R Mrs Shirley Archer v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Flaux LJ,Floyd LJ |
| Judgment Date | 18 June 2019 |
| Neutral Citation | [2019] EWCA Civ 1021 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C1/2018/0899 |
| Date | 18 June 2019 |
[2019] EWCA Civ 1021
Lord Justice Floyd
Lord Justice Henderson
and
Lord Justice Flaux
Case No: C1/2018/0899
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE HONOURABLE MR JUSTICE GREEN
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Conrad McDonnell (instructed by KPMG LLP) for the Appellant
Mr David Yates QC (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing date: 14 th May 2019
Approved Judgment
Introduction
This is an appeal about costs, a subject which would normally not justify a first, let alone a second, appeal. But as Lewison LJ recognised, when granting permission on 1 November 2018 for a second appeal to this court, “the point raised is one of broad significance”.
The appellant, Mrs Shirley Archer, and her husband, Mr William Archer, were among the first groups of taxpayers to receive an accelerated payment notice (“APN”) from the Commissioners for Her Majesty's Revenue & Customs (“HMRC”) following the enactment of Part 4 of the Finance Act 2014 (“ FA 2014”) which received the Royal Assent and came into force on 17 July 2014. After the issue of precursor letters, an APN was issued to Mr Archer on 19 September 2014, and a separate APN was then issued to Mrs Archer on 4 November 2014. Each APN said that it related to the same “DOTAS arrangements”, that is to say tax avoidance arrangements which had been notified to HMRC and allocated a reference number (in this case 74201516) under section 311 of the Finance Act 2004 (“ FA 2004”).
The DOTAS legislation was contained in Part 7 of FA 2004 (sections 306 to 319, headed “Disclosure of tax avoidance schemes”) and regulations made by the Treasury thereunder. It required the promoters of specified types of tax avoidance scheme to disclose prescribed information about them to HMRC prior to or shortly after their first implementation. Pursuant to those obligations, on 3 April 2006 KPMG LLP disclosed to HMRC a scheme described in the notification as “Certificate of deposit planning 2”, the purpose of which (stated shortly) was to enable a client (“Mr X”) to obtain an allowable loss for income tax purposes by means of certain transactions involving a “certificate of deposit” acquired by Mr X from a bank. The idea was that Mr X would grant his spouse (“Mrs X”) an option to buy the certificate of deposit for substantially less than its market value; she would then sell the option to an independent third party for its full market value; and the third party would in due course exercise the option. In this way, it was hoped that the grant of the option by Mr X, its disposal by Mrs X to the third party, and the subsequent exercise of the option by the bank, would generate no liability to either income tax or capital gains tax (“CGT”) in the hands of Mr or Mrs X, while leaving Mr X with an allowable loss roughly equal to the amount of the discount from market value at which the option was granted, and leaving Mrs X better off in capital terms to approximately the same extent. The net cost of the scheme to the taxpayers, if it worked, lay in the professional fees presumably payable to KPMG and the turn negotiated by the bank for its participation in the scheme.
The scheme was employed by Mr and Mrs Archer in March and early April 2006, with the object of reducing Mr Archer's income tax liability for the tax year 2005/06. The liability which he wished to avoid arose from the sale by him in April 2005 of loan notes in a UK trading company in which he held a substantial equity stake. It is common ground that this sale gave rise to an income tax liability in 2005/06, chargeable on Mr Archer under Case VI of Schedule D. As I understand it, however, loss relief could in principle be claimed against that liability for certain categories of loss, including any loss from transactions in deposits under Chapter 11 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”): see section 392(1) of ITTOIA 2005, and Part 2 of the table in section 836B(2) of the Income and Corporation Taxes Act 1988 (“ ICTA 1988”), as then in force.
The provisions of Chapter 11 of ITTOIA 2005 (sections 551–554) impose a charge to income tax on profits and gains from the disposal of “deposit rights”, which are defined in section 552(1) as including “(b) a right to receive the principal amount stated in a certificate of deposit, with or without interest.” By virtue of section 552(2), “certificate of deposit” means a document which relates to the deposit of money in any currency; which recognises an obligation to pay a stated principal amount to bearer or to order, with or without interest; and by the delivery of which, with or without enforcement, the right to receive that stated amount, with or without interest, is transferable.
Against this background, the following transactions then took place:
(a) On 21 March 2006, Mr Archer acquired certificates of deposit with an issued value of £17.5 million and a maturity date of 20 April 2006. They were issued by Schroder & Co Limited, were payable to bearer, carried interest and were negotiable;
(b) On 27 March 2006, Mr Archer granted Mrs Archer an option to purchase the certificates from him for £2 million. The option was granted by deed for no consideration, and could be exercised only in full and only on 5 April 2006;
(c) On 4 April 2006, Mrs Archer sold the option to a Manx bank, Fairbairn Private Bank (IOM) Limited (“Fairbairn”), for £15,338,889. Before doing so, she took independent advice from the London office of KPMG and from a firm of solicitors, Addleshaw Goddard. The sale price was the result of negotiations over the period from 27 March to 4 April 2006. Mrs Archer then invested the cash proceeds of sale in an assurance bond in her sole name, which she still retained when the APN was issued to her some 8 1/2 years later in November 2014; and
(d) On 5 April 2006, Fairbairn exercised the option and Mr Archer sold the certificates to Fairbairn for £2 million, thus incurring a paper “loss” on the transaction of £15.5 million.
Acting on advice from KPMG, Mr and Mrs Archer submitted their tax returns for 2005/06 in July 2007. Mr Archer claimed to set the loss arising from his sale of the certificates of deposit against his liability to income tax under Case VI of Schedule D. His return also included the DOTAS registration number of the scheme. Mrs Archer's return did not, however, include the £15,338,889 which she had received from Fairbairn on the sale of the option, presumably for the reason stated in the DOTAS notification, namely that the certificates of deposit were “a debt for [ CGT] purposes” and her disposal of them was then thought to fall within section 251 of the Taxation of Chargeable Gains Act 1992 (“ TCGA 1992”) which provides that “Where a person incurs a debt to another… no chargeable gain shall accrue to that… creditor… on a disposal of the debt, except in the case of the debt on a security (as defined in section 132).” Mrs Archer was also advised that it was unnecessary for her to include the DOTAS registration number on her return, so she did not do so.
On 20 July 2007, HMRC opened an enquiry into both tax returns for 2005/06. A very lengthy period of correspondence and negotiation ensued, which left the matter still unresolved when the APNs were issued to Mr and Mrs Archer in September and November 2014. Despite the apparent simplicity of the scheme, HMRC evidently found it difficult to analyse and changed their ground more than once. For present purposes, the details do not matter, but the following stages in the history may be noted. On 22 September 2011, HMRC wrote to KPMG saying they had “decided not to pursue further arguments in respect of Mr Archer's claimed loss under s 551 ITTOIA on the disposal of the Certificates of Deposit”, but expressing the view that CGT was due from Mrs Archer as a result of her disposal of the option. At about this time, HMRC proposed, and Mr and Mrs Archer agreed, to enter into a process of negotiation, referred to as “Tax Dispute Resolution” or “TDR”, with a view to settling most, if not all, of the open issues between the Archers and HMRC. In the course of this process, the head of Dispute Resolution at HMRC wrote again to KPMG on 27 March 2013, indicating HMRC's acceptance that the loss was properly claimable by Mr Archer, with the result that the only dispute related to the tax position of Mrs Archer. Shortly afterward, however, there was a volte face. On 11 July 2013, in a telephone call with KPMG, HMRC said they had changed their mind in relation to the efficacy of the scheme and no longer accepted that Mr Archer had an allowable loss for 2005/06.
The next major development was in February 2014, when KPMG submitted a global settlement proposal on behalf of the Archers which dealt with many open issues, but in relation to the scheme involving the certificates of deposit proposed that HMRC should accept both that Mr Archer's loss relief claim was valid and that Mrs Archer had no liability to CGT. This proposal was considered by a Board of three Commissioners, but rejected by them on 30 July 2014. HMRC did, however, indicate that they would be minded to accept an offer under which Mrs Archer was not chargeable to CGT, but Mr Archer conceded that his loss was not allowable. The Archers were invited to submit an “improved offer” on those terms, but they declined to do so.
By this stage, the APN legislation had come into force, so before proceeding further I will describe its main relevant features.
The APN legislation
By way of a high level introduction to the subject, it...
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