Al-Fayed v Lord Advocate
| Jurisdiction | Scotland |
| Judgment Date | 12 March 2004 |
| Date | 12 March 2004 |
| Court | Court of Session (Outer House) |
Court of Session (Outer House).
Lord Justice-Clerk Gill.
Michael Jones QC and Sarah Wolffe (instructed by Maclay, Murray & Spens, Glasgow) for the taxpayers.
Patrick Hodge QC and Jane Paterson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the opinion:
Associated Provincial Picture Houses Ltd v Wednesbury CorpELR[1948] 1 KB 223
Association of General Practitioners v Denmark (Case No. 12947/87) (1989) 62 DR 226
Balfour v Sharp (1833) 11 S 784
Dunlop v McGowans SC1980 SC (HL) 73
Gresham Life Assurance Society v Attorney General ELR[1916] 1 Ch 28
IR Commrs v Bullock WLR[1976] 1 WLR 1178
IR Commrs v Nuttall TAXWLR[1990] BTC 107; [1990] 1 WLR 631
Pine Valley Developments Ltd v Ireland HRC(1991) 14 EHRR 319
Pressos Compania Naviera SA v Belgium HRC(1995) 21 EHRR 301
R v Attorney General, ex parte Imperial Chemical Industries plcTAX[1986] BTC 8015
R v Director of Public Prosecutions, ex parte Kebilene ELR[2000] 2 AC 326
R v HM Inspector of Taxes, ex parte Lansing Bagnall Ltd TAX[1986] BTC 353
R v IR Commrs, ex parte Matrix Securities Ltd TAXWLR[1994] BTC 85; [1994] 1 WLR 334
R v IR Commrs, ex parte MFK Underwriting Agencies Ltd TAXWLR[1990] BTC 561; [1990] 1 WLR 1545
R v IR Commrs, ex parte National Federation of Self-Employed and Small Businesses Ltd ELR[1982] AC 617
R v IR Commrs, ex parte Preston TAXTAXELR[1983] BTC 213 (Woolf J); [1985] BTC 208; [1985] AC 835 (HL)
R v IR Commrs, ex parte Unilever plc TAX[1996] BTC 183
R v North and East Devon Health Authority, ex parte CoughlanELR[2001] QB 213
R v Secretary of State for Foreign and Commonwealth Affairs, ex parte Council of Civil Service Unions ELR[1985] AC 374
Ross v Ross SC1930 SC(HL) 1
Vestey v IR Commrs ELR[1980] AC 1148
York Corp v Henry Leetham & Sons Ltd ELR[1924] 1 Ch 557
This was an application for judicial review of a decision by the Inland Revenue Commissioners in 2000 not to abide by the terms of a 1997 agreement between the petitioners and the commissioners and to require the petitioners to complete tax returns for the years of assessment from 6 April 2000 to 5 April 2003 inclusive without reference to the agreement.
The taxpayer was treated as resident and ordinarily resident but not domiciled in the UK for tax purposes. An individual in the taxpayer's position who was chargeable to income tax and capital gains tax on foreign source income and capital gains on a remittance basis, could avoid a charge to tax on foreign remittances by putting in place appropriate arrangements to ensure that remittances received in the UK originated in a fund consisting exclusively of capital and therefore did not constitute income or capital gains.
In several cases involving wealthy individuals the Revenue had dealt with the problem of foreign remittances by entering forward tax agreements. Under such agreements, the individual agreed with the Revenue to pay specified annual sums in respect of specified future years of assessment. Those sums were accepted by the Revenue in lieu of any income tax and capital gains tax to which that individual might otherwise have been liable by reason of his having received foreign remittances, or constructive remittances, within the UK.
The taxpayer entered into three such arrangements, the last of which was the 1997 agreement. In 1999 after an investigation into the ownership of certain Scottish estates and several other well-publicised events involving the taxpayer the Revenue formed the view that it did not have a complete picture of the taxpayer's financial affairs and that the 1997 agreement should be terminated if possible. In 2000 the taxpayer received a letter from the Revenue resiling from the 1997 agreement. The taxpayer petitioned the Court of Session for judicial review of the decision by the Inland Revenue not to abide by the terms of the 1997 agreement.
Held, refusing to grant the petition:
1. The Revenue had a wide discretion in the exercise of its duties of care and management and the court would interfere only where the discretion had been exercised unreasonably or illegally.
2. In the everyday performance of their duties under s. 13(1) of the Inland Revenue Regulation Act 1890, the Revenue had to balance the duty to collect "every part of inland revenue" with its general duties under the 1890 Act and the Taxes Management Act 1970.
3. The making of a forward tax agreement was not a proper exercise of the Revenue's duties of care and management. The Revenue was constrained by its statutory duties. The Revenue's duty to collect tax lawfully due arose only where transactions had occurred that created a liability to tax. It was not a proper exercise of the Revenue's statutory powers and duties for it to make an agreement with an individual by which he could in effect operate outside the tax system on the basis that he had it in his power to avoid any liability to tax on his foreign remittances.
4. The 1997 agreement was ultra vires in principle by reason inter alia of the fact that it bound the Inland Revenue to an agreement that throughout its contractual currency the taxpayer would be regarded as domiciled outwith the UK, even if the acquisition of a domicile in the UK during that period were to alter fundamentally the nature of the taxpayer's liability to UK tax. The Revenue had therefore bound itself to an agreement which, in that event, would become contrary to law.
5. The Revenue had not retained any discretion to abide by the terms of the agreement. If it were to do so, it would be continuing in a state of non-compliance with its statutory duties.
6. Since the Revenue had acted ultra vires in entering into the agreement, the conclusion of the agreement could not be said to have created on the part of the taxpayer any legitimate expectation that the Revenue would abide by it, notwithstanding its illegality, for the entire contractual duration. As the agreement was ultra vires the Revenue, it could not be unfair to the taxpayer to be deprived of the benefits resulting from it.
7. The alleged wrong of which the taxpayer complained, if it occurred at all, was prior to the coming into force of the Human Rights Act 1998 so that the provisions of the 1998 Act and of the European Convention on Human Rights did not apply.
1. This is a petition for judicial review of a decision by the Commissioners of Inland Revenue ("the respondents") not to abide by the terms of an agreement dated 22 and 28 April 1997 between the petitioners and the commissioners and to require the petitioners to complete tax returns for the years of assessment from 6 April 2000 to 5 April 2003 inclusive without reference to that agreement. The decision complained of was intimated to the petitioners by two letters dated 2 June 2000.
2. The petitioners are brothers. The first petitioner is resident in London, the second is resident in the USA and the third is resident in Switzerland. The first and second petitioners are directors of various companies in the Harrods group. The late Emad Fayed was the son of the first petitioner. He died in 1997. I shall refer to the petitioners and Emad as "the family members".
3. The first petitioner is a UK taxpayer and is regarded by the respondents for tax purposes as being resident and ordinarily resident in the UK. Until at least 5 April 2000, if not thereafter, he was regarded by the respondents as not being domiciled in the UK.
4. If an individual is regarded by the respondents as being resident and ordinarily resident, but not domiciled, in the UK, he is chargeable to income tax and to capital gains tax on UK source income and capital gains in the normal way. He is chargeable to income tax and capital gains tax on foreign source income and capital gains on what is known as the "remittance basis".
5. The second and third petitioners are regarded by the respondents for tax purposes as being neither resident nor ordinarily resident nor domiciled in the UK. They therefore have only potential liabilities in respect of UK source income and gains in terms of s. 10 of theTaxation of Chargeable Gains Act 1992.
6. The agreement to which this petition relates is a forward tax agreement. It is the third such agreement that the parties have made.
7. If an individual such as the first petitioner is chargeable to income tax and capital gains tax on foreign source income and capital gains on a remittance basis, it is open to him to avoid a charge to tax on foreign remittances by putting in place appropriate arrangements. The purpose of such arrangements is to ensure that remittances received in the UK originate in a fund consisting exclusively of capital and therefore do not constitute income or capital gains.
8. Such arrangements involve the segregation of capital and the income and capital gains derived from it, and the careful planning of the source from which the foreign remittances are made to the UK. They require the keeping of detailed records and the engagement of professional advice. There is always the risk of their being challenged by the respondents. For the respondents, the investigation of an individual's foreign remittances may be time-consuming and expensive; and after such investigation the arrangements may prove to be immune from challenge.
9. In several cases involving wealthy individuals the respondents have dealt with the problem of foreign remittances by entering into forward tax agreements. Under a forward tax agreement the individual agrees with the respondents to pay specified annual sums in respect of specified future years of assessment. These sums are accepted by the respondents in lieu of any income tax and capital gains tax to which that individual might otherwise have been liable by reason of his having received foreign remittances, or...
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