An Editor v HM Inspector of Taxes
| Jurisdiction | England & Wales |
| Judgment Date | 21 June 2000 |
| Date | 21 June 2000 |
| Court | Special Commissioners (UK) |
special commissioners decision
MR T H K Everett
An Editor appeals against two assessments to capital gains tax for the years 1988/89 and 1989/90, each in the sum of £284,468.
The evidence before me consisted of an agreed bundle of documents together with an affidavit from the appellant's deceased father. In addition I received oral evidence from the appellant's mother and from the appellant himself.
His mother's evidence-in-chief was contained in affidavit which she swore on 24 January 1997 and which was treated as her witness statement. The appellant's evidence-in-chief was contained in a witness statement, which made reference to five annexed exhibits. Those documents will be available to the court should these appeals proceed further.
After deep involvement with two different magazines in the late 1970s and early 1980s the appellant established Freebie Magazine Ltd ("Freebie") in 1982. He was the magazine's chairman, managing director, publisher and editor-in-chief and owned 99 of the 100 issued shares.
Freebie was distributed free-of-charge in the City and West End of London. Its income was derived from advertising revenue and the main client base was made up of estate agents. The first edition of the magazine was produced in September 1982. Initially it was produced and distributed on a quarterly basis. In 1984 it was produced every other month and from 1985 it was distributed on a monthly basis.
In September 1987 the magazine became a weekly publication at the instigation of the appellant. He realised that "going weekly" would entail losses initially although the reputation of the magazine was enhanced.
On 19 October 1987 the Stock Market crash occurred and in the words of the appellant it "had a terrible effect on Freebie's income." The property market in the areas where Freebie was distributed stagnated and estate agents cut their advertising budgets. By the end of November 1987 the magazine's losses had increased to the region of £10,000 per week.
By October 1987 the appellant realised that Freebie would require financial assistance. In addition he needed funds personally in order to complete the purchase of a property on which he had exchanged contracts and in order to refurbish another property which he owned. He was short of cash, but had substantial assets and calculated that he needed to borrow some £75,000. To his surprise the banks which he approached were unwilling to assist him financially.
In the past, he had borrowed funds from his parents and they trusted him implicitly as he had never failed to make repayment on time. They were a retired couple, living abroad and supporting the appellant's sick older brother. Despite the fact that his parents had also suffered financially in the English Stock Market crash, they agreed to lend him £50,000. He conducted the negotiations concerning the loan mainly with his mother by telephone.
At about this time the appellant was introduced by a friend to X, who held himself out to be a lawyer. The appellant's friend told him that X "was a "legal-whiz kid" and "an international lawyer"." He had offices in the West End of London. Despite what the appellant had been told and the opulent appearance of his offices, X was not a qualified lawyer of any description, as the appellant was to discover at a later date.
On 28 October 1987 the Appellant wrote to X in the following terms: (Document A annexed to the appellant's witness statement.)
Dear X
Further to our telephone conversation the other day I am writing to put a few ideas to you to confirm roughly what we said.
As you know I have tried a few banks about an urgent loan for helping Freebie progress as a weekly magazine but they seem to be holding back until the markets have stabilised so I have agreed in principle to borrow £50,000 from my parents.
It was very kind of you to offer your legal services for free and I will pay you back with the occasional editorial comment in the "SNAPS" section of the magazine, its just that not being a lawyer like you I cannot put these things over in legal language.
I cannot give my home at the above as security because it is fairly fully mortgaged and similarly with my (once developed) new house so I have come up with some kind of idea of giving 60 per cent of Freebie shares to my parents and 98 per cent of the mag. as security, i.e. I borrow the money pay interest on the whole but they hold 60 per cent. I do not want to loose controll because Freebie is my baby but perhaps you can think up something that makes it clear that I must keep controll, despite them being quasi owners. £50,000 is a lot to my parents because they are retired but please draw up an informal agreement that makes them feel safe but still allows me editorial controll.
Very Best Wishes
(The appellant is dyslexic, which accounts for his spelling errors. Unfortunately his condition has meant that over the years he has signed documents on trust, as he said in evidence "without first reading the small print, which I very often don't understand anyway.")
Although wishing to give his parents security for their loan the appellant was anxious to avoid problems arising similar to those which had occurred in the past when he was a minority shareholder on other magazines. He said (at paragraph 23 of his witness statement) "I was concerned that I should retain control of the company" and later "I needed to "appear" to be the owner of the shares to my employees, advertisers and to my contacts/"names" in business, who regularly graced the front cover of Freebie." And again, later, at paragraph 24:
My reasons for not transferring the shares to [my parents] fully was to ensure that should I have any dispute with an employee of Freebie for example my authority would not be called into question…
On or about 11 November 1987 the appellant and his parents visited the offices of X, and after being kept waiting for some time were presented with the following document which they signed, without having read it or understood it at the time. They trusted and believed that X had put into the form of an agreement the appellant's requirements as communicated to X in the appellant's letter of 28 October 1987. X was acting both for the appellant and for his parents. The document, which appears as document B annexed to the appellant's witness statement was dated at its head 6 November 1987 and addressed to the appellant from his parents at their address abroad. It reads as follows:
Dear Sir
We are writing to set out the terms and conditions for the proposed Loan: -
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(2) BORROWER THE APPELLANT
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(3) AMOUNT £50,000...
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