Floyd v John Fairhurst & Company
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Neuberger,Lord Justice Potter |
| Judgment Date | 21 May 2004 |
| Neutral Citation | [2004] EWCA Civ 604 |
| Date | 21 May 2004 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2003/1759 CHANF |
[2004] EWCA Civ 604
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION, MANCHESTER
DISTRICT REGISTRY
(His Honour Judge Maddocks)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Potter
Lady Justice Arden and
Lord Justice Neuberger
Case No: A3/2003/1759 CHANF
Mr Edward Bartley Jones QC (instructed by Beachcroft Wansborough) for the Appellants
Miss Marion Lonsdale (instructed by Robin Simon LLP) for the Respondents
This is an appeal against the order of HHJ Maddocks sitting as a deputy judge of the Chancery Division of the High Court of Justice, Manchester District Registry, on 14 July 2003. By his order, the judge gave judgment for the claimants on their claim in the sum of £10,549 and for the defendants on their counterclaim in the sum of £12, 943. The claimants appeal against that order.
The action arises out of negligent tax advice given by the respondents ("Fairhursts"), who were the appellants' accountants and tax advisers. The third appellant ("the company") was set up in 1980. The sole directors and shareholders were the first two appellants, Mr and Mrs Floyd. They were equal shareholders in the company. In 1991, Mr Floyd and the company each owned land at Irlam, near Manchester. The company's business was the storage and repair of containers. Mr Floyd's business consisted of the letting of industrial units. Part of the company's land and the whole of Mr Floyd's land was compulsorily purchased by Salford City Council ("Salford") on 28 March 1991. The total compensation payable in respect of both sites was £900,000. Of this, the company received £341,692.50 and Mr Floyd £558,307.50. This gave Mr Floyd a gain of £391,400, resulting in a liability to capital gains tax on the land element of the compensation of £156,560. This sum became payable and was paid on 1 December 1991.
In 1990, Mr Floyd asked Fairhursts to advise him and the company on the capital gains tax implications of the prospective compulsory acquisition. Fairhursts gave advice to Mr Floyd in March and July 1990 and then again between October 1991 and January 1992. Fairhursts advised, correctly, that the company could defer part or all of the tax from the gains realised by it if part or all of the compensation was reinvested in new qualifying assets (land, buildings or goodwill) used for the purposes of a trade. However, Fairhursts failed to advise Mr Floyd that, if he reinvested his share of the compensation in land, he could obtain rollover relief under sections 111A and 111B of the Capital Gains Tax Act 1979, now sections 247 and 248 of the Taxation of Chargeable Gains Act 1992. It is doubtful whether Mr Floyd could have obtained the same sort of relief as the company since his land had been used for letting purposes and this did not count as the use of land in a trade. Nonetheless, he would have been eligible for rollover relief under the sections mentioned, and I shall refer to this form of relief as "CPO relief".
The land held by Mr Floyd had originally been owned by him in partnership with a Mr Leech. The partnership was called Boundary Trading Company ("BTC") . In 1985, Mr Floyd acquired Mr Leech's partnership share for cash. The company owned 1.06 acres of the land compulsorily purchased, and Mr Floyd (as successor to BTC) owned the remaining 0.9 acres.
In this action, Mr Floyd's case was that he suffered loss equal to the tax paid less a small discount for the fact that the tax would be deferred, not avoided altogether. The appellants also claimed the costs they incurred as a result of an investigation by the Inland Revenue commenced in 1991 into the affairs of Mr Floyd, BTC and the company. This investigation was caused at least in part by the failure of the Floyds, the former partnership and the company to file tax accounts in time. The investigation resulted in a beneficial compromise between the Floyds and the Revenue. Negotiations were carried on by Fairhursts, and the judge was satisfied that the compromise was a good one from the point of view of Mr and Mrs Floyd. In the action, Fairhursts counterclaimed for the sum of £26,500, being the principal amount of fees owed to them, of which £12,143 related to work other than the Revenue investigation.
The principal use which Mr Floyd made of the compensation which he received from the compulsory acquisition of his land was to purchase a property known as Westage Farm. In due course this was sold in two parcels, each with the benefit of principal private residence relief ("PPR relief") . In this way a capital gain of £282,045 was achieved with a tax saving of £112,018. The judge made the following findings:-
"Following receipt of the proceeds Mr Floyd incurred expenditure which included the following main items:
£
8 May 1991 repayment of mortgage on Quebec Cottage 113,020 1 June 1991 purchase of a classic car, Jaguar E type 20,100 10 October 1991 Westage Farm with barn and 5 acres 202,955 25 November 1991, 10 year policy 50,000 Same date 2 policies placed in trust for the children 100,000
It is perhaps convenient here to deal with Westage Farm. It was purchased by Mr Floyd at an auction sale for £200,000. The original attraction was that the barn offered garaging space for his collection of classic cars. However, acting on advice first from Fairhursts and then from Haslams (being the accountants he consulted in February 1993 when dissatisfied with Fairhursts) he first carried out improvements to the farmhouse which he then occupied as his principal private residence from 26 October 1993 and later sold with the benefit of exemption from capital gains tax under sections 222 to 226 TCGA 1992. He then on 13 July 1994 transferred the barn to a discretionary trust for his children and on completion of conversion works it was occupied by one of them as beneficiary and also as principal private residence so as to obtain PPR exemption for that part of the property when it came to be sold as 'The Farthings' on 3 September 1996. In round figures the exempt gain achieved for Westage Farm by this means was as follows:
Purchase cost £202,955 Improvements to farmhouse and conversion 165,000 of barn (as in Mr Floyd's statement)
Total 367,955
Sale of farmhouse on 1.12.94 360,000 Sale of barn on 16.9.96 290,000
Total: 650,000
Gain: 282,045 Tax at 40% 112,018
I should note that the figure of £165,000 was given by Mr Floyd in his written statement. In his evidence at the hearing he corrected this to £195,000, but without supporting documents I do not think I can accept that larger figure. For present purposes, however, it may suffice to note that the venture produced and was expected to produce a significant tax free gain by the use of PPR relief." (Transcript pages 9 to 10) .
In early 1993, the Floyds changed their tax advisers. They appointed Haslams to advise them. By the autumn of 1993 Haslams appreciated that CPO relief was available to the Floyds and that they could not claim it if they also claimed PPR relief on Westage Farm. However, by the time this happened, Mr Floyd had already bought Westage Farm and begun making improvements there. He did not have sufficient funds available to him to buy another property there and then to take advantage of the CPO relief. If he had been able to take advantage of CPO relief by acquiring an appropriate property (which could not be a property on which he sought to obtain PPR relief), he would have obtained a repayment of the sum of £156,560 and in addition the benefit of the capital gain and income stream on the new property. The period for making that investment was three years, subject to extension. Accordingly, he could have purchased the property at any time prior to March 1994, or indeed later if the Revenue had granted an extension.
There was a complication in that, on the sale of Mr Floyd's land, £108,000 of the compensation had been attributed to the land and £426,615 had been attributed to loss of the ability to let the industrial units on it. The balance of £23,692.50 was attributed to loss on the forced sale of equipment. Following enquiries by Haslams, the Revenue on 26 November 1993 accepted that the compensation for loss of the ability to let could be attributed to the land but they then expressed an intention to restrict the gain. The judge thought that the approach of the Revenue was unsustainable. However, Haslams took that matter no further.
The respondents do not contest that they negligently failed to advise on the availability of CPO relief in March and July 1990 and between October 1991 and January 1992. On this appeal, as before the judge, the appellants accept that the capital appreciation on, and income stream from, property acquired for the purposes of taking advantage of CPO relief can be compensated for by an award of interest.
Principal issue: would Mr Floyd have utilised CPO relief had he been aware of it?
The principal issue at trial was whether Mr Floyd would have taken advantage of CPO relief. It was common ground that this was not a question of assessing the chance of Mr Floyd having taken advantage of CPO relief. The court had to be satisfied, on a balance of probabilities, that Mr Floyd would have taken advantage of CPO relief, if competently advised. The judge determined this issue against Mr Floyd for the following reasons:-
"So here the question depends upon what Mr Floyd himself would have done if correctly advised.
I have not found this an easy question to determine. Insofar as it is appropriate...
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