Chris Hoyle v The Commissioners for HMRC [2024] UKFTT 1060 (TC)

“As a consequence of the turbulence affecting global financial markets from 2007 to the present date and the ensuing well-documented capital adequacy issues which have arisen in the banking sector, Partners are now more aware of the real risk that, in the event of their Lending Bank and/or Guaranteeing Bank failing, the collateral which provides security for the lease rentals distributed as drawings to repay their loans may be forfeited, thereby exposing Partners to the obligation to re-pay capital contribution loans out of their own funds. This issue is made worse where Lending Banks have called, as is their right under their security arrangements over partnerships guarantees, for a Lessee’s cash deposit in lieu of a bank guarantee to provide ongoing lease security. In such circumstances, the Partnerships and Partners are relying upon agreements between the relevant Lessees and the Lending Banks to provide security for future lease payments rather than having in place a direct guarantee letter of credit from a Guaranteeing Bank. This leaves Partners more exposed in the event of Lending Bank failure. In addition, a number of Partners have drawn down loans from UK branches of overseas Lending Banks which may become reliant upon fiscal support from the foreign governments.” (2) The second was the increase of the top rate of income to 50%: “Whilst this was considered a risk factor when Partners decided to contribute to Partnerships, Partners made their investment decisions to support the British film industry through investing in a film sale and leaseback partnership based partly on those election pledges to keep the top rate of tax at 40%. For those Partners who are now faced with a 50% top rate of income tax, their investment in the sale and leaseback partnerships may well have become uneconomic. (3) The third was that “Many Partners’ financial and personal circumstances have changed or Partners have died or become bankrupt”: “Despite these issues, Partners are not in a position to sell or gift away or otherwise pass on their interests in the partnerships or resign from Partnership, since to do so they would need permission from the Lending Banks, who have a charge over Partners’ interests in their partnerships and over the Partnership assets. Scotts are not aware of any partner receiving such permission. By repaying Partners’ capital contribution loans to the Lending Banks in the manner proposed below, Partners would have no further borrowings and hence no further exposure to any bank and would be free to gift or sell their interests in their Partnerships. Partners would also be free to sell or gift their shares in the Partnership subject to the fresh security interests which the Proposed Purchaser would take over their Partnership assets. If a purchaser or giftee is found for such an interest, it is likely to have only a nominal sale value and the advice of senior tax Counsel (Andrew Thornhill QC) is that neither the proposed repayment of loans from the proposed sale of Partners’ Capital Accounts nor such a subsequent sale would result in a tax charge beyond a nominal tax charge on any price paid by a purchaser or the market value of any gift, which as mentioned, is believed to be nominal. It must be stressed that any purchaser or giftee would then stand in the place of existing Partners in their Partnerships and there is no certainty that such a purchaser or giftee would be found. Alternatively, following the proposed transaction, Partnerships would be in the position to dispose of their assets subject to the permission of the Proposed Purchaser and subject to the lifting and reimposing of the Proposed Purchaser's charge over those assets. Again there is no certainty that such a purchaser can be found or that the Proposed Purchaser of Partners’ Capital Accounts would agree to such a transaction.”

“It is now proposed to Partners that they sell their beneficial interests in their Capital Account to the Proposed Purchaser and use the funds from such a sale to repay their existing capital contribution loans from the relevant Lending Banks. In order to allow the Proposed Purchaser to recoup its investment, it would benefit from Partners’ future drawings from the Proposed Purchaser up to the level of drawings arising from secured minimum rentals under the Partnership leases. Following repayment of the existing loans, the Lending Banks would be able to lift their security interests over Partnership assets which would allow the Proposed Purchaser to take security for its interest in Partners’ drawings by taking a charge over the secured minimum rentals. Following completion of the proposed transaction Partners would: • have no capital contribution loans from the Lending Banks; have no security charges over their Partnership interest; • would be free to sell or gift their Partnership interest or arrange for their Partnership to sell its assets but would; • still be liable to income tax on sums equal to their pro rata shares of minimum rentals, as they would still be a Partner in the relevant Partnership and be entitled to the same Partnership share of profits or losses but; • would not be entitled to interest relief on any payments to the Proposed Purchaser beyond the purchase price paid by the Proposed Purchaser. The proposed transaction would therefore leave Partners with no capital contribution loans and leave them free to sell or gift their interests in their partnerships or arrange for their partnerships to sell their assets but would result in a worse tax position for Partners if they did not subsequently gift or sell their Partnership interests or arrange for their Partnerships to sell their assets.”

“1. There is no certainty that, following a sale of a Partner’s Capital Account, a purchaser or giftee could be found for a Partner’s interest in his or her Partnership or a buyer found for their Partnership’s assets In such eventuality, those Partners will remain liable to tax on a sum equal to his or her share of the Partnership’s minimum lease rentals but will not receive the benefit of any interest relief, thereby resulting in a significantly increased tax liability. 2. In the event that Counsel’s opinion on the tax analysis is incorrect in any matter, an unanticipated tax charge may arise as a result of the transactions envisaged here. 3. With the litigious approach taken by HMRC today, particularly since 2005, they may seek to challenge tax counsel’s view on the taxation analysis in a tax tribunal or to a subsequent appeal court and Partners must be prepared for such an approach. It is also very likely that HMRC will wish to review any transactions outlined here for every Partnership and Partners should be aware that they are likely to open enquiries into their Partnership and Partners tax affairs to allow them to carry out such a review. SA is not authorised to and does not in fact, give legal, investment, accounting or tax advice and those wishing to participate should therefore seek their own independent investment and tax advice before proceeding. The opinion of Counsel is available to partners and their advisers for information purposes only and may not be relied upon in whole or in part howsoever or at all.”

“We are attaching a revised proposal to members to refinance their existing bank loans. Whereas a previous proposal was to refinance only from the proceeds from disposal of members’ capital accounts, the revised proposal is to refinance either from a disposal of members’ capital accounts or from the proceeds of a replacement loan. The intention of this amended proposal is that those members who have expressed a desire to hold on to their LLP interests throughout the remaining life of the LLP will be able to do so whilst allowing those members who wish to refinance and the proceeds of disposal of their capital accounts to do so. As previously mentioned, the lending bank has made it clear that they will require all their loans to be repaid at the same time and will not accept a partial repayment…Following the repayment of those members bank loans such members would be free to seek a purchaser for their remaining interest in the LLP. “By repaying Partners’ capital contribution loans to the Lending Banks in a manner proposed below, Partners would have no further borrowings and hence no further exposure to any bank and would be free to gift or sell their interests and their Partnerships. Partners would also be free to sell or gift their shares in the Partnership subject to the fresh security interest which is the Proposed Purchaser would take over would Partnership assets. If a Purchaser or giftee is found for such an interest, it is likely only to have the nominal sale value and the advice of senior tax Counsel is that neither the proposed repayment of loans or proposed sale of Partners’ Capital Accounts nor such a subsequent sale would result in a tax charge beyond a nominal tax charge on any price paid by a purchaser or the market value of any gift, which as mentioned, is believed to be nominal. It must be stressed that any purchaser or giftee would then stand in the place of existing Partners in their Partnerships and there is no certainty that such a purchaser or giftee could be found. Alternatively, following the proposed transaction, Partnerships would be in the position to dispose of their assets subject to the permission of the Proposed Purchaser and subject to the lifting and reimposing of the Proposed Purchaser’s charge over those assets. Again there is no certainty that such a purchaser can be found or that the Proposed Purchaser of Partner’s Capital Account would agree to such a transaction.” “The proposal to those who may wish to remain in the LLP … for the remaining of life of the LLP … is that they enter into replacement loan agreement on terms which require them to use the full proceeds of those loans to repay their existing bank loans … and the replacement lenders recourse in the event of a shortfall of lease income would only be to the members’ LLP drawings and not to members other assets. This is better than the current position with their existing bank loan where the bank would have recourse to all assets of the members in the event of a failure of the bank.” “Mr Andrew Thornhill QC has confirmed that members availing themselves of such replacement loans would continue to enjoy the benefit of interest relief and there would be no detrimental tax consequences of obtaining such limited recourse replacement loans.”

“After payment of, or provision for, any expenses of the LLP, allocations and Net Profit and Net Loss shall be made to the relevant Capital Accounts (or, if relevant, current accounts)…Net Profit shall be distributed as soon as reasonably practicable following its determination as aforesaid…” “No Member shall have the right to withdraw any part of his Capital Account except subject to consent by all members pursuant to a distribution of LLP assets made in accordance with Clause 8” “Subject to the Bank Security, upon dissolution of the LLP as set forth in Clause 9, distributions to members shall be made as follows … First, pay off liabilities… Then, the balance of the assets shall be distributed to all Members, pro rata, (according to their respective aggregate Capital Contributions).”

“there was a clear and pressing need to remove [BOI] from the existing Partnership arrangements as its potential bankruptcy or entering into administration would precipitate demands for the repayment of loans by the Bank to Partners…As the loans were buttressed by a network of guarantees and charges the removal of the Bank in such a manner would render the arrangements unworkable to the considerable distress of the Partnerships and the Partners. I understood that an orderly removal of the Bank from the structures would enable appropriate changes to be made to enable the Partners to remain in the same position in respect of future profits arising from the leasing of the films. That position was that while Partners remained borrowers…the profits would be reserved towards the repayment of such borrowings and not received by the Partners. Any new lender or purchaser of the Capital Accounts would have rights to such profits in the same manner as the Bank.” (2) In the course of those discussions, the possibility of selling Capital Accounts emerged as a viable solution. He indicated that partners could assign the accounts without ceasing to be partners. He was instructed by an e-mail of 19 January 2011 and pursuant to his advice the relevant resolutions were drafted. On 3 February 2011, he advised that they were apt, appropriate and complete to carry into effect the approval of the scheme for disposal of Capital Accounts. He was closely involved in the draft documentation. (3) He was aware that the drafting had to allow for the probability that not all members would seek to sell their Capital Accounts as some would re-fund from alternative lenders. All members had to take action to be rid of the loans. He understood that Mr Dryburgh had explored the possibility of finding a new funder to take over all the loans but found that most institutions were either unresponsive or indicated prohibitive costs – this was not a propitious time to be seeking funding from banks or other financial institutions. (4) He was satisfied that the explanatory letter did not constitute a financial promotion but advised that it should be prepared to the standard of such a promotion as it was essential that all members be fully and appropriately informed as to its purport and effect. During this drafting exercise he was convinced that he was “engaged in a firefighting exercise as a result of the probability rather than possibility of the liquidation of [BOI]”

“We were faced with the pressure of the Bank for repayment of [the loans], the prospect of the bankruptcy of the Bank and the repercussions of the failure by the proprietors of the Lessee Companies to keep those companies in good standing…They were unexpected contingencies whose consequences could have severe adverse effects on the Partners and the Partnerships. We were struggling to find solutions - not to obtain some tax advantage for the Partners. Indeed, I understood that [SA] sought to ensure there was no unexpected adverse tax consequences to either sellers of capital accounts or replacement borrowers as a result of the proposals made to clear [BOI’s] loans. The Partners were each advised to take their own advice from their own tax advisers.” (7) He and Mr Dryburgh had discussions with TS’s office. They had to satisfy themselves that there was no residual value for the Crown in the deposits. If there was no value the policy was to disclaim. The policy was also to dispose of assets rather than to enter into long term commercial arrangements. BOI did agree to making arrangements, including the continuation of interest payments on the secured deposit, thus enabling the preparation of an orderly reconstitution of the overall scheme. He recalled: “surmising that [BOI] perceived that such an orderly process would benefit the Bank by avoiding the costs and uncertainties of enforcing loan repayments. These matters considerably delayed the exercise of the sale of capital accounts.” (8) On 27 September 2012 TS issued the notices of disclaimer. BOI “was central to the overall arrangements as it was protected from a default by any of the borrowing Partners by a web of mechanisms and security”

“(1) allow all members to sell or gift their interests in the LLP; (2) agree that members’ future profit shares whilst remaining the same in overall percentage and numerical terms would derive solely either from the rents being paid under the replacement lease security with the replacement lender for those members who have repaid their loans from replacement loans or from the rents being paid under the replacement lease security with the acquirer of members’ capital accounts (the “Acquirer”) in the case of those who sold their interest in their capital accounts; and (3) appoint [SA] to seek possible buyers either for members’ interests or for those leases or shares in lease income which are now the subject of the security taken by the Acquirer. For the avoidance of doubt, no resolution will be brought forward that amends the overall profit shares of those who took the replacement loan nor to dispose of any assets which will ensure their profit shares remain the same and indeed any resolution to do so would be ineffective as a result of the protective changes made to the Members’ Agreement in April, 2011. Nor will any resolution seek to require a sale by any member who does not wish to sell. We would anticipate that notice following later this week.”

“And in some respects I think it was very late in 2012 before we had that comfort…even though we’d completed and got anagreement on the lessee issues, there were many other issues with lawyers and the bank and the bank’s lawyers which still had to be sorted out.”

“even though we would be coming to them trying torefinance, they would be more nervous about doinganything which would disturb the status quo, but not – as we found out later with [BOI] – not so much so that they wouldn’t actually do anything whichthey saw to be legitimate and within their power.” (3) He was taken to correspondence with Sir Peter Burt which took place in 2012. He confirmed that Sir Peter Burt was an investor in the West End Media Partnership who sold his capital account in that partnership in 2012.In an email from him to Sir Peter Burt, he said: “…would the lending banks find it attractive in today’s climate to be holding substantial producerdeposits [while] having their loan repaid? I am surethey would be pleased – every bank seems to need cash!I agree that it would be easier to refinancewithin the same bank/banking group but I am concerned that Tax Counsel may adviseit would be better to find new funding and I am alsoconcerned the banks may find it politically difficult toassist in an internal or intra group refinancing.” (4) He said that there was a clear nervousness about doing anything which could upset the status quo. He agreed that (a) basically any refinance proposal he came up with he would run past tax counsel and said “when…you do anything like thisit’s wise to go back to tax counsel. It’s difficultareas of legislation and you would always seek advice”, and (b) the concern was that there was no risk of losing the original loss relief and makingsure that the structure did not fall within chapter 5. He added that he wanted to make surethat he could take people out of the risk that theywere in with the full recourse loans withoutcreating any tax charge. He explained that when the bank called for the cash they held that deposit, subject to an all-encompassing agreement, to hold and to use it to pay the lease payments and the question to Sir Peter Burt was: would the banks find it attractive to still hold onto that money even though they were paying interest on it at 5%, but to have their loan repaid?; that would have resulted in a net cash inflow to them, so on one side they would have the cash from the partners, on the other side theywould have their money from their deposits. (5) He was taken to a document in which Sir Peter Burt said: “…there are two aspects to the proposal. Oneis a straight arbitrage play – the partners arecurrently receiving rentals equivalent to, say, [to] 10% and also borrowing at [10]. If the loan could be refinanced and the borrowing rate reduced to say…there is [a] 5% p.a. additional parameter to thepartners.” “The second part of your analysis if I read itcorrectly is even more attractive but is much morecomplicated and will not have been made easier bythe Government’s latest comments on tax avoidance andthe need for banks not to facilitate such schemes. Sogetting a bank to finance the new LLP or other entity will need careful handling although there is a goodunderlying reason to finance because of the fall ininterest rates.”

“the guarantees were falling, because the guarantee was an absolute guarantee to meet for those lease payments, instead being replaced by a contractual arrangement whereby the bank had an interest in a deposit with the lessee which it had set that whole arrangement up on day 1…So they were calling for the money into those deposit accounts, and their arrangements were between the bank and the lessees. And…the partnership…were wholly reliant upon those commercial arrangements between the bank and the lessees. So instead of having a guarantee that you’re going to get paid, you’re wholly reliant on a commercial arrangement between a bank and a third party. And also, of course, at the same time, there was the concern not just [BOI] but across the board of all the banks…that again is public record. So we, during that period, were looking for ways to try and do something about it…” (3) He explained that (a) SA started speaking to HSBC Private Bank about having a limited recourse loan because they were aware that they had provided such loans for other partnerships who already banked with them. They turned SA down because these LLPs were not original clients of theirs, (b) they approached BOI and Investec Bank but none of that worked and they then thought: “is there a commercial solution that we could come up with which would allow monies or borrowings to happen within the LLP which would have de-risked the borrowings then for the partners, because if the borrowings are with the LLP as a limited liability vehicle it would have achieved what we wanted, which was to de-risk the whole thing. And we thought there might be a commercial solution because the lease rates were being paid at a rate of…around about 5%. … Whereas the long-term deposit rates I think had fallen to…about 0.25%, 0.5 %, so we wondered if there was a commercial solution which might involve being able to find somebody to take the lease rental stream and provide money within the partnership to repay the bank. None of that proved successful. So we had been trying for some time to find a means of…de-risking the loans for the partners, but we had never at any stage [been] involved in trying to sell…the residual interest of the partnership, which is…basically selling the partnership interest subject to the existing arrangements with the bank…”. (4) He agreed that the LLPs did not make any effort to extract any value from the residual rights in the films. They simply sat and allowed the rent to come in under what were then sort of paper transactions and the interest to go out, and the part repayment of the loans. (5) As regards the dissolved lessees: (a) He confirmed that (i) the lessee companies started being struck off for non-payment of the administrative fees in 2008 and 2009, (ii) he did not know exactly when the LLPs found out about this but on an annual basis either the guarantor, which was mainly ABN Amro, was still paying the rent or, if the banks had called for the deposits after three years, they continued to pay the rents: “So from the perspective of the LLP and the partners, the money was coming in every year and was being drawn out by the bank under their charge structure, so it was coming in, going out. And the accounts were going out. So there was no trigger for the LLPs to know,…as long as the rents were being paid nobody was really looking at that side of things”, and (iii) he found out in 2011 (although later he said he knew before then), (d) the banks agreed to lend on the assumption that the lessees may go bust, may go into liquidation or be struck off, whatever: “So the banks designed all of their structure to ensure that if that happened there would still be the ability to pay the lease rentals, and the partnerships had comfort on that as well, and they’re all these arrangements, as we’ve seen, the banks did continue to pay”, and (e) the issue happened particularly when TS disclaimed. He said: “But I think that the banks were well aware that they did not want – the pricing on these on the whole was done on the basis that things were as de-risked as they could make it and, therefore, it was designed in a way which if there was a lessee failure that the banks were still in the position to meet these payments.”

“as long as the rentals were paid and still remained secure, then we were okay…in hindsight….I think I would have liked to have stayed more on top of that…but like many others, we were content and possibly lulled into a false sense of security that these things were okay..” (6) He agreed that ABN Amro did not lose the deposits and said that for the most part the deposits had started to move back to BOI in about 2009. He said he did not recall when ABN Amro “fell over” and when asked what he meant he said there was nothing specific; he was referring to the generality of what was happening at that time in the banking market. He said that the deposit was safe as long as the bank who took it over remained solvent and, if it became insolvent and there was a shortfall of assets against its obligations of deposits and liabilities, then, whether there was a guarantee or not, then there would be no money to pay it. He confirmed that, to his knowledge, the LLPs and their members did not take any steps to evaluate the risk of ABN Amro failing in the three year period in which it held the deposits and/or to evaluate whether ABN Amro might be a safer or different place to hold the cash than BOI and they did not try to renegotiate the guarantee. (7) He confirmed that the LLPs themselves and their members did not call a meeting to discuss or to seek advice on the 2008 banking crisis and SA did not contact them to say there might be a problem with the scheme. It was put to him that as in the investment memorandum the risk of the guaranteeing or lending bank losing the deposits was described as a remote risk, the LLP and the members could take that to be the case at the time and on an ongoing basis as they did not hear anything from SA to the contrary. He said, in effect, that at that point some of the members may have considered that risk remote but for others that definitely was not true. For example, Sir Peter Burt, a member in a partnership who used exactly this structure, and some other members were “in the know”

“what we always knew was that if a bank had an insufficiency of capital…and it…went into liquidation there was an issue. That’s obvious to anybody with any financial acumen.What we didn’t know but suspected there could be a problem is…if there was aninsufficiency of capital in the bank there wouldn't be an ability to pay any interest after the event, but the question is what if there was capital and would the bank have any obligation to pay any ongoing interestafterwards…So that was one of the key questions that we wanted answering. And the second was if a bank did fall over….and it did have a sufficiency of capital, what obligations would it have in relation to the arrangements with the lessees… in relation to the deposits…[which] were securing the leasepayments for the lessees who had become insolvent or…the company had been struck off.The advice certainly said for sure…there would be no claim on interest after the event of…a liquidation…there would be definitely no interest payable, so a creditor could claim for interest only up to the pointof liquidation and not beyond…I think Alistair Gordon alluded to it. It’s all very complex law – area of law, and I thought that he didnot say that…the partnership would be in the clear if there was sufficient – if the bank went intoliquidation there was a sufficiency of capital to payit, I did not think he was clear that we were definitely – those arrangements would subsist…” (9) He confirmed the advice was not passed on to themembers butit was passed on to the bank. So the counsels’ opinions were asmuch as anything else for the bank and for SA. He did notthink they added anything for the members because there was always the risk that, if the bank went intoliquidation and there was an insufficiency of funds, there would not beenough money to meet all the obligations. The matter went up tothe board of BOI. It had to because, when TS disclaimed the bona vacantia rights,the bank had no third party creditor, so those deposits were owned by the bank. The board, thankfully, chose to honour BOI’s obligations to continue to meet the lease payments. (10) He was asked why the members of Avondale had to wait to complete the sale of the Capital Accounts given the issue regarding the dissolved lessees did not affect Avondale. He said that he was not sure that SA made them wait because in 2012 they did closeon a capital account sale and loan repayment for another partnership (not one of these LLPs). It wasBurgos andBirdcrest (he was not sure which) who wanted all of these deals done at the sametime for all of these four LLPs. It did not need to be the same day but had to be allon in the same week. This information would have come from Mr Gower. (11) It was put to him that the advantage of doing this as a group forall of the LLPs was that he only had to go to counsel once for advice so there was a single cost which could be shared between the LLPs. He said that (a) the advice was given to SA and not to anyof the LLPs, (b) it may be the case that if you did closingsat a different time your costs may be higher but they still had to close andthere had to be documentation for every partnership and “from Scotts’ perspective, we would have loved earlier closings…because we wouldhave made some fees because…we weren’tgetting paid until these things completed.”

“banks were collapsing all over the world and indeed states were collapsing. There was a distinct concern that [BOI] was going to fold up, and after all our biggest bank, the Royal Bank of Scotland, had virtually collapsed until Gordon Brown chose to save the world banking system…And [BOI] being a much smaller bank was even more concerning.” (2) He could not specify precisely what date he was referring to or any more specific concern as regards BOI. He said the Royal Bank of Scotland reached the point at which they had to telephone the Government and tell them that “in a few hours-time we will have no money, zero cash” but he did not have a historic register for saying when that was and “that was the atmosphere at the time and we were aware that banks were in trouble, and we were particularly aware that [BOI] was in trouble, and [BOI] was anxious to see these loans repaid”

“Yes, John Dryburgh but also knowledge of the situation of banks at the time. There was really a clear need and a pressing need because we didn’t know what the future of [BOI] would be, didn’t know whether it would survive and it was important to find an answer before they collapsed.” (3) It was apparent that he had no first-hand knowledge of the members’ concerns or actions at the time. (a) When asked if he knew that the members did not take any steps to seek any advice on their particular contracts, he said the members were in touch with Mr Dryburgh and he was not in direct touch with them and all of that was a matter for SA. He agreed that he did not know anything about what any specific member did or did not do and said: “The situation was that John Dryburgh was discussing with me ways and means of dealing with a situation where the bank may collapse. The last thing that the partnerships wanted to face was a liquidator of the bank, and so it was a question of finding a means to replace [BOI] from the partnership business setup.” (b) He said the members were not his direct client; his client was SA and: “you try to find a solution to the problem of [BOI] being a precarious lender and the difficulties that would arise if [BOI] were to go into liquidation or indeed if [BOI] decided to push through every remedy available to them in terms of the loan agreements, which could mean a demand to partners to produce substantial sums of money.” (c) He said that all they were trying to do was find an answer to the problem of a bank that was a trouble for a lender to have; they wanted to get away from that. Whether any suggestion they made would be attractive to members is something to ask Mr Dryburgh about as he was with them. He was simply helping SA find an appropriate and a workable real solution to the problem presented. He understood from Mr Dryburgh that there were some members who would be in a very bad serious financial situation if a demand was made to repay the loan. (d) When it was put to him that he had no direct knowledge of the actual contractual arrangements entered into by the members or the LLPs, he said he would have seen the documents but he was not “specifically reading back all those documents”; he was working on finding the answer to the then current problem. It was put to him that he was not looking at the actual contractual documentation but was doing something more high level – blue sky thinking – looking at it as an abstract problem. He said it was an actual problem. (4) He said that all sorts of other problems had arisen because of the dissolved lessees and they had to go to counsel when they realised the difficulties that created. He assumed that Mr Dryburgh had looked at possibilities for refinancing the loans, but in December 2010 it was a very fluid situation, they talked around it, there were certain possibilities, but then they arrived at what they thought would be a workable way through. Then they discovered the dissolved lessees problem, and that created the banking questions which they put to counsel, and they got opinions, which he still cannot pretend to have thoroughly understood. He pointed out that if a partner wanted to sell his interest in a partnership and his partners were not keen, he could not do so, but he could assign his rights to his Capital Account without any concern about the other partners. He had not heard of Grant Thornton, the accountants, offering a similar idea in the market. (5) He confirmed that in January 2011 he was formally instructed by SA and he made it clear from the start that he would not advise on tax. At this time he was asked either to draft or assist in the drafting of the documents required for sale of the Capital Account. It was put to him that at this time Mr Dryburgh wanted from him an idea about how one might sell different interests in a partnership and was looking to access his knowledge of partnership law. He said that certainly the law of partnership was part of the consideration. It was put to him that he had formulated this proposal which involved two sequential sales. He said that the two happened consecutively but not by prior planning - certainly not his prior planning that he was involved in. They found an answer to the question of the loans and utilising the accounts and then the question was raised as to whether the partners should dispose of the remaining interest in the partnerships. He did not advise on tax, so did not consider it appropriate for him to point out anything about the tax position of the partners from the disposal of Capital Accounts. Mr Dryburgh took appropriate advice on tax elsewhere. He did not attend any conferences with Mr Andrew Thornhill QC. (6) He remembered the February letter. He was concerned first to satisfy himself that it was not technically a financial services promotion as set out in his witness statement. They discussed the letter and he was involved in drafting it; he and Mr Dryburgh discussed elements of it all the way through. He would not have advised on the tax statement. (7) It was put to him that the February letter does not say that there is actually a risk of the banks failing and he did not give that advice to the members. He suggested that was clear from the concerns raised. He thought it was a little later on that they talked to counsel about banking matters. He was asked what his evidence was for the statement that BOI were putting pressure on members to repay their loans. He said he did not see it directly and his evidence on that was based on what Mr Dryburgh reported. (8) Whilst he remembered the revised proposal in the March letter and was aware that Birdcrest was the buyer of the Capital Accounts, he did not remember the detail of the loan option. He said that he was not arranging the refinancing; he was preparing the documentation to explain things to the members. It appears that he was not involved in drafting the documents relating to the refinancing. He said that would be arranged by the relevant members themselves with their own lenders but other evidence demonstrates that was not the case. (9) He agreed that BOI respected fully the contractual arrangements with the LLPs even where the lessee company had been dissolved. In his comments in his statement about why BOI respected the arrangements he was surmising that their line of thought was that it was much more convenient for them for there to be an orderly arrangement than some kind of collapse and: “The intention was to replace [BOI] in terms – [BOI] was a risky lender who might turn and demand a repayment almost at any time if things weren’t going for the bank, which we thought was quite possible. So, yes, we were proposing a means by which their involvement could be removed in an orderly manner”. (10) He was taken to a letter he drafted to TS which included the following: “The result in those cases is that the leases have become bona vacantia. Where the call for deposits is made prior to those companies being struck off the deposits have been charged to accounts in the name of the dissolved company. In some other cases the banks incorporated arrangements in a deposit and charge where lessee companies are struck off and the deposits are in alternate charged accounts. In [other] cases the funds are in the lending bank and suspense accounts over which those banks have a charge. In all cases those deposits are being used to fund the ongoing lease payments. This situation is unacceptable to the partnerships as they have additional rights under the leases at the end of the primary period to a share of the residual market value of the rights … ” (Emphasis added).

“The danger of [BOI’s] failure at that time and the consequences thereof was a concern for Rarebird and no doubt for [SA], although I was only ever instructed by Rarebird in this connection.” (Emphasis added.)

“They proceeded in stand-alone steps”

“I can say that there were no negotiations whatsoever with any party for the sale of the members’ interests or LLP assets before 11th February 2013. We had mentioned to several parties over the months and years leading up to 18th January 2013 that if members of certain LLPs could repay their existing [loans], which was by no means certain, they may subsequently wish to and may be in a position to seek a buyer of their members’ interests or of their LLP assets. Five of the parties which whom we had those discussions had indicated that they should like to be notified were that to happen. I would add that Stuart Gower’s client was involved in financing and had no interest in acquiring film partnerships and indeed went out of their way to obtain legal opinion that they would not become partners upon acquisition of the beneficial interest in members capital accounts.”

“those Members who have sold their Member’s Capital Account…to Birdcrest… shall, with effect from 18th January, 2013, be entitled to share only such Net Profit…from those lease rentals payable…to the extent of those sums payable to the LLP in accordance with Schedule 1 of [the Account Acquirer GDSA].”

“We had an aspiration but we didn’t discuss fees or that in detail with anybody. We just talked the concept of what we were doing and what the next stage was”, (d) other than Mr Simpson (and possibly Mr Bowman), they all asked to be notified as soon as the first sale had gone through. He could not remember the actual dates of discussions with them but it was prior to January 2011. He did not take any notes as in most of the cases they were talking about other things; there were no specific meetings set up specifically to discuss any of these things with them, (e) in re-examination he said, in effect, that prior to the writing of the February letter he did not have any “discussions” about buying members’ interests with these five persons or the people who they might haveintroduced, but he mentioned “what we were doing and what we were looking to do at the end”

“You may also be aware of potential purchasers or advisers who may have clients who are interested andI would be grateful if you would be able to circulatethe finalised letter to them. I will also give morethought but…if you can send letters out tothose contacts it will be a good start. Given the international nature of the potentialpurchasers you may [want] to send a copy of the lettersby email as well. If so, please copy me in. As mentioned, please can you also let us havecertified copies of the sent letters. Thanks again for your help … We look forward toworking with you.” (5) Mr Dally confirmed that he received formal instructions in early March 2013. He could not remember when Mr Dryburgh firstgot in contact with him. He was not in as continuous contact with him as previously, because they had stopped beingable to do sale and leaseback deals but “he was someone I would still see at film festivals and different things” and it was a connection that he keeps up. He thought Mr Dryburgh would not give him advance warning of pretty urgent work but we note he had no recollection and Mr Dryburgh said he did contact him in advance. (6) Mr Dally agreed that his task was very clear from Mr Dryburgh’s email – to put the five names into the NML headed paper, send the letters out, email them if international, copy Mr Dryburgh in and then get certified copies of the sent letters.He confirmed he sent the letters only to the five named persons and they were sent out by a receptionist at NML on 5 March 2013 at 4.30pm. He said it was fairly normal to be asked if he could think of anyone else, but on this occasion he was not able to help “because it was such an unusual deal that I really didn’t know anybody that would…”

“Minimum payment at this stage has no real value at this time. So could arrange that partners get a kick back from future value as and when generated?”

“That is something to consider – we would need to think about structure in detail and revert to the partners with a specific structure of sums sought”

“Well, I certainly would discuss the terms with John.I would have discussed the terms that were going backwards and forwards with John, would be fairly normal. And in that discussion of terms, I mean, was a solution arrived at fairly quickly or were there toings andfroings, proposals going both ways. It took a little while if I remember. A couple of weeks I think.” (14) Mr Dryburgh agreed in effect that (a) realistically what mattered to thepartners was that somebody was willing to buy the residual interests off them and what they were asking to be paid upfront was entirelyreasonable for each individualpartnership, because the sum was spread across the LLPs and was well within the 1.5% threshold which meant that SA would get some fees out of this, (b) as regards the payback element, the acquirer wouldhave had to get their own money back before theywould start even to consider paying any money back to thepartnership and it was out of the partners’ control as to what in fact the acquirer would do outside of the jurisdiction after. He agreed that was a bit of icing on the cake and described it as a carrot, (c) CH was given the exclusivity to try and closethe deal and then they really set about getting the documents in place to give effect to the deal and instructed Mr Gordon to help with that with the benefit of the DLA Piper advice, and (d) DLA Piper understood how to draft the documents to ensure that the tradeemigrated outside the UK and they approved Mr Gordon’s work both in termsof the resolutions and all the transaction documents. (15) In re-examination he said that he thought that CH won the day as, at that partners’ meeting, the feeling was that he is a film producer, whereas EH was anex-banker and had not identified who his investors were and the partners wanted to go with someone who could potentiallygenerate this additional income. They wanted to make the sale for a price that waswithin the boundary that they had identified butthe thing that swayed them was that CH had come up with this identified ability to possibly make some money down the line. He thought that had EH been a bit more organised he could have done the same but he did not at the time ofthe meeting.In the deal that CH agreed within the documents there was an incentive in that, if one made enoughmoney from the re-exploitation of the films,particularly those where the lessees had becomedissolved, then the partners would share in the upside from them. He said that the meeting with CH was the first time there was any detailed discussion of the uplift arrangement. (16) Mr Dryburgh confirmed the relevant persons were instructed to make every effort to get the sale done by 5 April 2013. He did not agree that neither party actedin such a way that there was any genuine risk to thedeal actually going through. He explained that (1) CH had an accountant, who advised on tax matters, and he was absolutely certain that CH would havehad to get their blessing to go ahead because he would have toconsider both the UK and the Irish taxposition, and that was clearly a complex matterfor him, and (2) he also needed his lawyers to be happy, (3) initially they heard nothing really from CH and hislawyers for some weeks and it was only when he appointed FOD that they actually saw some progressbeing made, and (4) by 12 April 2013 he had an email saying CH was confident he was on track toclose by 18 April. He agreed essentially there were only niggles to deal with at that point. One of the partners, Ms Emma Simmonds, did get rather interested in the deal but she was interested inthe detail and, while she was asking questions, she had already given SA her signed powers of attorney and paidthe fees so she was not standing in the way. (17) Mr Dally agreed that NML and/or Mr Homer were asked to draft the SPA for thesale of the residual interests, but said it was not theirarea of expertise, and Mr Gordon or somebody else did that. Mr Dryburgh said it was clearly a bespoke transaction requiring bespoke documents and he was under pressure to move quickly and NML did not have the bandwidth within the firmor any precedents to start with. His intention when he appointed NML was that they would see the whole process through but that did not happen. (18) Mr Dryburgh agreed that (a) as was apparent from the notes of meetings with EH and CH in March 2013, DLA Piper sort of gave him the key bullet points on what had to be done as regards moving the LLPs to Ireland and whilst they did not draft the documentation they didprovide the advice; their knowledge and expertise was available to him/SA. He added that they checked everything which Mr Gordon did. He drafted based on their advice, and then the documents were all provided back to them to confirm thatthey were in line with their advice. He was not sure when he first instructed or contacted DLA Piper and could not remember if he had checked the relevant personnel’s availability to deal with this, and (b) in accordance with the DLA Piper advice, the service providers had to be replaced with non-UKequivalents.He thought that the reference to sums due to NML for services provided to Rarebirdwhich were to be borne by LLP related to thework that Mr Dally was asked to do for Rarebird in relation to La Vie en Rose and it was actually anadditional fee. He agreed thatthe LLP picked up his costs. (19) He said he did not have any knowledge of anybody making a gift of a residual interest, but they may well have done. He thought therewas one party who did contact them about that, but he did not know if they went ahead. He agreed that (a) the idea was to gift to a person who had a lower rate of income tax, and (b) members were free to make a gift (or to sell (and the LLP was free to sell)) once the relevant resolutions were passed. They had their own right to do that. (20) He confirmed that he had not agreed with any one of the five potential purchasers that they were going to be the purchaser and he did not know before he sold theCapital Accounts that the sale of the residual interests would be to CH rather than EH. It was put to him that Mr Rangeley’s evidencewas very clear that in the course of drafting his April 2011 paper he was told that there wasa market for this kind of residual interest (see below). He said he did not recall sayingthat there was a market but thought that he may well have said that he could see thatthere would be a market from overseas purchasers who would be able to purchase that but “there was, asa fact, no precedent for this type of transaction”

“It’s only uncommercial if you’ve…got a scheme whichis all put together at one time. That wasn’t how thiswas. We only started to speak to potential buyers afterthe first transaction had happened. We had a number in our head.” (8) He did not agree that he did not name a figure or a ballparkfigure for what might be paid to the purchaser in 2013 because it was obvious to everybody what the right kind ofprice would be.He said again he had an aspiration of the price that he thought would bepalatable to the members and that’s “what we had in ourmind” but they didn’t put that number toeither CH or EH. It wasa number they had in their mind. But they are commercial people as well. They would know that if they came up with a massive number that (a) they may have competitionand (b) the members may well refuse it. So they would have been commercial individuals when they came up withtheir numbers: “I mean, these are obvious things. If you charge toomuch money the buyer is not going to buy and also,again, any commercial individual would know that…they’re not being given a sole run of this, so they would have to price it competitively. That’s thecommercial world.”

“we were engaged in original drafting from scratch in order to deal with a novel circumstance arising from the unplanned disposal of Capital Accounts because of the Bank pressure. This does not fit with a categorisation of the activity as the implementation of a pre-planned tax avoidance scheme. This was rather an exercise in extreme firefighting under pressure.”

“We are instructed by the selling partners to make every effort to close the sale of their interests by 5th April, if at all possible.” (4) There was no pre-existing pro forma to guide the drafting. This was a dynamic ever-changing process of original drafting: “I would not expect to draft a tax avoidance scheme in such a hectic manner. I was drafting for a commercial deal. Commercial deals often demand hectic drafting”

“When drafting for tax purposes I expect to be fully advised as to the tax purpose so that I might draw attention to any matter which I might apprehend as a possible risk to the tax purpose. I was not so advised in this matter. In summary I am satisfied that the exercise I was engaged in was a bona fide commercial transaction where the outcome was uncertain until final closing. The characterisation of the exercise as a tax avoidance scheme is erroneous and unsupported by the nature of the exercise.”

“It was a mechanism at thatstage that did not involve any refinancing of any banks. And, from memory, it certainly did seek to exit partnersbut the loans remained. It just got them out of… the tax charges but loans remained…the whole thing was a paperexercise it was put to us…It certainly….wasn’t something which I thought was worth taking or even considering further”, and (3) Mr Gordon knows partnerships very well and advised him on the partnership law part of it and “he understood very well the concept, more than I did.I picked up the concept from…the Grant Thornton document. That was the first time I rememberseeing something like that. But the detail of actuallywhat that meant and how it would go about came fromAlistair. I don’t recall him taking credit for it but,yes, we did discuss these things for sure”

“It had to be done inthe two steps and our understanding was if we did it intwo steps and we didn't get involved in seeking to sellthe second part, that there would not be a tax charge.”

“We didn’t have that conversation, but…we couldn’t see any reasons…why theywould object but there was never a discussion as towhether they would. But there was no reason that wecould see why they would object if it was done properly. But like everything else, that had to be put to Plectron’s lawyers, who were a completely differententity and had nothing to do with…Burgos, not as far as I’m aware, that wasStuart Gower’s contact. They were really the peopleadministering everything afterwards. So we had no reason to believe they would as long as they and their lawyers were happy with everything andthere was nothing cutting across what they did. Therewas certainly no reason why they should have.”

“I mean, being a charteredaccountant I’m sort of expected to keep my finger onthe economic pulse and I was well aware that (a) there was a banking crisis and (b) the Irish banks were particularly badly affected, and being an investor myself in one of the partnerships it was, froma personal view, a matter of concern because I felt that probably I’d find it financially painful if the worstwere to happen….they wouldn’t pay the interest on the deposit, which is the interest which basically finances the interest on the investor’s loan. Which would have left the investors having to pay it themselves.” (3) He was taken to the following comments in his note: “disposal of your beneficial interest in yourcapital account…The use of the funds raised, plus a small cashcontribution from yourself, to repay the loan…This does not at this stage involve your retirementfrom LLP or giving up your right to profits…Since you have not, however, given up your right to profits, you would initially be in a worse positionbecause you would have no loan interest to set againstyour share of profits. You have therefore at this stage, taken on a certain commercial risk…At that point you would be free to dispose of your interest in the profits, either by way of sale or gift. It is not clear as to whom you would gift theinterest, as it represents a tax liability but no income.” “It is understood that any purchaser will be likelyto purchase the interest, and a cost of doing soincluding other disposal costs and placing the money in a fund to deal with tax disputes would not exceed 3% …but there is no certainty of this and noundertaking to do so as part of the first step…I list below the factors you should take into account. (4) He said a gift was not something that he thought his clients should seriously consider – he was just surmising as towhat the options would have been atthat time, and was not aware that a single clientexpressed any interest whatsoever in that route. He said he was not pushing his clients in thedirection of one option as opposed to another – far from it: “The whole tenor of this part of the report is to set out the risks and to leave the decisionto the client because every individual client has a different attitude to risk, which may be related to their own personal circumstances or it just may be aninbuilt attitude to risk, but it was not my job to tell them what to do, merely set out the options, cover allthe aspects of risk and leave it to the clients todecide which way they wanted to go”

“… in the event of a complete failure by both thefilm lessee and [the bank] your assets couldbe at risk”

“things…happen basically. I mean, youcould be talking to somebody in his mid-40s who hasa fairly well-paid city job…and certainly expects to be earning at that sort of rate for the next15 years, but it doesn’t always pan out that way and,therefore, I was just putting it down because this is a generic report, this is for everybody who subscribed to it, irrespective of their personal circumstances, and it might have been a point that resonated with one or more of the readers, but…particularly if their circumstances had changed. Maybe they decided to make a change of career course and go and run a farm inCornwall. Who knows? Well, it happens.”

“Quite what all the consequences of this could beare not completely clear…”

“It was a sort of Holy Grail to some extent, but…whenever an exit scheme crossed my desk I found plenty of reasons not to go ahead. It’s…risky…you’ve got section 797 here, which everybody attempts to deal with, but the trouble is that most schemes are very badly put together and as a tax consultant (a) I’ve taken an intellectual interest in this sort of thing but (b) there’s no way I would recommend one to a client if I felt it was destined to fail.”

“All of this lengthy preamble serves to put the taxpayer on notice that (whilst the Government is still apparently incapable of distinguishing avoidance from evasion) there are, and will be more, tools intent on annihilating tax avoidance. As regards the [SA] proposals …it is fair to assume that should a GAAR be introduced later on this year or maybe Budget 2012, such future strategies are unlikely to work. This could therefore [be] the reader’s last opportunity to extract oneself from future tax liabilities.” (3) He agreed that (a) the proposals he referred to here were those that he wasadvising his clients on, namely, those for extracting oneself from future tax liabilities and he was assuming that this provided an opportunity for an investor to retire. He said he was covering the probability or possibility that a GAAR was coming infairly soon, and (b) he was saying here that “if you did want toexit the partnership…do both sell the capital account andthen go on and sell the partnership share, that’s what you need to do and you need to decidewhether you want to do it now”

“Hopefully if a buyer turned up, yes”. (4) He accepted that in the report he gave hisopinion on Ramsay and agreed that his job was to help his clients make a rational decision about what option to choose based on their personal circumstances. It was put to him, in effect, that he was saying in his report that if a person chose to sellthe capital account but did not sell the residual interest, he would be left with a certain obligation to pay tax for the rest of the 15 years without any interest relief, so if the person did not want to sell his partnership share after selling the capital account, common sense would say he should choose the loan option. He said: “I wouldn’t say it is common sense because there are two completely different options available to the member. They can just go for the rollover because that’s simply what they want and they don’t want to take any kind of risk or they’ve decided that that’s what they bought into and they’ll stay…with it for the full term of the lease…If somebody is minded to sell their capital account, then clearly they have to accept the risk that a purchaser will not come along any time soon and they would be left with the liability to pay the tax…I go to some pains to emphasise that that’s a decision for the client.” (5) He agreed (a) the thought process was (i) if an investor was minded to sell the Capital Account but did not sell the residual interest he would be left with a certain obligation to pay tax for the rest of the 15 years with no interest relief, and (ii) if he sold the residual interest he might walk away with a substantial tax saving if the scheme succeeded butthe tax risk is that chapter applies and the tax isaccelerated, (b) he was saying the choice was between (i) not selling the residual interest and having a certain obligation to pay tax for 15 years or (ii) a risk that that the certain tax was accelerated but also the opportunity of not paying any tax at all. He said that he emphasised that that is a risk which the client must assess for themselves. In the report he said: “If your financial circumstances are that – even allowing for time to build up a tax reserve ... you would have difficulty paying the tax then, unless you are still prepared to take that risk, common sense suggests that you should not do it…you should instead opt for the loan rollover.”

“Clearly if somebody was going to sell their capital account they were hoping and expecting that somebody then would be found to acquire their residual interest in the partnership, but I think I’ve emphasised in my report that at the point in time at which the partner sells his capital account there is absolutely no prior arrangement commitment, whatever, by anybody to come in and purchase the residual interest…That’s something which my clients had to take on board…the clients, I suppose, were hoping that [SA] would find somebody who would acquire that residual interest, but I went to great lengths to make it clear that there was no such commitment, nobody waiting in the wings at that particular time.” (11) It was put to him that he said in the report a number of times there was no guarantee or words to that effect and that is because, for example, the two sales were notconditional on each other.In the report he said: “At that point you would be free to dispose of your interest in the profits, either by way of sale or gift. It isnot clear as to whom you would gift the interest, as it represents a tax liability but no income. It isunderstood that any purchaser would be likely to purchase the interest, and the costs of doing so including other disposal costs and placing the money in a fund to deal with tax disputes would not exceed 3% but there is no certainty of this and no undertaking to doit as part of the first step.”

“I was just using my own language to emphasise thatthere was no certainty. Things can happen and…Well, I wouldn't say it was likely. At that particular time, there might have been, and I'm surmising now, there might have been somebody who had expressed an interest in acquiring the residual interests in the partnership but at that time had made no commitment to do so, certainly not transmitted their interest to the selling members, and, therefore, that uncertaintyremained, and anything could have happened in that interim period… that particular prospective purchaser could have decided to go and do something else.”

“they may not have assessed therisk…they may have just said, “I’ll leave things as they are and take the rollover”, and maynot have given any further thought to it…you have to remember that clients are not tax experts. And some clients have a fairly short attention span to this sort of thing. One does one’s best, one puts information in front of them, but clients are clients.”

“I’ve been at pains to point out that at the time of thedisposal of the interest in the capital account therewas no buyer for the residual interest in the partnership, and it seemed to me that the GAAR riskwould only come to light if both steps were duly taken”. (2) When asked what commercially such a buyer would obtain he said the buyer bought the income stream and the taxliability that goes with it (if there is a tax liability) and it was not for him to say if economically the buyer got anything of value. Hisunderstanding was that there was a market at the timefor these particular types of assets, but he had no contact with those markets and did not really know whatthe economics were. He then confirmed that there was a market is what he was told at the time. He thought in the relevant passage in his report he was saying that: “we’ve already discussed the possibility, no more thanthat, that there would be a purchaser for the residual interest. But what I’m saying…is what would happen if you sold the capital account…Yes, there are two completely…different risks there. If you sell the capital account andnothing else happens, then you will pay tax at your top rate on the partnership profits.If you went ahead and were offered by someone topurchase your residual interest and you went ahead and did that, then my assumption is thatthat might have fallen foul of section 797 and, therefore, there would have been the concertinaed…taxliability.”

“the details – the conversations I had with him were pretty much in outline. We didn’t go through this document line by line. I think I asked him if selling the capital was a sensible thing to doand he came back and said, ‘Yes’. So … I don’t thinkwe went into the tax implications in any detail.”

“For me, at this point,I think being exposed to the potential risk of [BOI] I was in no mood to refinance”. (3) It was put to him that it was very clearly set out in the Marchletter that both options removed any risk of him having to repay BOI or personally repay anybody. He agreed that is what it seemed to say and it provided a complete answer to the worry about the BOI failing and the loan option was “a very attractive offer…if you’re just worried about [BOI] failing.” (4) He said he did not consider in detail that if he chose the loan option he did not have to bear the costs of that transaction: “I just dismissed thefact that I didn’t want to go for an alternative lending”

“I can’t remember how, but I was updated that there was a delay but there was still a prospect.”

“So I was a partner, I was relying on some advice, but…I’m not sure that I ever digested the documents in detail, and recall is difficult”, and (2) he did recall the three issues set out in the February letter. When he was asked if he had any feeling for which were the more serious issues he said: “It was a risk of [BOI] going into liquidation and my loan being recalled, which really was the outstanding issue for me”

“at a general level I did understand that, if completed, this was an opportunity to extinguish my liability to an Irish bank [BOI], which was experiencing serious financial difficulties in the wake of the global financial crisis, allowing me to extinguish the potential liability I would face in the event of its insolvency.” (4) When he received notification this brought home to him that he had a personal, financial risk directly connected with the problems in the Irish banking sector, as he had a loan from a troubled Irish bank. He read the documentation supplied to him although he cannot pretend that he understood all the technical issues. The documentation stated that any failure on the part of BOI to meet ongoing lease payments would have required members who had a loan to finance this from their own resources. He did not have the means to meet such a liability. If this had occurred then the likelihood is that the BOI would have called in the loan. He referenced “Acceleration Events” in the documents and said that he “didn’t know the likelihood of that but equally I had no communication to say that everything was fine, notwithstanding the financial crash”. (5) He knew generally that Ireland appeared to have overreached itself financially and he knew from friends of people in Ireland in serious financial difficulty and properties being sold for unreasonably low valuations as people had a desperate need for cash and the banks seemed to be running out cash. Moreover, at the height of the global financial crisis it did not seem credible that he could obtain a cash loan of such magnitude from a non-Irish financial lender. The troubles in the Irish economy were well known and his exposure to BOI was for a prolonged period but he saw himself as powerless to remedy this exposure to the bank until the first opportunity had been consummated. He was therefore pleased when this finally happened. “Indeed, in March 2011 the Irish Central Bank and Irish Stock Exchange had suspended [BOI’s] shares “to avoid the possibility of a disorderly market”.” (6) Other than this disposal nothing else really changed for him as the documentation sent to him made it clear that he remained a full profit sharing member of Avondale, with no change to his profit share. (7) He understood that if the first opportunity was successfully completed he would then be free to seek to dispose of his residual interest. It would also leave the partnership free to sell its assets He understood that this was never guaranteed. So, he didn’t really turn his mind “to the prospects of the second opportunity happening because it’s trite, but true to say that unless a deal is agreed and a contract is signed, it doesn’t exist”

“I am not a tax expert but there was nothing communicated to me which led me to consider that the second opportunity was already negotiated or in any way certain at the time of completing the first opportunity. Moreover, I didn’t consider them as one transaction, not least because there were different parties involved in each. It seemed to me that the first opportunity was entirely justified on its own terms, without reference to the second. The first opportunity solved a problem, not only for me but also for all other Avondale members. The second opportunity was a separate matter which, when it occurred, allowed me to dispose of my interest and retire as a member, and when it did happen, which wasn’t certain, I saw this as a prudent step to take for the reason given in paragraph 14 above.”

“We’ve all seen the queues outside Northern Rock when there was the run on the bank, and the last time I saw that was black and white movies of the great depression.”

“but one’s also aware about world events and the troubles, particularly with [BOI] and theentire Irish situation. Bank of Allied Irish bankI think was nationalised in 08/09, I can’t remember. [BOI] I think came within a whisker of failing in 2011, as I recall, and I think there was some foreign money injected, so maybe in hindsight it would have been better if it had been similarly nationalised. So, as far as I was concerned, the effects of the global financial crisis were significant, pervasive andlong lasting and they continued, and just because somebody has given an equity injection into a bankdoesn't mean that the bank is, therefore, fully solvent. So I fully expected those problems to continue.” (2) He thought BOI came within a whisker of failing, as he put it, sometime in the middle of 2011. He confirmed that he was referring to BOI shares being suspended. He said: “it was all over the news, to ensure that there was an orderly market in the shares”

“The fact of the matter is that, from my perception, the troubles with – well, the entire Irish banking sector, not just [BOI], were pervasive and I didn’t want to have anything more to do with them, quite frankly.” (3) It was put to him that if SA had actually thought that he was at dangerous risk as regards having to repay the loan he would have had a direct personal communication from them dealing in detail with his contractualarrangements with his specific bank. He replied that would seem rather impractical as there were presumably hundreds of different investors and confirmed that he did notreceive any such individual communication. It was put to him that it is not impractical for SA to seek instructions from him as a partner to spend money to get proper legal advice on the robustness of his contractual arrangements and securities with BOI in the event of any kind of failure. He said: “To the best of my knowledge and belief, [SA] did not volunteer to provide advice and it was up to the individual investors whether or not they took independent advice.”

“I don’t think it was a foregoneconclusion in the slightest…because to look at it in a scenario where there’s more than one possibleoutcome it’s a logical fallacy to say that that whichoccurred was in fact preordained. I mean, it’s likesaying after this, therefore, because of this. That’sa logical fallacy…the first transaction removed the capital account vis à vis [BOI], correct, yes. And I realisethat following that I was still very much a member ofthe partnership and would, therefore, be liable to, you know, income tax on the residuals. That’s absolutelyfine with me because one had removed the risk, as I saw it, of an acceleration event vis à vis [BOI]. So, yes, once the rest – once the capital account had been disposed of effectively,I mean, you describe it as a husk. Frankly, I think it was a bit more than a husk, wasn’t it, because I was still a full member of the partnership exposed to all the risks and liable for tax on a yearly basis? I knew that and I understood that, but there you are. It wasn’t a husk.”

“There have been countless examples in history wherenegotiations have commenced but ultimately failed. In real estate I believe it is called gazumping.” (2) He agreed that (a) it is clear from the February letter that having sold his Capital Account he would still be liable to income tax on his share of the partnership profits and that hewould no longer be entitled to any interest relief onany payments, (b) so he would be paying tax at 50% on the gross rental income with no deductions at all, and (c) therefore, it was not just a question of an extra £4,000; it was whatever 50% ofthe gross rental payments is and the February letter very explicitly says it would result in a worse tax position if he didn’t subsequently gift or sell his residualinterest. (3) He agreed that he understood that when the March letter was produced there was another option – the loan option. When it was put to him that he understood that the benefit of that option was to eliminate all liability to BOI, he said he understood that this was a loan proposed by BOI. It was put to him that the letter does not say who would make the replacement loan, but it does say that those who took the loan option would have no further personal liability in the event of any default. He said he had understood that when he read this letter. It was put to him that, therefore, it did not matter who the lender/replacement lender was because the effect of the new refinancing was that the individual actually had no further personal risk. He said “the first proposal seemed to me to be eminently sensible and I couldn’t quite understand the need for a second proposal. So when I had something that seemed to me to be clear and something that seemed to me to be not entirely clear I chose the former option”. (4) He agreed that when he read the statements in the March letter set out above, he did not regard himself as in the category of members who expressed a desire to hold on to their LLP interests throughout the remaining life of the LLP. He confirmed that he understood that there was now on the table a choice of removing all personal risk on the bank lending but remaining in the partnership. He agreed that (a) the sale option was for those who did not want to stay in the LLP for the remainder of the term and said that he understood very clearly that there were two different proposals, (b) a further advantage of staying in the partnership if he chose the loan option was that not only would he have no personal liability to the lending bank but he would continue to get interest relief, (3) he understood that if he stayed in the partnership he would carry on paying tax on the rental income for the remainder of the term but with interest relief and that if he left the LLP, he would not carry on paying that tax on rental income and so that would be a very attractive feature of leaving the LLP. (5) When asked again about the impact of the change in tax rate to 50 % he said “it simply was not a driver for my actions”

“we had confirmation from a QC that the tax position of members who wished to dispose of their capital accounts would not change as a result of…other members availing themselves of a replacement loan…you can never guarantee anything, but you can almost predict that some people will always, given a choice, choose one or other option. You won’t get 100%. So what that said to me was that I would be no worse off if some members availed themselves of the option of the replacement loan.” (6) When it was put to him that counsel’s tax advice set out in the February letter was given on the footing that he would both sell his Capital Account and go on and sell his residual interest, so that he would indeed leave the LLP, he said “Yes, that advice is very clear” and added: “but just because advice is rendered as to a potential scenario it is not a guarantee that that scenario actually out turns. It is merely advice as to a theoretical one of a number of possible future events. So I did not take the fact that the advice had been rendered as any evidence that in fact what out turned in the end would in fact occur, because there were many other members who all had to make their own individual decisions and, as I had no communication with any of the members, I had no indication of how as a collective the members were thinking.” (7) He accepted that SA had taken advice from counsel experienced in this area, to ensure that were the full arrangement to come to fruition there would be no tax downside for him at all and he read and understood that at the time. It was put to him that if the advice had been that he would lose his original loss relief he would not have wanted to go into this arrangement. He said that would have been a very material factor against doing what he ultimately ended up doing. (8) It was put to him that he would not have proceeded if the advice had been that as a result there would be a tax charge on a sum equal to the money paid to him to repay the replacement loan. He said there was nothing to that effect in the documentation and agreed that counsel’s advice was positively the other way but added: “Then again, an opinion is just that and, at the end of the day, it’s the learned judge’s opinion that actually is the only one that matters”. (9) It was put to him that he said previously that his only motivation was removing the risk of having to repay the lending bank out of his personal assets but in fact he chose the option that gave him much more by allowing him to exit the partnership. He said: “it didn’t guarantee the outcome that actually out turned. It was simply the option that I chose at the time. You cross one bridge at a time and you only deal with the instant transaction. Yes, it seemed to me more favourable but, as far as I was concerned, that was it, full stop”. (10) It was put to him that it was more favourable because if the arrangement was successful one achieves a substantial tax saving; one does not have to pay any tax for the remainder of the 15 years. He seemed to accept that. He said his understanding was that that would not have been the case for the first transaction. It was only when the second transaction was consummated that that eventuality occurred. He was asked why he regarded selling his Capital Account as favourable unless he wanted and hoped to be able to sell his residual interest. He said “No. When I look back, and I refer you to the documentation where it says that under the replacement loan there would still be some element of recourse to the members.”

“It seemed to me to make sense because, as I recall, the winning proposal, they had I think a better track record…in the film industry.” (5) He said that he knew that there was a payment to ensure that the purchaser made the acquisition, and recalled they were unanimous in choosing CH as he was suggested to have a better background in the film industry. (6) Mr Hoyle thought that it had been suggested that the purchaser might be able to make something of the residual film rights because “they presumably would have bought it to do something with it and, therefore, having that asset and being able to not resell it but re-use it to make profits would clearly have been a motivation for them, and the fact that they were experienced in the film industry meant it was more likely that they would actually wish to buy because they could see a way of making some further monies out of that acquisition”

“Other than this disposal nothing else really changed for me as the documentation sent to me made it clear that I remained a full profit sharing member of Downing, with no change to my profit share.” “While I had never really considered disposing of my interest in Downing I understood that if the first opportunity was successfully completed I would then be free to consider my position and seek to dispose of my partnership interest in Downing, subject to the approval by the members. The documents however made it clear that after the sale of my capital account, as detailed above, I would still be a member in the partnership and that I would still share in the profits but without the risky loan and on balance this seemed more in line with the situation I envisaged at the outset.” (6) The first opportunity however had prompted him to look more closely at his financial affairs and by the time the second opportunity came along, he had come to the conclusion that his current investments were not all they should be. The various properties he owned gave him little or no return and their value had depreciated considerably since their purchase. As for the partnership investment, while the first opportunity had relieved him of his indebtedness to BOI, it appeared unlikely that there would be further returns from this investment in the near future. (7) All communications he received on the technical issues of the proposed transactions were through his then financial advisors and were, either from, or on behalf of, SA. To the best of his knowledge and belief he did not have any individual conversations or individual communications with them as he relied on written communications sent out generally to all the members. His then financial advisors were unable to guide him or effect a solution but thought he should follow the majority view of the partnership members. (8) While he was not certain when he finally made this decision to sell his residual interest, at the time of the first opportunity he did not consider his partnership membership to be a risk per se and at that point only looked critically at his exposure to BOI and viewed the sale of his capital account “as a self-contained opportunity to repay the bank loan”. (9) The second opportunity when it came was unfortunately not straightforward as there were alternative proposals to consider from different parties. He discussed his situation with various friends some of whom were partners in Downing and the general view was that they were in favour of selling their interest. Given all that had transpired by the time of the second opportunity he just wanted to sever his ties with the partnership. (10) He was later informed that the partnership as a whole agreed and following receipt of all necessary approvals, the second opportunity was consummated on 23 April 2013. (11) He commented on the structure as follows: “I am not a tax expert but there was nothing communicated to me which led me to consider that the second opportunity was already negotiated or in any way certain at the time of completing the first opportunity. Moreover, I didn't consider them as one transaction, not least because there were different parties involved in each. It seemed to me that the first opportunity was entirely justified on its own terms, without reference to the second. The first opportunity solved a problem, not only for me but also for all other Downing members. The second opportunity was a separate matter which, when it occurred, allowed me to dispose of my interest and retire as a member, and when it did happen, which wasn’t certain, I saw this as a prudent step to take for the reason given above.”

“Probably, but I couldn’t say for certain”

“I was advised with my current accountant, as we did the statement and we talked through all of the things, and obviously a lot of the dates were – we had to look through maybe some paperwork, but I was helped on – I was advised on my statement, yes”

“As you are aware I only represented Mr Forsyth since May of this year…Mr Forsyth is a professional golfer and former European tour player…knows very little about tax and has been guided by the promoters of the Downing Film Partnership…Mr Forsyth received £2 for the sale of his interest in the partnership, which he had been led to believe had run its course. He doesn’t envisage receiving orenjoying any future profits or gains from this venture.His interest in the partnership has terminated.” (c) He assumed he had discussed this with his adviser in 2016. He agreed essentially that this was consistent with his comment that what was presented to him by the Ireland accountants when they first contacted him was an opportunity to get out of the partnership and sever ties and that is what was offered to him and then he did what he was told to do to make sure it happened. (10) In re-examination it was put to him that it is clear that his memory and recollection of things is a bit vague. He confirmed he did not recall a meeting to decide who to choose as the buyer of his interest in the partnership. When it was put to him that no one asked him for his views on who to choose as there were several candidates he said: “No idea, no. I don’t recall that at all, no.”

“Yes, mostly really that I can vaguely – if I’m correctand again I don’t want to say anything I’m not 100%certain on…so…I was of the belief that on my tax returns I waspaying tax on something to do with the film partnershipI believe and this was an opportunity that that was nolonger going to be the case. I thought that sounded positive.”

“The essence of the new approach was 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. Of course this does not mean that the courts have to put their reasoning into the straightjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found …”

“The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

“I do not propose to say more than the wording of the relevant provisions of schedule 2 to the 71 Act as amended by the 2014 Act is, in my view, unambiguous, since that unambiguous wording gives rise to a conclusion which cannot be said to be devoid of sense or purpose the words must on conventional principles of statutory interpretation be given their ordinary meaning. It was difficult at times not to gain the impression that much of the argument on behalf of the Secretary of State in essence was to put forward the presumed intention of Parliament as being founded on an endorsement of a decision of the Supreme Court in AA [Afghanistan case] and then to mould the language of the amended statutory provisions to meet that presumed intention, but it is elementary that the intention of Parliament is ultimately to be derived from the statutory language which it actually has used. If the result which I reach in this case is unwelcome to the present covenant its remedy is to amend the statutory provisions. It is not, however, a proper exercise of judicial function to achieve such amendment by distorting the statutory language under the guise of a purported process of statutory interpretation.” (4) The comments made by Davies LJ in the decision in Sudan apply equally here. When this section was originally introduced it made perfect sense to refer to a trade but when the approach to film leasing altered these provisions clearly needed changing. If these rules were enacted now they would simply miss the mark. No doubt the legislature would not have wanted to produce such a result had they considered the interaction of the two sets of rules in this particular scenario but the words cannot be twisted to give a result they manifestly do not achieve. (5) In the alternative, if the LLP’s activities did amount to trading in 2006/07 and 2007/08, any trade ceased shortly thereafter. Therefore, in the years 2012/13, 2013/14 and following, there are no “profits arising from a trade” and no disposal of such profits can occur within the meaning of sections 797 and 799. (6) On the authority of Carvill v Inland Revenue Commissioners (No 2) [2002] STC 1167(“Carvill”), even if it was decided that the appellants were carrying on a trade in the earlier year it does not stop them saying they were not and that decision was wrong (and in any event, as noted any trade should be regarded as having ceased trading before the relevant tax years). Carvill makes it clear that an issue which has arisen in year 1 can be revisited for the purposes of charging tax in year 2, 3, 4, 5 even if there was a decision of the court governing year 1. It establishes that it is perfectly possible for different tribunals to take differing views of precisely the same transaction certainly if it relates to different years (and the principle may go further and establish that the only thing a tax case decides is how much tax is paid). He referred to [18]: “I recognise that there is something very odd about the fact that although directed at different years of assessment the two decisions were concerned with the identical issue in relation to the same transaction. However, the oddity is no more than a reflection of the well-established rule that the doctrine of res judicata does not apply to the decision of commissioners in relation to the amount of tax due in respect of one year of assessment so as to preclude either the taxpayer or the Revenue from contesting the self-same issue of fact or law on an appeal in relation to a different year of assessment (see the review of authorities, Mr Justice Jacob in King v Walden, in particular the decision of Mr Justice Lightman in Barnett v Brabyn and the decision of the Privy Council in Capital v Income Tax Commissioner of Columbia, approved by Lord Hope with whom Lord Hoffmann agreed in Levin v Westburn.”

“As an ordinary word in the English language “trade” has or has had a variety of meanings or shades of meaning. Its meaning in tax legislation is a matter of law. Whether or not a particular activity is a trade, within the meaning of the tax legislation, depends on the evaluation of the activity by the tribunal of fact. These propositions can be broken down into the following components. It is a matter of law whether some particular factual characteristic is capable of being an indication of trading activity. It is a matterof law whether a particular activity is capable of constituting a trade. Whether or not the particular activity in question constitutes a trade depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles. To that extent the conclusion is one of fact, or, more accurately, it is an inference of fact from the primary facts found by the a fact-finding tribunal.” (Emphasis added.)

“When analysing the proprietary nature of a partnership share, it is necessary to distinguish between the internal and external perspectives, since they are very different. The distinction was clearly drawn by Lord Justice Hoffmann in I.R.C. v Gray in these terms: “As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share. …, the external perspective may still be of relevance in certain circumstances, e.g. when determining the manner in which a partnership share should be transferred and, perhaps, where a firm holds shares in a company subject to a right of pre-emption, if one partner were to assign his partnership share.” “As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share. …, the external perspective may still be of relevance in certain circumstances, e.g. when determining the manner in which a partnership share should be transferred and, perhaps, where a firm holds shares in a company subject to a right of pre-emption, if one partner were to assign his partnership share.”

“… the enactment of the Limited Liability Partnership Act 2000 created from April 2001 the concept of limited liability partnerships as bodies corporate in UK law. In conjunction with this, new CGT provisions dealing with such partnerships were introduced in section 59(a). S59(a)(1) complements section 59 in treating any dealings in chargeable assets by a limited liability partnership as dealings by the individual members for CGT purposes. Each member of a limited liability partnership to which 59(a)(1) applies has therefore to be regarded like a partner in any other non-corporate partnership as owning a fraction or share of each of the partnership assets and not an interest in the partnership itself… Where an asset is disposed of by a partnership to an outside party, each of the partners will be treated as disposing of his fraction or share of the asset. In computing gains or losses the processes of disposal will be allocated between the partners in the ratio of those share and asset surpluses at the time of disposal…. When this Statement of Practice was published in 1975 it did not address the situation where a partner contributes an asset to a partnership by means of a capital contribution. HMRC clarified its approach to this in Revenue and Customs brief 0308. OTS asked HMRC to include this clarification in the Statement of Practice. Where an asset is transferred to a partnership by means of a capital contribution, the partner in question has made a part disposal of the asset equal to the fraction or share that passes to the other partners. The market value rule applies if a transfer between connected persons or is other than by a bargain at arm’s length. Otherwise the consideration for the part disposal will be a proportion of a total amount given by the partnership for the asset. That proportion equals a fraction or share of the asset passing to the other partner. A sum credited to the partner’s capital account represents consideration for the disposal of the asset to the partnership. Although this is similar to a change in partnership sharing ratios it is not possible to calculate the disposal consideration on a capital contribution by reference to section 4 as the asset does not have a balance sheet value in the partnership accounts. In these circumstances HMRC accepts the apportionment of allowable costs on a fractional basis as provided for in section 4 rather than by reference to the statutory A over A plus B formula… Where a partnership asset is revalued a partner will be accredited in his current or capital account with a sum equal to his fraction or share of the increase in value. An upward revaluation of chargeable assets is not in itself an occasion of charge.” (Emphasis added.)