R (Masters) v HM Revenue and Customs

JurisdictionEngland & Wales
JudgeMr Justice Underhill
Judgment Date13 November 2008
Neutral Citation[2008] EWHC 2721 (Admin)
Docket NumberCase No: CO/936/2008
CourtQueen's Bench Division (Administrative Court)
Date13 November 2008
The Queen on the Application of
(1) Mercury Tax Group Limited
(2) Darren Neil Masters
(1) Her Majesty's Commissioners of Revenue and Customs
(2) The Crown Court (sitting at Leeds and Blackfriars)
(3) James Michael Preston
(4) David Cook

[2008] EWHC 2721 (Admin)


He Honourable Mr Justice Underhill

Case No: CO/936/2008




Mr Andrew Mitchell QC and Mr Kennedy Talbot (instructed by Irwin Mitchell) for the Claimants

Mr Andrew Bird (instructed by Solicitor to HM Commissioners of Revenue and Customs) for the Defendants

Hearing dates: 17–18 September 2008

Mr Justice Underhill



The First Claimant (“Mercury”) is a company based in Leeds which provides tax consultancy services. The Second Claimant, Neil Masters, who is a solicitor, is its principal shareholder and Managing Director. In respect of the tax year 2002–2003 Mercury operated, for some 23 clients, a tax avoidance scheme known as “the RDS [Relevant Discounted Securities]” or “gilt strip” scheme (“the Scheme”). The First Defendants (“HMRC”) came to suspect that the scheme had been dishonestly implemented. On 30 October 2007 two Commissioners, on behalf of the Board of HMRC, approved the making of an application for warrants under s. 20C of the Taxes Management Act 1970 entitling their officers to enter a number of premises associated with Mercury or its clients in order to search for documents. An application was made to HH Judge Spencer QC, sitting at Leeds Crown Court, on 8 November 2007, and the warrants sought were granted. Warrants were issued for three Mercury offices, Mr. Masters' home and the homes and several office addresses of 22 of the clients – some 31 premises in all. The warrants were executed on 13 November 2007. As a result of information obtained in the course of the execution, an application was made on the same day to HH Judge Hillen at the Blackfriars Crown Court for a warrant in respect of a further office address of Mercury in London. That was also granted.


By these judicial review proceedings, issued on 29 January 2008, the Claimants seek a declaration that both the decision of the Board of HMRC to seek the warrants as regards Mercury's offices and Mr. Masters' home and the decisions of the Crown Court to grant those warrants were unlawful. The named Defendants are not only HMRC themselves and the Crown Court but also the two officers of HMRC who presented the Informations on the basis of which the warrants were granted, James Preston and David Cook: as to them, however, it is now accepted that they are not appropriate parties, and no relief is sought against them. The Claimants ask that the warrants be quashed and all documents seized on the searches be returned: they also seek an order for damages. Initially HMRC were unwilling to disclose the Information and the transcripts of the hearings in the Crown Court; but following a warning from Mitting J that their case might be prejudiced if they maintained that position they gave disclosure. On 24 July a Divisional Court comprising Moses LJ and Blake J granted permission and ordered an expedited hearing. The Claimants have been represented before me by Mr Andrew Mitchell QC and Mr Kennedy Talbot and HMRC by Mr Andrew Bird. The Crown Court has played no part in the proceedings.


So far as material, s. 20C of the 1970 Act reads as follows:-

“(1) If the appropriate judicial authority is satisfied on information on oath given by an officer of the Board that –

(a) there is reasonable ground for suspecting that an offence involving serious fraud in connection with, or in relation to, tax is being, has been or is about to be committed and that evidence of it is to be found on premises specified in the information; and

(b) in applying under this section, the officer acts with the approval of the Board given in relation to the particular case,

the authority may issue a warrant in writing authorising an officer of the Board to enter the premises, if necessary by force, at any time within 14 days from the time of issue of the warrant, and search them.

(1AA) The Board shall not approve an application for a warrant under this section unless they have reasonable grounds for believing that use of the procedure under section 20BA above and Schedule 1AA to this Act (order for production of documents) might seriously prejudice the investigation.

(1A) Without prejudice to the generality of the concept of serious fraud -

(a) any offence which involves fraud is for the purposes of this section an offence involving serious fraud if its commission had led, or is intended or likely to lead, either to substantial financial gain to any person or to serious prejudice to the proper assessment or collection of tax; and

(b) … .”

The “appropriate judicial authority” is a Judge of the Crown Court: see s. 20D (1) (a).


It is the Claimants' case that the Information put before Judge Spencer did not afford reasonable ground for suspicion that any tax fraud had been committed and that his decision to issue the warrant accordingly did not satisfy the requirements of s-s. (1), alternatively that the warrants should be quashed because HMRC did not comply with their duty of full and frank disclosure. Essentially the same material was deployed before Judge Hillen, and the case as regards his order is thus identical. The Commissioners' decision to approve the application, as required by s-s. (1) (b), was also based on the draft Information. The Claim Form contains a claim that the Board and the Court failed to consider the less intrusive alternative of a production order under s. 20BA (as referred to at s. 20C (1AA)); but that was not separately argued before me, no doubt because the Claimants' essential case was that there was no reasonable ground to suspect tax fraud, and if that were the case no order could be made under s. 20BA either.



The Scheme depended on the existence of provisions in the tax legislation permitting losses made on investment in gilts to be set against other tax liabilities of the investor, in particular for income tax. It operated by deliberately generating what would be treated for tax purposes as a loss, although it would involve, as Mercury put it in its marketing materials, “no corresponding financial loss”. In bare outline, this was achieved by the taxpayer buying a gilt strip – that is, the right to receive a specified payment of principal or interest from existing gilt stock —and then granting to a trust of which he was the principal beneficiary an option to buy the strip at a small fraction of its face value: the grant of the option would “degrade” the value of the strip, and the taxpayer would then sell the devalued strip at an even smaller fraction of the price for which he had bought it, thereby generating the required tax loss. The trust would then exercise the option and be in a position to realise the full value of the strip. The taxpayer would not in reality lose out because of his interest in the trust. Extraordinary as it may seem to the uninitiated, it is common ground that this scheme, if properly implemented, was at the material time lawful and effective (although the loophole on which it depended has now been closed). But it depended on the relevant transactions being genuinely carried out, and in the correct order, so as to create legally enforceable rights and obligations at each stage.


It is necessary that I set out in a little more detail the actual steps taken, or purportedly taken, in order to put the Scheme into effect. I will do so by reference to the case of a Mr Alain Grisay, on whom (as will appear below) HMRC particularly focused, although the machinery employed was the same in all cases. The essential steps were as follows:

(1) By a Trust Deed dated 19 November 2003 Mr Grisay set up a life interest trust (“the Trust”), of which he was the settlor and principal beneficiary. The sum settled was £3,000 (though, as will appear, initially a somewhat smaller sum was envisaged), being an amount sufficient to pay the fees of the trustee company, which was a Kleinwort Benson (“KB”) vehicle called Saint Melrose Limited (“SM”). The sole Director of SM was Kleinwort Benson Trustees Limited (“KBT”).

(2) On 25 November 2003 Mr Grisay borrowed £950,000 from Kleinwort Benson Private Bank Limited (“KBPB”).

(3) With that sum, plus £50,000 of his own money, on 2 December 2003 Mr Grisay bought a gilt strip for £1 million: the strip in question represented a payment of principal from 5% 2004 UK gilts repayable on 7 June 2004 (though, again, the use of a different strip was initially envisaged). (The purchase was in fact in the name of a KB nominee company called Frank Nominees Limited, but that is an irrelevant refinement for present purposes.)

(4) By an Option Agreement (in the form of a deed) dated 2 December 2003, i.e. the same day as the purchase of the strip, Mr Grisay granted an option to SM as trustee of the Trust to purchase the strip for £10,000.

(5) By a Sale and Purchase Agreement (again, in the form of a deed) dated 3 December 2003, i.e. the following day, Mr Grisay then sold the strip (subject to the option) to a company called Olivos Limited, said to be unrelated to any of the participants, for £5,000. Assuming the Scheme to have been properly implemented, he at that point crystallised a tax loss of £995,000.

(6) On 9 December 2003 SM, as trustee of the Trust, sold the option to Schroder & Co Limited (“Schroders”) for £984,695. That sum was then advanced by SM to Mr Grisay who was...

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