Ex parte Preston (pet. all.)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Templeman,Lord Scarman,Lord Edmund-Davies,Lord Keith of Kinkel,Lord Brightman |
| Judgment Date | 25 April 1985 |
| Judgment citation (vLex) | [1985] UKHL J0425-3 |
| Date | 25 April 1985 |
| Court | House of Lords |
[1985] UKHL J0425-3
Lord Scarman
Lord Edmund-Davies
Lord Keith of Kinkel
Lord Brightman
Lord Templeman
House of Lords
My Lords,
This is an appeal in judicial review proceedings whereby the appellant Mr. Preston seeks a declaration that the respondent Inland Revenue Commissioners are not entitled to exercise and perform their statutory powers and duties under Part XVII of the Income and Corporation Taxes Act 1970 by counteracting a tax advantage alleged to have been obtained by the appellant by his dealings in the shares of Gymboon Ltd.
Part XVII of the Act of 1970 begins with section 460. By section 460(6), if the commissioners have reason to believe that a taxpayer has obtained a tax advantage in consequence of a transaction in securities in the circumstances prescribed by section 461, the commissioners may notify the taxpayer in writing. The taxpayer may then make a statutory declaration that section 460 does not apply to him either because he has not been involved with any transactions in securities in the circumstances prescribed by section 461 or because he can show, in the words of section 460(1):
"that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained …"
If, notwithstanding the taxpayer's statutory declaration, the commissioners see reason to take further action, they shall by section 460(7)( a) submit to a tribunal established for the purpose by section 463, a certificate to that effect together with the statutory declaration of the taxpayer and, if the commissioners wish, a counter-statement by the commissioners with reference to the matter. The tribunal after taking into consideration the statutory declaration by the taxpayer and the certificate and counter-statement by the commissioners shall by section 460(7)( b) determine "whether there is or is not a prima facie case for proceeding in the matter …" If the tribunal determine that a prima facie case has been established, the commissioners by section 460 (3) shall counteract the tax advantage obtained by the taxpayer by a number of alternative adjustments, including an additional assessment to tax on such basis as the commissioners may specify by notice in writing served on the taxpayer as being requisite for counteracting the tax advantage so obtained. By section 462(1) the taxpayer to whom notice has been given may appeal to the special commissioners on the grounds that section 460 does not apply to him or that the adjustments directed to be made are inappropriate. An appeal lies from the special commissioners to the tribunal under section 462(2). The tribunal shall rehear and determine the appeal and by section 462(3) the determination of the tribunal shall be final.
In the present case, there has been a notification by the commissioners and a statutory declaration by the appellant both under section 460(6), followed by the presentation to the tribunal of a certificate, the statutory declaration and a counter-statement. The tribunal has determined under section 460(7) that there is a prima facie case for proceeding. The commissioners have proceeded by serving notice under section 460(3) designed to counteract, by means of an additional assessment, the tax advantage which they say the appellant has obtained. No appeal has yet been heard by the special commissioners under section 462 (1) because the appellant seeks by this appeal to obtain a declaration that all the steps taken against him by the commissioners pursuant to Part XVII of the Act of 1970 are unlawful.
The dispute between the appellant and the commissioners has its origin in the activities of the appellant between 1974 and 1977. The appellant gave an account of his activities between those years in a letter dated 24 May 1978 written by the appellant to Mr. Thomas, an officer of the Special Investigations Section maintained by the commissioners. In November 1974 the appellant took employment with the Rossminster Group Ltd. "with a view to developing a commercial and corporate financial activity for the group, and with the ultimate aim of making such activity the principal, if not sole, activity of the group." He "built up a team of 6 or 7 competent corporate finance executives. Our activities were principally confined to commercial and corporate finance matters and, in particular, my own involvement with the other activities of Rossminster was minimal." By the latter part of 1976, "on the one hand the substance of Rossminster's current financial well-being clearly now depended very little on my department and in commercial terms we were no longer an essential ingredient of the group's future well-being. At the same time, from a personal viewpoint, I had become progressively less sympathetic towards the nature and aims of Rossminster's main field of activity." It is common knowledge that Rossminster's main field of activity to which the appellant referred consisted of the invention, marketing and carrying into effect of large numbers of sophisticated tax avoidance schemes which were lawful and which were thought by Rossminster but not guaranteed to be effective. The appellant ceased to be employed by Rossminster in March 1977 and received an ex gratia payment.
From information supplied to your Lordships by the appellant through his counsel, it appears that the tax returns for the appellant for the years 1974- 75 and 1975-76 represented that after allowing for claims for loan interest, the appellant was not liable to pay any income tax. In the year 1974-75 a deduction of £11,592 loan interest was claimed for income tax purposes and a capital loss of £10,000 was shown for capital gains tax purposes. In the year 1975-76 a deduction of £26,074 loan interest was claimed for income tax purposes. In May 1978 the appellant's taxation returns were referred to the Special Investigations Section of the commissioners. After some preliminary correspondence, Mr. Thomas, the officer of the Special Investigations Section dealing with the matter, invited the appellant to call on Tuesday, 6 June and said in a letter dated 18 May that the particular matters that he would like to discuss were:
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"(a) Your claims to relief for interest paid to Rossminster Acceptances Ltd.,
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(b) the loss which you have claimed in respect of the purchase and sale of shares in Jurby Raven Ltd., and allied operations,
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(c) your transactions in the shares of Gymboon Ltd., Jacksons Bourne End Ltd., the Telbex Group Ltd., Powerstem Ltd., Alanvale Securities Ltd. and First London Securities Ltd.,
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(d) the leaving payment which you received from Rossminster Management Services Ltd.
It would be very helpful if you would bring to the meeting the documents, correspondence and other papers in your possession which are relevant to these matters."
It subsequently transpired in July 1982 that among the documents in the appellant's possession which were relevant was an incomplete draft of the agreement whereby the appellant had sold his shares in Gymboon Ltd.
The appellent replied by letter dated 24 May 1978. He pointed out "that although a chartered accountant, I am by no means well versed in highly-complex taxation matters, and feel that I am not competent to converse with you on equal terms. Subject to my comments below, therefore, if the interview is still considered necessary I feel that I must now seek professional advice. In the meantime, however, in order to facilitate the finalisation of my affairs I set out below certain information and observations on the matters specified in your letter of the 18 May. In this regard it seems to me that your questions fall into two main categories. Dealing first with the claims for relief for interest paid to Rossminster Acceptances Ltd. (in connection solely with which the holding of shares in First London Securities Ltd. arose) and for loss on disposal of shares in Jurby Raven Ltd., the following background information may be relevant." He then set out the history of his employment with Rossminster from which I have largely quoted and continued:
"As you will appreciate, as the head of the corporate financial and commercial activity at Rossminster I would have displayed a considerable lack of confidence in my employers if I had failed to enter into the transactions in question and into which all other senior employees of Rossminster had evidenced their intention to enter. The foregoing deals adequately, I hope, with the first category. Turning to the second category of matters raised by your enquiries, these involve commercial investments of business substance, and need not, in my view, be considered other than as capital transactions. As things stand today it is not a matter of great concern to me to see whether or not I proceed with my claims for relief for interest or capital loss. What is most certainly of greater importance is that my taxation affairs are maintained on a current basis. Accordingly, without prejudice to any claim which may have to be made for interest relief or capital loss, I am prepared to forgo such claims for the years in question on the basis that by doing so I shall facilitate the agreement of my tax affairs. In the light of the above you may feel that a discussion is no longer necessary. However, if you still wish to proceed with such a meeting, perhaps you will provide me with a list of specific questions on which I can obtain professional advice."
There was a telephone conversation between Mr. Thomas and the appellant on the 25 May 1978 and the substance of that conversation was confirmed the following day by a letter from Mr. Thomas in these terms:
"If I understand the penultimate paragraph of your...
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