Case VI but the Commissioners upheld the taxpayer’s contention that the£9000 was in fact paid for a right to future profits of the ice show and was therefore a capital transaction. (5) Upjohn J noted that the Commissioners had accepted that any services of introduction rendered by him to Major Martineau were only trifling and that the payment of the£9000 would not be attributable to such services. This was not challenged by the Crown on appeal. Upjohn J said (page 669): “There is no doubt that a contact for services may, and clearly does, form a matter for assessment under Case VI of Schedule D, and not the less so that the services to be rendered are trivial or that they are to be rendered once and for all so that the remuneration may be regarded as a casual profit arising out of a single and isolated transaction.” 360. At [32] the UT said that the question in Bradbury was whether the£9,000 was remuneration for the taxpayer having introduced Major Martineau to the company and for procuring the company to enter into the agreement to share the profits of the show and explained that the Judge: “emphasised that the transaction stood entirely on the documents and his decision was particular to the facts of the case. He asked “can you really say as a matter of business common sense that in and by that transaction, [the taxpayer] undertook to perform services?”
“He said first that the principles derived from the case law showed that there was no need to consider what the taxpayer actually did in performance of the agreement under which the payment was made. It was enough that the payment was made under a binding agreement (rather than as a gratuity) and that the agreement bound the taxpayer to provide some kind of services. Alternatively, if it was necessary to look at what Mr Manduca did in return for the Bonus, then there was sufficient evidence to show that he did in fact perform services that fell within Case VI.” 363. At [35] the UT concluded that the bonus was remuneration for services provided to Dexia by Mr Manduca and “those services fall firmly within Case VI” and accepted HMRC’s submission that: “ Brocklesby v Merricks and Bradbury show that once it is established that the payment was an income receipt rather than a capital receipt and that it was paid pursuant to a binding contract in return for some kind of service then there is no need to go further to inquire into the extent of the services in fact provided.” 364. The UT continued, at [36], that further it was clear that the bonus was to pay for services which are akin to profits and gains that fall within the other Cases. The UT referred to an extract from Whiteman and Sherry on Income Tax (paragraphs 12-001 to 12-041) where, after discussing Leeming v Jones , the authors give as examples of income which is not ejusdem generis, betting winnings, gifts and receipts by finding. The UT noted that the taxpayer’s counsel argued that what Mr Manduca did was so limited that the supposed services were akin to the passive receipt of shares in Versteegh or the introduction of Major Martineau to the ice show promoter in Bradbury. At [37], the UT said that characterisation of the facts was not correct noting, in particular, at [38], that the taxpayer and his business partner were the key people on whose reputation the continued confidence of employees and investors rested and it was important for Dexia to obtain their commitment to the transfer of the business, before the formal employment relationship started: “ The role they would play in facilitating the transfer was to cooperate and so conduct themselves as to ensure that staff and investors stayed on board and that such a drift of money and talent did not occur in that interim period. I do not see any difficulty in describing that as a service provided by Mr Manduca or in holding that that service is ejusdem generis with the services listed in the other Cases in Schedule D. ” 365. In Manduca , therefore, the UT accepted that, once it was established that the payment in question was an income receipt rather than a capital receipt and that it was paid pursuant to a binding contract in return for some kind of service, then there was no need to go further to inquire into the extent of the services in fact provided in order to establish that s 687 applied. I do not take from that, as the appellants seemed to suggest, that the UT was laying down a rule that s 687 cannot apply as regards receipts relating to services unless there is such a binding contract whatever the circumstances. Dickinson v Abel and Scott v Ricketts 366. In Dickinson v Abel , in summary: (1) The taxpayer was a farmer who, through introductions from M and M’s father, received offers from companies to purchase a farm which belonged to his wife’s late grandfather’s estate in which neither he nor his wife had an interest. He sent the offer to the trustee of the estate, a bank. (2) Shortly after M introduced him to a representative of the companies who offered£100,000 for the farm. The farmer said that the offer should be made to the bank and asked what was in it for him. The representative said the gravel companies would pay him£10,000 if they bought the property for£100,000 . (3) The farmer’s evidence, which was accepted, was that he did not know what was in the representative’s mind and he did not often speak to the bank. (4) The following day he told the bank the offer was on the way and, when asked to comment, said that he personally would accept it but he did not reveal the promise of the£10,000 . The bank accepted the offer and the farmer received the£10 . (5) The High Court rejected the Inland Revenue’s position that the£10,000 was taxable under Schedule D Case VI. 367. As HMRC pointed out, it is notable that it was common ground in this case that the£10,000 was taxable only if it was paid in pursuance of an enforceable contract. Given the agreed scope of the issue, the focus was necessarily on whether or not there was an enforceable contract between the farmer and the representative as regards the provision of his services for a fee. The court did not consider, therefore, whether the parties’ common view was in fact correct. On that basis, I consider that this case does not add to the debate on whether a payment for services must be paid under a binding enforceable contract to be taxable under s 687. 368. In Scott v Ricketts : (1) The taxpayer was an estate agent, who from 1955 onwards acted for a retailing society in negotiations with the local authority about compensation for the acquisition of a bomb site, the C site, and the terms for a building lease from the local authority of a fresh site, the M site. (2) During the negotiations, the taxpayer offered the society a site owned by another client which suited the association better. Since the society wished to retain its rights over the M site for the purpose of obtaining compensation for the C site, and the taxpayer was interested in acquiring the M site on his own account (although on the terms then available it had no premium value) they reached an understanding that the society would, in due course, endeavour to assign its rights in the M site to him. An agreement in writing to that effect was drafted but never executed. (3) On becoming aware of the society’s interest in the alternative site, the local authority broke off the negotiations and eventually the society instituted an action for specific performance. (4) At that stage, R Limited, a development company which had already made an abortive approach regarding the M site, proposed through the taxpayer a settlement on the terms that it would acquire that site and would make up the compensation for the C site to a specified sum. The society indicated to R Limited that the taxpayer’s agreement to the proposals in his private capacity should be obtained because of the understanding it had with him. (5) R Limited accordingly offered, in consideration of the taxpayer withdrawing any claim to participate in the development of the M site, to pay the taxpayer personally£39,000 , when the proposals went through and duly paid him that sum. (6) The Court of Appeal rejected HMRC’s argument that the sum was a reward for services in the general capacity which was taxable under schedule D case VI. 369. In the Court of Appeal, Lord Denning MR (as he then was) commented at page 320 that the reason for the payment appeared to be that the parties thought that the taxpayer had some sort of claim to an interest in the M site because at one stage in the negotiations it was proposed he should take over the site either on his own or jointly with R Limited but in the end R Limited took the site over themselves and the taxpayer was left with no interest in it. He said that his ensuing claim “may have been a business claim, a moral claim or a legal claim. But whatever it was, he was bought out for£39,000 ”
“The one point now is whether this£39,000 is chargeable under Case VI. That Case is a “sweeping-up” provision. It catches “annual profits or gains” which have not been caught by the other provisions. It is difficult to construe and we have to go by the decided cases…..In Ryall v Hoare , Mr Justice Rowlatt staked out the guidelines and there had been other cases following it ...... Some things are clear. 'Annual profits' does not mean profits which are made year by year. It is satisfied by profits made in one year only. “Profits or gains” includes remuneration for work done, services rendered or facilities provided. They do not include gratuitous payments, which are given for nothing in return, nor do they include profits in the nature of capital gains….” 370. Lord Denning MR continued, at page 321, that the crux of the case was that the taxpayer had no legal ground to be paid anything. All he had was a moral claim or nuisance value. He noted that in the High Court the Judge had concluded that because the payment “was “dressed up” as a contract - to use the Judge’s own words” it was taxable under Schedule Case VI. Lord Denning did not agree. He noted that (a) where a person gives up a good legal claim in return for money, that is not a sum within Case VI; for tax purposes that is the sale of an asset for a price, (b) a payment made for an unfounded claim, which strictly is not an asset, has the same quality for tax purposes as if the claim were well founded, and (c) even a sum paid in respect of claim which is only a moral claim with no legal basis has the same quality for tax purposes. In his view, in all of those cases the sum is not an annual profit or gain within Case VI. He concluded, at page 321 to 322, that: “The Judge seems to have thought that, as the payment was made under contract, that was enough to bring it within Case VI. I cannot agree with him. It must be a contract for services or facilities provided, or something of that kind. The present case is rather like Leeming v Jones …If the sum was taxable at all, it was taxable as part of the profits of [the taxpayer’s] trade or profession. Once that is negatived, it becomes simply a sum received in compromise of a disputed claim; whether legal or moral makes no difference.” 371. Davies LJ and Russell LJ essentially agreed that, whist it was highly doubtful that the taxpayer had any kind of valid legally enforceable claim, the sum was plainly paid to buy out that claim and did not have the quality of income. 372. Davies LJ noted, at page 323, that the payment was made under a contract in return for the taxpayer giving up any rights he may have. He said there was some suggestion that it could be said that the taxpayer’s undertaking in the contract to sign any necessary documents to implement the agreement might be the consideration for the payment and that therefore in some way the payment was a payment for services to be rendered or things to be done in the future. In his view, the signing of any such document would be in exactly the same position as the execution of a conveyance on the sale of a piece of land. He concluded that this was not in any form an annual receipt of a profit or gain but rather “the buying out” of the taxpayer’s claim. 373. Russell LJ noted, at page 324, that if the taxpayer’s claim had been a legal claim: “it is plain that the£39,000 would be outside Case VI: it would be payment received by way of realisation of an asset, and as such would lack the quality of income for tax purposes which is necessary to come within annual profits or gains under that head. The Crown says that this cannot apply to a case where there is no legal right.” 374. He noted that the question was whether the receipt had the quality of income and concluded that: “…for this purpose there is a true analogy between a sum received on the sale of an asset, or a sum received in settlement of a legally enforceable claim (or, I may add, one arguable legally enforceable), and a sum received, as here, in payment for the withdrawal of a moral or business-world claim, a spes acquisitions such as this. By such analogy I think the sum paid is not shown to have the quality of income necessary to attract tax, and is, therefore not within Case VI.” 375. I note that Mr Goldberg placed much emphasis on this case. I do not agree, however, that it provides clear authority that for a payment for services to fall within Schedule D Case VI/s 687, it must be made under a binding contract under which payment is enforceable by the recipient: (1) Each of Lord Denning, Davies LJ and Russell LJ concluded that the relevant payment was in the nature of a capital sum paid for the withdrawal of “buying out” of a claim (albeit there was no legal basis for the claim) rather than a payment with the quality of income. In other words, it was not a payment for the provisions of any services as the Crown had argued. (2) Lord Denning rejected the proposition that the fact that the payment was made under a contract was sufficient to render it taxable under Case VI. His following comment that: “ It must be a contract for services or facilities provided, or something of that kind”
“… what is a “profession”? I am very reluctant finally to provide a comprehensive definition…it seems to me… that a “profession” in the present use of language involves the idea of an occupation requiring either purely intellectual skill, or if any manual skill, as in painting and sculpture, or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production, or sale, or arrangements for the production or sale of commodities. The line of demarcation may vary from time to time. The word “profession” used to be confined to the three learned professions, the Church, Medicine and Law. It has now, I think, a wider meaning. It appears to me clear that a journalist whose contributions have any literary form, as distinguished from a reporter, exercises a 'profession'; and that the editor of a periodical comes in the same category. It seems to me equally clear that the proprietor of a newspaper or periodical, controlling the printing, publishing and advertising, but not responsible for the selection of the literary or artistic contents does not exercise a 'profession', but a trade or business other than a profession. What then is to be done if the same man is both proprietor, editor and contributor? In my view, it can always be determined as a question of fact what is his reasonable remuneration as contributor ...” (2) In Carr, Du Parcq said: “I think that everyone would agree that, before one can say that a man is carrying on a profession, one must see that he has some special skill or ability, or some special qualifications derived from training or experience. Even there one has to be very careful, because there are many people whose work demands great skill and ability and long experience and many qualifications who would not be said by anybody to be carrying on a profession. Ultimately one has to answer this question: Would the ordinary man, the ordinary reasonable man - the man, if you like to refer to an old friend, on the Clapham omnibus - say now, in the time in which we live, of any particular occupation that it is properly described as a profession?...” 389. HMRC said that the ordinary observer looking at the specialism, skill and remuneration of the Members of Odey would say that they were financial professionals providing professional services: they would not say that they were tradesmen: (1) The skills of an analyst and a fund manager are based on intellect and judgement and the two roles require very similar skills. (2) Furthermore, Odey’s income, like that of other professional firms, is fee income for services provided and not the profit on buying or selling (trading) in goods, financial instruments or any other asset. Investors invested money in Funds managed by Odey. The Funds were in effect Odey’s clients since they agreed to pay fees for the management of the Funds. Whilst some of the Members had their own money invested in the Funds that simply put them in the same position as, for example, a solicitor who obtains advice from their own firm in a personal capacity. (3) The great majority of Odey’s income came from management fees and performance fees. While performance fees were linked to the performance of the Funds, management fees were not except indirectly in that they were linked to the value of Odey’s assets under management. (4) Some Members had management roles with Odey, but they had a background in fund management (except Mr Pearey who had an accounting background). In any event, the partners in a law firm are engaged in managing the lawyers but that does not mean that they are not engaged in professional activities. While Odey employed traders, the traders were not Members of Odey apart from the head of trading who essentially had a management role. (5) All these are the hallmarks of professional activity today. We no longer live in a world where a person is not regarded as undertaking professional activities because their work involves markets, financial or otherwise. The tribunal should adopt a modern and common-sense approach to this issue, just as Judges were prepared to do a century ago. 390. HMRC continued that, alternatively, the Members’ activities are of a kind undertaken in a vocation on the basis of caselaw where it has been held that a vocation constitutes any way of earning money which is systematically carried on but is not a form of buying and selling. In their view, the Members set out to make profits in a systematic manner by providing investment management services and, as noted, their income derived from fees paid by their clients and not from buying or selling on their own account. 391. HMRC relied on Partridge v Mallandaine (1886) 2 TC 179 where, at page 181, Denman J held that bookmakers carried on a “vocation” as follows: “….I think the word 'vocation' is a still stronger word. It is admitted to be analogous to the word 'calling', which is a very large word; it means the way in which a person passes his life, and it is a very large word indeed. These persons goes to races and they systematically bet, and for this reason, it must be assumed, make profits. Does it lie in their mouths to say that they are not to be assessed to income tax because they cannot bring an action in respect of the bets which they make ... so many of theirs bets paid as puts, say,£1,000 a year in their pockets; and to say that because they cannot bring an action to recover the bets they make, betting being made illegal ... therefore they cannot carry on a vocation, it seems to me is putting a construction upon the Act which would be giving a very undue favour to persons with whom the legislature is by no means to deal with favour, inasmuch as the thing they do is a thing which is hampered by the legislature because it is supposed to be mischievous, namely, the recovery of bets by actions so as to facilitate the making of bets and carrying on of vocations such as this. But I go the whole length of saying that, in my opinion, if a man were to make a systematic business of receiving stolen goods and to do nothing else, and he thereby systematically carried on a business and made a profit of£2,000 a year, the Income Tax Commissioners would be quite right in assessing him, if it were in fact his vocation. There is no limit as to its being a lawful vocation, nor do I think the fact that it is unlawful can be set up in favour of these persons as against the rights of the Revenue to have payment in respect of the profits that are made. I think this does come within the definition of the word 'vocation' according to common sense.” 392. HMRC also relied on Graham v Green (1925) 9 TC 309 where, at pages 313 to 314, the court reached the following conclusion relying on the earlier case: “It has been settled that a bookmaker carries on a taxable vocation. What is the bookmaker’s system? He knows that there are a great many people who are willing to back horses and they will back horses with anybody who holds himself out to give reasonable odds as a bookmaker. By calculating the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds… are in his favour, he makes a profit. That seems to me to be organising an effort in the same way that a person organises an effort if he sets out to buy himself things with a view to securing a profit…” 393. Finally, HMRC submitted that the reference in s 774 to professions and vocations, but not trades, is intended to exclude from its ambit those who earn money by buying and selling assets and profiting on the sale. If a person makes money by selling stock-in-trade, he cannot dispose of that to someone else without incurring a charge to income tax, either as a commercial sale or on the principle in Sharkey v Wernher[1956] AC 58 . This principle does not apply to professions (see Mason v Innes 44 TC 326). There was, therefore, no need to apply this anti-avoidance machinery to those who made money by selling their stock, but the exclusion should not be extended more widely than that. 394. The appellants submitted that Odey and so its Members in fact carry on a trading activity in acting as fund managers trading in investments and it/they profit from the performance of the funds by way of management and performance fees, calculated by reference to the value of funds under management, namely, from how well the traders perform in buying and selling investments. The business consists of selling services to customers (the Funds under management) and is as much of a trade just as selling train journeys to passengers is a trade. The concept of trade is not limited to purchases and sales of assets. 395. Mr Goldberg said that the law on this point was laid down in 1919 or earlier and is very clear. In addition to the cases which HMRC referred to, Mr Goldberg also referred to the following cases: (1) Burt & Co v IRC[1919] 2 KB 650 where Scrutton LJ said the following, at page 658: “whatever may be the limitation of a profession, I do not think it applies to the exercise of commercial knowledge in connection with the sale of goods, or export or import of goods”. (2) Christopher Barker & Sons Ltd v IRC[1919] 2 KB 222 where Rowlatt J held that a stockbroker’s business was not a profession and commented as follows, at page 229: “Now is a stockbroker's business a profession within the meaning of the section. It seems to me that what a stockbroker does is to buy and sell a commodity on the market. It is true he does not expect to have to pay for it himself or to be responsible ultimately to satisfy the contract itself, as he's a buyer and seller in the market for an undisclosed principal to whom he looks to indemnify him from liability. It does not seem to me that that is a profession within the meaning of this section. A stockbroker is remunerated by a commission, which he receives from his principal. The person who takes the liability off his shoulders. In my opinion, the advice given by a stockbroker comes within the dictum of Lord Justice Scrutton in Burt & Co v IRC because it is the exercise of commercial knowledge in connection with the sale of commodities in the market. Therefore, it seems to me that although the appellant does a certain amount of advising for which they were remunerated by fees, it is advice given in connection with the exercise of the business of a stockbroker, and that in giving that advice, they are not exercising any profession at all, even assuming that part of the business can be severed from the purely stockbroking part of their business of buying and selling stocks and shares for which they are remunerated by commission.”
“(a) it is contained in the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return; (b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim; (c) it is contained in any documents, accounts or particulars which, for the purposes of any enquires into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer, whether in pursuance of a notice under section 19A of this Act or otherwise; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above— (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or (ii) are notified in writing by the taxpayer to an officer of the Board.”
“ My starting point is that the interpretation the appellant seeks falls within the plain meaning of the words of s30B TMA 1970. This is not a situation where profits or income have not been included when they ought to be included, or where profits or income have been included which are or have become insufficient. Conversely the interpretation HMRC seeks departs from the ordinary meaning of the words “profit” and “income” so as to encompass negative amounts. Beyond asserting that the provisions may be read in that way, HMRC have not put forward reasons which persuade me that “profit” /”income” in the particular context of this provision should be read in that way. On the contrary the interpretation HMRC suggest appears to me to be at odds with the preceding provisions in TMA 1970 dealing with partnership returns and partnership statements which take care to specify whether amounts are net and which specifically mention losses in distinction to income. Section 12AA TMA 1970 which provides the basis for the partnership return refers in s12AA(1) to establishing the amount each partner is chargeable to income tax and then goes on in s12AA(1A) to specify that this is a net amount which take into account any relief or allowance for which a claim is made.
“The Plan works by creating a pool of special capital that may, at the sole discretion of the directors of PSCL, be reallocated in the future to individual members provided that certain eligibility criteria are met….. After meeting its expenses and liability to corporation tax PSCL uses profits allocated to it by the LLP to contribute capital to the LLP. This special capital is used to acquire shares in investment funds managed by the Odey group or shares in [OHAG]…..OHAG is the ultimate parent company of the Odey Group.”
“In no sense is profit deferred, although it can be said that any reallocation of special capital is deferred until such time as the directors of PSCL are satisfied that the eligibility criteria are met and choose to exercise their discretion to reallocate capital held by the company to an individual partner.” (iii) Mr Stewart was a partner in the LLP and not an employee and so never received salary. The partnership profits allocated to Mr Stewart were not deferred under the Plan. (iv) “To be eligible for a reallocation of capital an individual must remain a member of Odey during the eligibility period. This is fundamental to the retention effect that the Plan is designed to have. Moreover, the directors of PSCL must exercise their discretion in favour of the individual.” (v) They repeated the information given previously regarding Mr Stewart’s departure from Odey. They said that the letter dated13 April 2012 confirmed to Mr Stewart that PSCL had received an initial recommendation from RemCom that he should be considered for a possible reallocation for 2012. The letter describes the terms under which PSCL would consider the initial recommendation and the eligibility period. (d) A letter dated20 December 2013 from Mr White to Mr Stewart’s advisers noting he had issued a closure notice to Mr Stewart on that day and that he had no further questions in relation to Odey at this time. (3) In relation to Mr Fletcher: (a) A letter dated30 July 2013 from Mr Raymer of HMRC to Mr Fletcher in which he noted that the High Net Worth Unit was dealing with his tax affairs. It appears Mr White was a member of this unit. (b) A letter dated20 September 2013 from Mr Fletcher’s advisers to HMRC noting that their enquiries in relation to the Plan had been forwarded to Odey. They also enclosed responses to HMRC’s enquiries in substantially the same form as those set out at (2)(a) above in relation to Mr Stewart. He set out details of the relevant awards made to him in a letter from PSCL dated13 April 2012 providing details of the allocations under the Plan for 2011 and 2012. (c) A letter dated7 November 2013 from Mr White to Mr Fletcher in which he notified him that he had closed the enquiry and noted that he had not made any amendment to Mr Fletcher’s tax return for the 2011/12 tax year. 418. The bundles also contained internal documents prepared by HMRC in relation to their enquiries into the tax returns of Mr Stewart and Mr Fletcher for the 2011/12 tax year: (1) An undated document headed “HNWU [High Net Worth Unit] Enquiry Plan” stated to relate to HMRC’s enquiry into Mr Stewart’s tax return for the 2011/12. This included the following statement: (a) Under the heading “Risk Area”: “OAM LP Income”. (b) Under a heading “Summary of proposed response”: “Check if [taxpayer] is a user of a deferred profit scheme. Risk lead by Steve Gannon (LBS) - feed outcome back”. (c) Under a heading “Key matters arising”: “Customer has provided details of deferred profit scheme in use. Referred back to Steve Gannon (L&C) and provided with further questions to take forward”. (d) Under the heading “final conclusion”: “No further risk areas identified from responses given to questions. Close risk.” (2) A similar undated document relating to Mr Fletcher in which Odey was again identified as a “Risk Area” and under the heading “Summary of proposed response” it was stated: “Potential user of deferred profit scheme. Risk being led by Mr Steve Gannon (LBS)”. (3) A note of a call from Mr Stewart to Mr White on1 August 2013 in which Mr White noted that: “Stewart also stated that a deferral scheme was in use at Odey. The scheme was administered by Deloittes and Stewart had contacted them for details which he could pass to White. Stewart also advised he had recently resigned as a partner at Odey.” (4) A note which seemed to be a record of a call from Mr Fletcher’s adviser to Mr White on8 August 2013 . Mr White noted that: “Advised that in response to the questions regarding the partnership income they were having to contact the agent for the partnership and duly it was going to take more time in which to provide a response…” (5) A document dated16 October 2013 which appeared to be a file note made by Mr White regarding Mr Fletcher in which he said: “Risk area satisfied: OAM LLP The risk area was taken forward on behalf of Steve Gannon, the CRM for OAM. The issues are being addressed through another Odey individual - therefore we do not need to ask further questions in relation to this risk. NFA required.” (6) A “HNWU [High Net Worth Unit] Settlement Report” relating to a settlement reached on5 November 2013 in relation to Mr Fletcher: (a) It was noted that: “OAM LLP issue” was: “taken forward with 2 individuals with OAM LLP, on behalf of Steve Gannon (L&C) [Large and Complex unit within the Business team] as a collaborative working issue. Both responses received were identical and further questions were asked of the other partner as he responded first and we have ongoing local risk issue. I do not propose to repeat this process with Fletcher as it appears the local risks have been satisfied and I cannot justify drawing out the enquiry.” (b) In the summary, it was stated that: “ All identified risk areas have been addressed satisfactorily, therefore, I have no grounds in which to continue this enquiry and I propose to settle.” (7) A memo dated5 November 2013 to Mr Raymer from Mr White regarding the enquiry into Mr Fletcher’s return for the 2011/12 tax year. Again, Odey was identified as a risk area and Mr White made the same comment as in the above document. Mr White asked if Mr Raymer agreed to settling and closing the enquiry. (8) Another file note dated22 November 2013 relating to Mr Stewart in which under a heading “OAM LLP”
“LW advised this risk was led by the Hedge Fund Team in Euston Tower. The current state was that they had a similar case, which they were currently awaiting advice on from CTISA as to whether distributions from the deferral scheme were taxable in the hands of the recipient. LW was concerned that all local issues had been settled - could he justify holding the case open any longer on the basis of advice from CTISA, which may or may not result in further risks? LW advised he was not absolutely sure that the customer had received anything from the deferred profit scheme. An email from Steve Gannon on the Hedge Fund team had [intimated] that he may have, but had not confirmed that he absolutely had: LW advised he was also concerned that he had taken the risk forward with another customer who was also a member of OAM LLP. With that case, once all of the local issues had been settled the case had been closed down. MJ advised that due to the uncertainty regarding the customer’s distributions from the scheme and that another LLP member had had his case settled swiftly upon resolution of the local issues we must be seen to be applying a fair and consistent approach, Duly his view was to close the risk without awaiting the response from CTISA. LW agreed this and advised he would close the case in its entirety. Result: risk to be closed - nil.” (9) A memo dated10 December 2013 relating to Mr Stewart in which Mr White said: “In terms of the 11/12 ITR [tax return], we also find ourselves back at the position as per my file memo dated 22/11.13 [the memo referred to at [4].] I will convey to the agent that the 11/12 enquiry will now be closed, with nil penalties charged… Agreed by M Jones.”
“There is a PIP [Partnership Investment Plan] mark 1 corporate partner avoidance scheme whereby just over£6m has been allocated to special capital in the Period February 2011 to5 April 2013 . As SG [Mr Gannon] says, this has been confirmed by informal enquiries made by HNWU (on Stewart). If all the special capital has been reallocated to individual partners before FA 2014 bites the tax at risk is approximately£1.7 m which is relatively small beer given the amounts at risk elsewhere. Nevertheless, I recommend that enquiries are opened before the enquiry window closes at the start of October (given that we are still awaiting a handling strategy for these schemes).”
“ It is clear from the accounts that this is a PIP using Special Capital. SC of£1.9m was acquired up to March 2012 and will presumably be allocated to other partners in the LLP in due course. This is the less objectionable version in that they are recording the gross income and paying tax at CT rate on the whole profit share. The profit allocation for the period to 31 March is£4.6m . We now have some information from HNWU on the workings of the scheme which confirms its nature (see separate pdf)….”
“…..Corporate partners - these have been put on the team potential list along with the other [redacted] and related issues. Individuals - copy of this risk assessment to HNWU [High Net Worth Unit] with covering memo highlighting issues found in relation to the individual partners (new corporates etc.)” (3) The document contained a list of all the Members and their profit shares for the year ended5 April 2013 . 423. The bundles also contained an email dated18 September 2014 from Mr Paul Jackson, a senior indirect tax specialist at the Large Business Service to Mr Nick Hagan relating to Odey. Ms Frusher explained that Mr Jackson later became the customer relationship manager for Odey and that Mr Hagan was the tax specialist who at this time was responsible for Odey within the Large Business Service. In this email Mr Jackson referred to gaining “access to the CAF” which, as Ms Frusher explained, is HMRC’s electronic customer file to which an officer is given access only if he or she is working on the case. The email continued: “I went to a meeting yesterday morning which was organised by Bob and Winston about the TF risk assessment…...Winston went through his risk assessment which I attach if you had not seen it…Winston recommends that we open enquiries”. [Below this under a heading “Summary of risks” there was reference to “Corporate partner avoidance - [PSCL]…… I now realise that you should have been there, as your views would be valuable and you should be in the loop. The expiry window for Odey closes on the 7 October…..If you cannot issue the enquiries, can you suggest a colleague who could help?..” 424. Finally, the bundles contained an undated paper headed “Official - Sensitive” described as an “Anti-Avoidance Board - Technical Paper” (“ the 2014 technical paper ”). This included details of the type of planning undertaken by Odey and HMRC’s views on its tax effects which, broadly, correspond to the arguments they raised in this case. Ms Frusher said that she thought that this was produced in the autumn of 2014. Enquiries into Odey’s partnership tax returns 425. The time limit for opening an enquiry into Odey’s partnership tax return for the 2011/12 tax year expired on25 July 2013 and no enquiry was opened into that year However, as Mr Jackson had requested, Mr Hagan opened enquiries into Odey’s partnership tax returns for the 2012/13 and 2013/14 tax years on6 October 2014 and12 August 2015 respectively 426. In the letter of6 October 2014 , Mr Hagan asked for a copy of Odey’s computation of profit for tax purposes and its profit and loss account to be provided by30 November 2014 . 427. In the letter of12 August 2015 , Mr Hagan asked for more detailed information to be provided by31 October 2015 in relation to the 2013/14 tax year including: (1) copies of (a) all documents relating to Odey such as the agreement governing it, (b) the Remuneration Policy, (c) notices to Members showing how the Plan was intended to work, (d) all documents concerning the profit allocations for 2013/14, (e) documents notifying the Members of their initial profit allocation, (f) any document whereby any limited partner subscribed for capital in Odey and documents concerning any such subscription, (g) documents whereby any limited partner reallocated capital to the Members of Odey and documents concerning any such reallocation, (h) documents in which any Member was notified of the amount of capital to be reallocated, (i) any tax advice received by Odey or its members in connection with the plan and minutes of Odey in which the tax treatment of the Plan was explained or discussed, and (j) the investment management agreements for the Funds managed by Odey; and (2) details of (a) the amounts and dates on which any subscriptions for and reallocations of capital were made by Odey both during and subsequent to the 2013/14 tax year, (b) by whom and by what process (i) the amount of capital to be reallocated to other Members of Odey and the recipients of reallocated capital was decided and (ii) the concept of the plan was introduced to Odey and its Members, (c) in each case, the commercial reasons for the introduction of each of the limited partners as members of Odey, (d) why each limited partner received a profit allocation and how the level of the profit share was determined, (e) whether Members were offered any alternatives to the Plan, and (f) whether Members had the option to say “no” to the Plan and whether any Members declined to participate. 428. Odey responded to the requests for information set out above on29 September 2015 . In the covering letter: (1) Odey set out details of the commercial rationale for the Plan noting it was introduced to engage with the FSA’s Code. Odey said it was compulsory for all Members other than Mr Odey and set out the thresholds for Cash Awards and noted that “Deferred amounts are on risk and since the inception of the Plan, three members have left and all forfeited their potential awards in full” (and Odey listed the Members and the relevant sums). (2) Odey said they were not aware of any significant communication sent by email which had been omitted but that, whilst they had performed a preliminary check of their files for emails, they had not carried out a full scanning of their computer drives or a complete search of their paper files as they considered that would be unduly onerous and time consuming as HMRC’s enquiries would be resolved by the completeness of their responses. (3) Odey said that some of this information had been supplied to HMRC previously in the context of enquiries into two partners’ individual returns which, so far as they were aware, were closed with no adjustments. (4) Odey said that some of the information requested pertained to actions by PSCL and, in order to supply HMRC with any of their communications and internal documents, they had sought their written authorisation. 429. According to the list accompanying the letter, the documents which Odey sent to HMRC at this time included (a) copies of the 2011 LLP Agreement and related documents such as deed of adherence executed by Members and notices given when they left, (b) the Remuneration Policy dated31 May 2011 , (c) as regards the tax year 2013/14, minutes of RemCom meetings, notes from RemCom to ExCo, copies of letters from Odey to PSCL, board resolutions of PSCL including in relation to reallocations of Special Capital, letters from Odey to Members detailing their profit shares, letters from PSCL to Members regarding the reallocation of Special Capital, and (d) copies of investment management agreements between Odey and the Funds it manages. The various documents listed appear to comprise all those evidencing how the Plan was implemented in the 2013/14 tax year in line with the description of the processes used set out above. 430. The list also included an explanation of the commercial rational for the Plan (which in short form corresponds to that set out above) and of the role of PSCL which was described as “owned by a Business Purpose Trust with a fiduciary responsibility to act for the advancement and protection of the Odey Group”
“The Remuneration Policy….details the process by which any profit share is deferred. The board of PSCL determine the reallocation of capital in accordance with their duties and the Remuneration Policy of [Odey] upon the satisfaction of certain commercial hurdles detailed in the Remuneration Policy.”
“identifying that something may or may not have happened, and then further work is needed to confirm that. You wouldn’t necessarily start issuing enquiries or assessments on the basis of such limited information. What I know now is, having seen the plan documentation for Odey, seeing the tax advice and the further information which has been provided as part of the bundles, it is a much fuller view in terms of understanding how the plan formed part of the profit sharing arrangements….when I say "tax advice", I mean the one-page document that has been referred to, which I think has been prepared by EY or the partnership itself and shared with the partners around the time the arrangements were being implemented. It has the pros and cons listed at the bottom….” 438. Mr Williams confirmed that at one time Large Business did have staff at Euston Tower, but at a certain point they all moved to Bush House. He said there were “a number of overlapping teams in this picture”
“Not worked. Initial documents require review”
“ As you can see there is a mixture of the amount of work we have done, From Odey, that has not been reviewed at all, to [redacted name] where they claim to have given us everything that they can. 3 of the cases were worked by a TS before they left the team…” 443. When asked what the “not worked” and related comments meant in re-examination, Ms Frusher said that her understanding was that this meant that the response that was provided by Odey on29 September 2015 had not been reviewed in particular by Mr Hagan as the tax specialist attached to the case before Ms Frusher; it meant that he had not worked the case any further from that point. 444. On10 December 2015 Mr Williams emailed Mr Jackson confirming that Ms Frusher would look at the two cases where there are records to review one of which was Odey. He asked Mr Jackson to arrange for Ms Frusher to have access to the documents. Ms Frusher said that her mandate at this time was to review the information received from Odey on29 September 2015 and advise how HMRC should take that forward. 445. In an email of21 December 2015 Mr Paul Jackson wrote to Ms Frusher noting that his team had started the “PDFing” of the Odey documents and had worked their way up to six tabs on the folder. He asked her if she had access to the case file and said that, if not, he would arrange access. 446. Ms Frusher said that when she became involved she ascertained that HMRC had not raised any enquiry into Odey’s partnership tax return for 2011/12 or into the individual tax returns of the Members who participated in the Plan in relation to that year. She noted that whilst Odey’s partnership tax return showed a profit allocation to PSCL, there was no explanation in the return or the supporting documents of how the arrangements worked in practice. 447. When asked how she had found out that there were no enquiries into the 2011/12 tax year, she said that she had “read-only access” to HMRC’s “Self-assessment software system” which records basic information for a tax year for an individual such as whether there is an enquiry open. She noted that the partnership tax return would also sit within that system. She could not say whether officers looking into Odey’s tax affairs before she did would have had access to this system as an officer has to request access specifically: “Because Large Business focuses on corporate entities, you automatically get given access to corporate tax software…. The equivalent in the income tax field is the self-assessment system. Again, it is automatically given to colleagues dealing with self-assessment returns on a daily basis. So, I requested that access, and was given it. I don’t know whether other tax inspectors within large business would have done the same thing although they could have done.” 448. Ms Frusher said that having gone through all of the material set out above she felt that, when she carried out her review in 2015/2016, she did not have all the information held within HMRC that she might have had. Some of these documents she only saw for the first time at the hearing. Further information requests 449. On17 February 2016 Ms Frusher asked Odey for further information and documents: (1) She noted that she had reviewed the documents provided in respect of the 2013/14 tax year and required further information in respect of the 2012/13 tax year in order to gain a better understanding of the Plan. For that year she asked for copies of documents in which (i) the profit allocations for that period were discussed, described or agreed, (ii) members were notified of the profit allocations, (iii) any limited partner subscribed for capital, (iv) any subscription by a limited partner for capital or any reallocation of capital to other members was set out, and (v) members were notified of any reallocation and the amounts of, and (b) the amounts in which and dates on which any subscription for and reallocations of capital were made. (2) In relation to the tax year 2013/14 she: (a) Asked for copies of any capital call agreements, side agreements, conditions or understandings outside of the LLP Agreement in respect of the profit allocations received by members. (b) She asked for Odey to carry out a wider check for all relevant email correspondence. (c) She noted that Odey had advised that some of the information previously requested required the written authorisation of PSCL and said that HMRC assumed that this confirmation had now been received and the relevant documents could be provided. (d) She asked for tax advice received by Odey in relation to the Plan, copies of all communications, documentation, presentations or other written notices provided to any member showing how the Plan was to work (in addition to the Remuneration Policy which had already been provided) and copies of any documents and communications in which the tax treatment of the Plan was discussed. (3) Ms Frusher also asked for (a) further details with supporting documents of PSCL’s activities in the 2012/13 and 2013/14 tax years, (b) a description of what other checks and measures the directors of PSCL undertook in terms of the performance of the individuals other than the recommendations made by RemCom, (c) copies of any correspondence with the Members in respect of their performance, (d) copies of any supporting documentation (including emails) where Special Capital awards are described, discussed or agreed by the directors of PSCL, (e) details of whether there had been any circumstances where the directors of PSCL decided not to follow a recommendation from RemCom or under which rewards had not been paid (other than as regards Members leaving Odey), (f) for the tax years 2012/13 and 2013/14, a breakdown of each Member’s Special Capital account detailing the dates of the reallocations and withdrawals, copies of the notices from PSCL to ExCo of the decision to reallocate Special Capital, and copies of the vesting schedules as referred to in PSCL’s board minutes, (g) details of the treatment of any Special Capital not paid to member in line with the recommendations of RemCom, (j) confirmation of whether PSCL has operated its own bank account, a copy of the trust deed of the trust which owed PSCL and other related trust documents, details of the group’s intentions for PSCL in future accounting periods and what PSCL intended to do with the remaining special capital of£7.9 million as at5 April 2015 , and (k) details of on what terms Members profit shares have been deferred in the accounting period ending on5 April 2015 if PSCL had not been used as part of the deferral process. 450. Prior to sending the above information requests to Odey, on27 January 2016 Ms Frusher had sent an email to Mr Jackson with a draft of the letter to Odey. She said that a lot of basic information was still to be provided such as tax advice, documents where tax treatment is discussed and email communications. She added that she thought “they had done a fairly good job of implementing the EY planning, and have documented each stage accordingly but there is a distinct lack of evidence of any real review of the special capital awards/individual performance by the corporate vehicle and its directors. There appears to be no deviation from the LLP recommendation”
“HMRC believes that the allocations of profit made by [Odey] to [PSCL], which are subsequently distributed to members of [Odey] in the form of capital, should be treated as allocations of profit to the individual members and be chargeable to income tax. If contrary to HMRC’s view, PSCL is found to be entitled to receive the share of [Odey’s] profits, then the reallocation of sums by way of special capital to an individual member would be considered to be the income of the individual member. This is because amounts received are rewards for services to the partnership, and as a result are taxable as income. It is necessary to issue assessments to protect HMRC’s position and to prevent the loss of tax. The amount of income tax will be based on a percentage of the total unit shares and bonus shares awarded in respect of the “2012 allocation”
“ My reading of the anti-avoidance board document….is it sets out HMRC’s primary challenge, which is the section 850 argument, and then the alternative analysis is the miscellaneous argument……in terms of when the Special Capital comes out to the members and what the tax treatment of that is. In my witness statement, what I’m trying to say…..is in February 2016 and March 2016, it was flagged to our team - first, that Colin Williams, who shared this information with the tax specialists, that under section 30B, on the plain reading of it, we potentially have a problem because we are not looking to increase profits to any individual party, we just want to share them differently across the partners in terms of how we think the tax treatment should be. So, a customer had raised a contention saying, on the plain reading of section 30B, it doesn’t look like you can do that. So, in the alternative, we did assessments on the individual partners under section 29. Just in case section 30B didn’t work, we would fall back on to section 29. The advice of our specialists is that section 30B should work, but it was kind of a belt-and-braces position to adopt. But also you could say the assessments for 11/12 would cover the miscellaneous secondary argument position, although I think, from memory at this point, there isn’t any Special Capital being paid to members that early on in the arrangements….. We knew in 2014 we would put alternative challenges under the miscellaneous arguments. To my knowledge, we didn’t know in autumn 14 about the potential issues with section 30B, and why we might need section 29 instead, if on the plain reading of 30B that we couldn't amend the allocations between the partners…..”. 456. It was put to Ms Frusher that she must have known in 2016 that she would need to use s 29 or open an enquiry to impose the miscellaneous income charge; that could not have been done by s 30B. She said that she did not know if that was necessary because at that stage there may have not been Special Capital coming out to the Members. Provision of further information 457. Odey replied to Ms Frusher’s letter of17 February 2016 on12 April 2016 although, in her view, “very little” additional information was provided. In that letter, Odey set out that they intended to focus for the time being on the documents and information required for the 2013/14 tax year in relation to which, in Odey’s view, Odey had already provided a significant amount of information. The reasons they gave for their approach included that: (1) The documents for the 2012/13 tax year would be substantially the same as those for the 2013/14 tax year which they had already provided except that, for example, the quantum would be different. They said that they had provided a detailed summary of the amounts of Special Capital reallocated to Members for the 2012/13 and 2013/14 tax year. (2) HMRC appeared still to be reviewing the documents already provided and once they had provided a view of that it may not be necessary to provide documents for the earlier year. (3) They understood that in discussions with Ernst & Young, Mr Williams had indicated that he agreed this was a sensible approach. (4) They had provided responses to new questions that were not included in the letter of12 August 2015 . (5) They had already provided documents and information in relation to PSCL to the extent they had received authorisation from it to do so; Odey was not in a position to provide any further detail as it had no legal nexus over the affairs of PSCL as it is a separate legal entity. 458. On22 June 2016 , Ms Frusher wrote to Odey again requesting Odey to provide the outstanding information and documents by29 July 2016 . She said that HMRC: “believe that the allocations of profit made by [Odey] to [PSCL], which have been subsequently distributed to members of [Odey] purportedly as capital, ought to be treated as allocations of profit to individual members and chargeable to income tax. As such, it is important for HMRC to understand the full facts relating to the Plan, before reaching a decision on the appropriate tax treatment.” 459. In that letter, her comments regarding the information/documents requested from Odey, include that (a) although the documents relating to the 2012/13 tax year may be substantially similar to those already provided by Odey for the 2013/14 year, she considered they were reasonably required as they related to a different accounting period, (b) the tax advice was needed as it was important to the issue of whether the Plan formed part of the profit sharing arrangements and to whether s 773 ITA applied. The information request included with the letter included a new request for details of the specific roles and activities of the Members who had participated in the Plan. 460. On22 June 2016 Ms Frusher also wrote to PSCL asking for information to be provided by29 July 2016 : (1) She noted that HMRC were aware from their correspondence with Odey that recommendations were made by RemCom to PSCL in respect of profit allocations to individuals participating in the Plan. She asked for details of what other reviews the directors of PSCL had undertaken in terms of the performance of the individuals and for copies of all relevant documents in that respect. (2) She asked for copies of any documents relating to capital awards and tax advice received by PSCL in relation to the Plan, copies of notices from PSCL to ExCo of the decision to reallocate Special Capital to Members for the tax year 2013/14, further details of the intention of the directors of PSCL in respect of the£7.9 million of Special Capital remaining within PSCL as at5 April 2015 and any other information or documents connected to the Plan which would assist in HMRC’s understanding of how the Plan operated. 461. On8 July 2016 , Odey replied stating that they considered they had already complied with many of HMRC’s requests and that they thought it had been agreed at a meeting between Mr Williams and Ernst & Young that until such time as HMRC were in a position to present the substantive issues of their enquiry and related technical support that no further such information requests would be made. They said they understood that a further meeting was to take place between HMRC and Ernst & Young on19 July 2016 to discuss these issues and they proposed to await the outcome of the meeting to determine what if any further information was required. 462. Ms Frusher replied on12 July 2016 asking for confirmation that Ernst & Young was acting for Odey and, if so, for the required form authorising Ernst & Young to act as their agent. She said that if she received this and Odey agreed to abide by any agreements arising from HMRC’s discussions with Ernst & Young on this matter, she was able to allow an extension to the deadline for providing the outstanding information to31 August 2016 . 463. On29 July 2016 Mr Jackson of HMRC notified Odey that HMRC “were content to let the deadline slip” for the provision of information essentially in light of the ongoing discussions with Ernst & Young. 464. Odey did not provide any further information on the arrangements during 2016. Ms Frusher thought that discussions at that time centred on whether Odey would be included in Ernst &Young’s “project plan” whereby they proposed to act as a single point of contact with HMRC in relation to a number of taxpayers who had used similar arrangements to the Plan. On9 November 2016 , Ernst & Young confirmed that Odey had agreed to this approach and meetings with HMRC were then arranged for1 February 2017 . 465. On4 January 2017 Ms Frusher wrote to Odey setting out HMRC’s summary of the facts as they understood them and HMRC’s views on the correct tax treatment which, in summarised form, corresponds to the arguments put forward at the hearing. She asked for the outstanding information and documents to be provided by1 February 2017 . She also wrote to PSCL at the same time asking for the outstanding information requests to be dealt with by1 February 2017 . She wrote to them again on19 May 2017 asking for the information to be provided by31 May 2017 . 466. Odey responded at some length on27 January 2017 and made various corrections to the facts set out by HMRC. The notes of the meeting with HMRC on1 February 2017 show that Odey provided detailed information on how the Plan was intended to work. Odey provided further information and documents between May to September 2017. 467. Ms Frusher said that the corrections made by Odey to HMRC’s summary of the facts and the explanations they gave at the meeting in February 2017 provided some further background detail of the Plan but did not change her view. She added that the limited further information provided in 2016 or early 2017 did not change her view that the profits allocated to PSCL were in fact taxable as income of the relevant Members or that the alternative position applied. Issue of assessments in March 2017 468. Ms Frusher raised assessments on the relevant Members for the 2012/13 tax year at the end of March 2017 in respect of sums received on the reallocation of Special Capital made to Members in that tax year. She said in her witness statement that she did not make the assessments until this time because: (1) Although at this time her view of the correct tax position remained as set out above and she felt Odey were not cooperative with her requests for information during 2016 she felt that it was important to remake the requests for information to be provided and give Odey time to comply before making the further assessments. (2) She also wanted to give time for a more open dialogue with Odey that was possible only once they confirmed they were taking part in the Ernst &Young “project plan”. 469. These assessments were made by another officer at HMRC on Ms Frusher’s instructions. She explained that she made the assessment in terms of the figures contained in them, and she instructed colleagues in the High Net Worth Unit that she wanted these assessments to be made. It was considered to be more appropriate to issue the assessments through the taxpayers’ normal point of contact. 470. When asked at the hearing for a further explanation, Ms Frusher said that there was a delay as at the time she was still trying to obtain information from Odey before she made any further assessments and she was obviously, mindful of the time limits. She said that she would not have raised assessments for 2012/13 when she was still information-gathering and still trying to open a dialogue with Odey and that she had issued the discovery assessments for 2011/2012 because she was coming up against a time limit. 471. When asked whether she had made a discovery when she issued the assessments for 2011/12 she said: “I made a discovery based on the information I had available, which formed my initial view, and I made a discovery for 11/12 on that basis”. 472. When asked why she did not at that time make a discovery in respect of the 2012/13 tax year, she said: “because I wanted to get the outstanding information….to further develop that view. There were key pieces of information outstanding from the partnership in terms of the tax advice they’d received. I was pushing for evidence of the review process because this wasn’t evident in the company minutes or the remuneration committee minutes. They were very thin in terms of detail and understanding to what extent PSCL applied its discretion in paying those awards out to individuals two years down the line, and I wanted to use the time in 2016 to obtain that information from the partnership, which is why I entered into the correspondence that I did.” 473. It was put to her that she did not need the information she referred to make a discovery. She said that: “ in terms of looking at the alternative arguments, the Special Capital amounts coming out and also the s 773 argument, sales of occupational income, looking at the purpose of the arrangements in terms of if there is a tax motivation, that is a key piece of information. We would always try, you know, to keep having a conversation with a customer to get information. And as you see in early 2017, we actually had a face-to-face meeting for them for the first time and there was a possibility they may have chosen to settle with us and we would not issue assessments before that if we were in a good time window, which may have been detrimental to those conversations.” 474. She was not sure when HMRC first became aware of planning such as that undertaken by Odey but she thought it was around 2012. It was put to her that a submission was made in the BlueCres t case, in which she also gave evidence for HMRC, as set out at [30] of the decision in that case, that in the appellant’s view HMRC’s analysis had remained, essentially, static since 2013 in the case of planning of the type Odey entered into. She confirmed that in that case HMRC had accepted that was the case. She was asked why they did not accept that in this case. She said: “ The BlueCrest arrangements…..were implemented quite a few years before some of the arrangements we were looking at, including [Odey]. Whilst there is a common theme across these arrangements, they are all very, very fact dependent. So, in the anti-avoidance box handling document from 2014, that obviously identifies what the main challenges could be, but it was very much about going out and finding the evidence and facts to support those challenges we were going to make and having those conversations with the customers.” 475. Ms Frusher said in re-examination that she probably read the 2014 technical paper in early 2016. When asked why she did not make the assessments of all the individuals at that time, she said: “Because I made the 11/12 assessments, as I said, because I was coming up to a time limit, so it was important that I did do that. In terms of the secondary arguments, understanding the purposes of the planning - one of those being the tax purpose - is important, so obtaining any tax advice documents which I didn’t have in early 2016, I don’t think I obtained until summer of 2017. That’s why I wouldn't have done all of the assessments in one go at that time. I wouldn’t have also had information on what Special Capital amounts had been paid to individuals. The first assessments done in 11/12 were very much estimates based on the information we had.” 476. She was asked what is involved in forming a view, in respect of an individual Member’s potential assessment, as opposed to the partnership as a whole. She said: “I would have looked to see what amounts they were allocated per the award letters; I would want to see the potential review process that may have been attached to them via the company minutes; where they weren’t available, I asked for other correspondence, emails, et cetera, which I was never given; and I would have looked at the individual’s tax return to see if they made any specific disclosure in terms of these arrangements, and perhaps what their analysis was. I think as well going back to the tax advice point, seeing that documentation and seeing from a partner’s perspective when these arrangements started, what they would have seen entering into those arrangements and what their understanding would have been.” 477. There was the following further main correspondence in 2017 and early 2018: (1) On31 March 2017 , Odey wrote to HMRC stating that it was taking longer than they had anticipated to compile the outstanding documents and information requested by HMRC. (2) On 10 May, Ms Frusher replied stating that this should be provided no later than31 May 2017 . (3) Odey provided some of the requested items on12 May 2017 including the documentation requested for the 2012/13 tax year. (4) On 15 June, Ms Frusher wrote to Odey reiterating the request for email correspondence and further details of the particular roles and activities of individual Members who had participated in the Plan for the purposes of determining if the Sales of Occupation income legislation applies. (5) On14 July 2017 , HMRC wrote to Odey with their final view of the Plan. (6) On15 September 2017 , Odey provided further outstanding items. (7) On19 September 2017 , Ms Frusher sent Odey closure notices for the enquiries into its partnership tax returns for the tax years 2012/13 and 2013/14 and made amendments to those returns by reducing the profits allocated to PSCL and increasing those allocated to the relevant Members. (8) On24 October 2017 , Ms Frusher wrote to Odey offering a review of HMRC’s decision in respect of these years under s 49C TMA. Odey accepted this offer in a letter of20 November 2017 and HMRC notified them of the outcome of the review on18 January 2018 . Issue of assessments for 2013/14 478. Mr Williams explained that: (1) When, in early November 2017, Ms Frusher began a period of maternity leave, he initially asked Mr Nick Haynes to assume temporary responsibility for Odey as a tax specialist but in late November 2017 Mr Ben Blakely was appointed to this role. (2) Around this time, Odey took up HMRC’s offer of a statutory review (as set out above) and Mr Blakely’s immediate task was to prepare a submission for HMRC’s Review Team. Mr Williams supported him in this, offering advice and ultimately authorising the submission. (3) In January 2018 Mr Blakely organised the making of enquiries into individual partners' tax returns for 2015/16, where those were required. Again, Mr Williams supported and advised him in this task. (4) On13 February 2018 Mr Williams asked Mr Blakely to consider whether discovery assessments were required for the year ended5 April 2014 . In the email to Mr Blakely he said: “Please could you check whether discovery assessments are required to protect the miscellaneous income argument?”
“It was my custom to raise this with the tax specialists each year, so obviously I would be aware that there was an assessing time limit coming up. But in this case, I think I had actually forgotten about it, and….I was prompted when I received an email from John Deuchars [in February 2018], asking me whether assessments were required.” 480. It was put to him that, in effect, he asked Mr Blakely whether assessments were needed because s 9A inquiries had not been opened. He said: “No. What I would expect somebody to do in those circumstances is to consider a number of things. One is certainly that, whether assessments were required. I would also expect them to consider - given in this case the assessments were in relation to the miscellaneous income argument, I would have expected Ben to consider whether the individuals had, in that year, received any allocations which could have potentially been subject to that assessment. I would have expected him to consider what disclosures had been made so that, you know, to judge whether or not he was entitled to make a discovery assessment; and I would also expect him to consider whether any amounts had been returned as taxable income.” 481. It was put to him that the wording in his email of13 February 2013 does not seem to constitute a request for Mr Blakely to consider whether there was an insufficiency of tax. He said that was how he intended it. It was put to him that his request was capable of meaning that the insufficiency of tax was taken for granted, and the question for Mr Blakely was whether action was needed to remedy it. He said that he could see that the email could be read that way, but it is certainly not what he intended. 482. He did not know in detail what Mr Blakely did when he received the email. He referred to the spreadsheet in the bundles which set out reallocations of Special Capital to the relevant members in the 2013/14 tax year which he assumed was considered by Mr Blakely. The date on the spreadsheet appeared to state20 February 2016 but Mr Williams could not confirm when HMRC received this information. He did not know when this spreadsheet was produced or who had considered it before Mr Blakely. 483. It was put to him that Mr Blakely might have discovered that no assessment had yet been issued and that somebody else might have already thought there was an insufficiency of tax. He said that was possible but he had seen no evidence of it. It was put to him that Ms Frusher would have thought there was an insufficiency if she had looked at this. He said that was possible but noted he could not say what she would have thought. He agreed that if she had carried out the same “exercise”, he would have expected her to come up to the same conclusion. 484. In re-examination he was asked what “exercise” he meant. He said: “the exercise of looking at the tax returns and then considering, partly, whether there was an inquiry, so an assessment might be required; whether the individual had received any sums of money that could be regarded as miscellaneous income; whether there are any notes on the tax return that would have constituted a disclosure that prevented a discovery assessment; and whether the individual had returned that what we say is income as taxable income…. It has happened in other cases within the project, that people have regarded the amounts -- have included the sums they received as special capital coming out that they have actually included it in their tax returns as taxable income”. 485. In re-examination Mr Williams was asked what the phrase “Not worked. Initial documents require review” meant or signified in the email of8 December 2015 sent to him by Mr Jackson of HMRC (see [414]). He said: “as Ms Frusher indicated, one of the reasons that the Taskforce was brought in was because of resource pressures. London Financials, as it then was, were unable to work all of these cases as quickly as was desirable, so these are - there were a number of cases where documents had been received where the tax specialists allocated to them had either moved on, or were simply not able to devote the resource to them, and therefore the additional resource was brought in. I was brought in to run the project; with me I brought in certain tax specialists, of which Ms Frusher was one, and the project manager, et cetera, to add that additional resource.” 486. In re-examination he was asked to explain why he said “the substance of the work” was done later by Ms Frusher. He said: “I was involved from October 2015, when I became project lead for this project. At that time, my role was to provide advice and support to the tax specialists working on the project, and to oversee the inquiries. So, whilst I wouldn’t have known the detail of each inquiry, I would have a general feeling for how the inquiries were progressing, and I am aware that pretty much all of them were at fairly early stages of information gathering. Most of the making of technical arguments, for instance, the technical decisions, took place at meetings. As we heard from Ms Frusher, the meeting in this case took place in 2017. I attended that meeting. So, that’s when, having finished the information gathering, or at least partially gathered the information, we would have the sort of discussions about how the law applied to the facts of this case. Most of that took place after my involvement, and therefore after Ms Frusher’s involvement.”
“He referred (at [15]) to the fact that the word “discovers” in this context has a long history, and that, even though the conditions under which a discovery assessment may be made have been tightened following the introduction of self assessment, nevertheless the meaning of the word “discovers” has not changed. Thus, in R v Commissioners for the General Purposes of Income Tax for Kensington , ex parte Aramayo 6 TC 279 at 283, Bray J said that it meant “comes to any conclusion from the examination he makes and from any information he may choose to receive” and Lush J said that it was equivalent to “finds” or “satisfies himself”
“ In Cenlon Finance Co Ltd v Ellwood (Inspector of Taxes) (1962) 40 TC 176 ,[1962] AC 782 , the House of Lords considered the meaning of the word 'discovers'. They rejected the argument that a discovery entailed the ascertainment of a new fact. Viscount Simonds said ( (1962) 40 TC 176 at 204,[1962] AC 782 at 794): 'I can see no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered. The words are apt to include any case in which for any reason it newly appears that the taxpayer has been undercharged and the context supports rather than detracts from this interpretation.'” 489. The UT noted, at [24], that in the decision in Aramayo to which Lewison LJ referred, Bray J found that “discovers” cannot mean to ascertain by legal evidence. But, they said: “it is nevertheless the case that an officer’s discovery must be a reasonable conclusion from the evidence available to him. To that extent, although the test in s 29(1) is a subjective test, an element of objectivity is introduced in examining the reasonableness of the officer’s conclusion (see R v Commissioners of Taxes for St Giles and St George, Bloomsbury, ex parte Hooper[1915] 3 KB 768 , at 782).” 490. They set out, at [27], that the taxpayer referred to what Lord Denning had said in Cenlon Finance (which Lewison LJ had also referred to) at 799, namely that “if a lawyer reads his text book and realises he was mistaken about the law he will make a discovery”
“that the threshold is crossed when the lawyer learns a new point of law. However, if the same lawyer, having fully considered the matter and having reached a conclusion, then thinks about the matter further and (without the benefit of further research into the facts or the law) simply changes his mind, then Mr Gordon says that this is not a discovery that his first conclusion was wrong; it is merely a change of opinion.” 491. At [28], they concluded that they agreed with the taxpayer that the word “discovers”: “ does connote change, in the sense of a threshold being crossed. At one point an officer is not of the view that there is an insufficiency such that an assessment ought to be raised, and at another he is of that view. That is the only threshold that has to be crossed. We do not agree that the lawyer, in Lord Denning’s example, would be regarded as having made discovery any the less by waking up one morning with a different conclusion from the one he had earlier reached, than if he had changed his mind with the benefit of further research. It is, we think, evident that the relevant threshold for there to be a discovery may be crossed as a result of a “eureka” moment just as much as by painstaking research. There must be something new.” 492. At [29], they said that the mere fact that a threshold must be crossed does not mean that something more than a change of opinion is required. At [30], they noted that in Cenlon Finance , Viscount Simmonds considered the following comment by Lord Norman in IRC v Mackinlay’s Trustees 22 TC 305 (at page 312) was correct: “I do not think it is stretching the word "discovers" to hold that it covers the finding out that an error in law has been committed in the first assessment, when it is desired to correct that by an additional assessment.” 493. They referred also, at [32], to what Lord Normand had said in Mackinlay’s Trustees (at 311 and 313) as they explained had been approved in other cases: “I think the word ‘discover’ in itself, according to the ordinary use of language, may be taken simply to mean ‘find out’. What has to be found or found out is that any properties or profits chargeable to tax have been omitted from the first assessment. Of course, if there were any reason in the context for restricting the word ‘discover’ to the discovery of an error in fact, that restriction would necessarily receive effect, but in my opinion the context points, not to any such restriction, but, on the contrary, to so wide a meaning that the word ought to be held to cover just the kind of discovery which was made here, when the Special Commissioners found out that, by reason of a misapprehension of the legal position, certain of the profits chargeable to tax had been omitted from the first assessment.” 494. They concluded, as follows, at [37]: “ I n our judgment, no new information, of fact or law, is required for there to be a discovery. All that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment. That can be for any reason, including a change of view, change of opinion, or correction of an oversight. The requirement for newness does not relate to the reason for the conclusion reached by the officer, but to the conclusion itself. If an officer has concluded that a discovery assessment should be issued, but for some reason the assessment is not made within a reasonable period after that conclusion is reached, it might, depending on the circumstances, be the case that the conclusion would lose its essential newness by the time of the actual assessment. But that would not, in our view, include a case, such as this, where the delay was merely to accommodate the final determination of another appeal which was material to the liability question….” 495. In the UT’s decision in Tooth the UT set out, at [75], that a discovery of a situation set out in s 29(1) connotes “a change in a state of mind” as was held in Charlton at [28] and, at [76], that as was said in Charlton at [37], no “new information, of fact or law, is required for there to be a discovery”
“ the requirement for the conclusion to have "newly appeared" is implicit in the statutory language "discover"”. 501. Mr Chacko said that HMRC does not accept, in principle, that “staleness” should have any role at all in a case of an assessment that is issued within the applicable statutory time limits. In an appropriate case HMRC will argue that point in the higher courts. They accept, however, that as matters stand, there is case law, which is binding on the tribunal, that “staleness” operates as a ground of invalidity even if the assessment is made in time. Mr Chacko referred to the UT’s earlier decision in Pattullo v Revenue and Customs Commissioners[2016] UKUT 270 (TCC) (“ Pattullo ”), which was cited in Tooth and Beagles . 502. At [52] of the Pattullo case the UT said that, quite apart from the “highly persuasive passages” in Charlton at [37] and Corbally-Stourton v Revenue and Customs Commissioners [2008] STC (SCD) 907 at [44] “the requirement for the discovery to be acted upon while it remains fresh” appears to arise on the natural meaning of s 29(1) itself given it applies “if”
“The word “if”, like many words in the English language, has a variety of shades of meaning. It may be purely conditional. But it may equally have a temporal aspect, as in the expression “if and when” (e.g. if the sun comes out we shall go to the beach). I do not regard this as stretching the meaning of “if”
“Mr Gordon was right, in my view, to accept that the discovery could be kept fresh for the purposes of being acted upon later…..each case would turn on its particular facts. He gave the example of notification being given to the taxpayer of the discovery in the expectation that matters could be resolved without the need for a formal assessment to be made. No doubt there are many other examples which could be given. The UT in Charlton at para 37 recognise that the decision in each case will be fact sensitive. I do not think it would be helpful to try to define the possible circumstances in which a discovery would lose its freshness and be incapable of being used to justify making an assessment. But I consider that Mr Gordon was right to accept that it would only be in the most exceptional of cases that inaction on the part of HMRC would result in the discovery losing its required newness by the time that an assessment was made.” 504. The UT concluded, at [57], that in the circumstances of that case, a delay of some 18 months or more would have made the discovery stale. 505. Mr Chacko noted that Pattulo was referred to in Beagles and considered that the UT in that case also endorsed the view that it is only in exceptional cases that inaction on the part of HMRC would result in a discovery losing its essential newness by the time an assessment is made (referring to [50], [53] and [87]). 506. Mr Goldberg made the following main points: (1) From the evidence there is a prima facie case that Mr White made a discovery, in that he was certainly aware of the possibility of insufficiencies of tax in the appellants’ tax returns, as early as in November 2013 and/or that one of the many other officers involved did so by no later than September 2014. At that time there was an Odey case team who considered the risk assessments which set out the risk in relation to the Plan and the 2014 technical paper was produced which clearly demonstrates that HMRC had a strategy for dealing with risks arising from this type of planning. (2) The fact that Mr White seemed fully aware of risk in relation to Mr Fletcher and Mr Stewart before he received any information beyond that in their tax returns, plainly indicates that there is sufficient information within the tax return made by the appellants for an officer of HMRC to see at least the possibility of an insufficiency. Moreover, the tribunal must bear in mind the overall context as regards what HMRC knew of planning of the type undertaken by Odey which they refer to as a “Partnership Incentive Plan”