R (R & C Commissioners) v General Commissioners for Berkshire
| Jurisdiction | England & Wales |
| Judgment Date | 27 April 2007 |
| Date | 27 April 2007 |
| Court | Queen's Bench Division (Administrative Court) |
Queen's Bench Division (Administrative Court).
Wyn Williams J.
James Maurici (instructed by the Solicitor for HM Revenue and Customs) for the claimant.
The defendant did not appear and was not represented.
The first and second interested parties appeared in person.
The following case was referred to in the judgment:
Investors Compensation Scheme Ltd v West Bromwich Building SocietyWLR [1998] 1 WLR 896
Income tax - Investigation - Agreement - Revenue commencing investigation into taxpayers' affairs - Revenue and taxpayers reaching agreement - Taxpayers agreeing to pay specified amount in respect of tax, interest and penalties in return for Revenue agreeing not to take proceedings against them - Issues as to proper construction of agreement - Whether Revenue precluded from raising enquiries and serving notices in respect of specific tax year - Taxes Management Act 1970, Taxes Management Act 1970 section 9A section 19Ass. 9A, 19A.
This was an application by Revenue and Customs for judicial review of a decision of the general commissioners that, on its true construction, an agreement between the Revenue and certain taxpayers for the payment of a sum in respect of unpaid tax, interest and penalties, precluded the Revenue from raising enquiries and serving notices in relation to a subsequent tax year.
The taxpayers started trading in partnership in 1998 as "consultants and seafood dealers". The partnership ceased trading in July 2002. The Revenue formed the view that between 1998 and 2002 the partnership had traded almost exclusively with "related parties", buying from and selling to companies in which the individual taxpayers were interested. The Revenue took the view that the trading activity of the partnership lacked any obvious commercial purpose and that its true purpose was to allow the taxpayers and companies controlled by them to gain a series of tax advantages.
When the partnership ceased trading the business was sold to its principal customer as a going concern along with the assets of the partnership which included trading stock valued at £35,000 and goodwill valued at £2,800,000. According to the sales agreement, the payment by the company was to be by means of a loan account entry. The result of that transaction was the potential for significant tax advantages for both the purchaser and the vendor. The Revenue alleged that the transaction was an attempt at a tax avoidance scheme. Accordingly they began an investigation into the tax affairs of the taxpayers and their companies. The result of the investigation was an agreement in writing concluded in May 2004 between the Revenue and the taxpayers whereby, in consideration of proceedings not being taken against any or all of the taxpayers, they offered to pay the sum of £525,000 in respect of tax, interest and penalties. The Revenue accepted that offer. Six months later the tax inspector wrote to the taxpayers informing them that he intended to open an enquiry into their tax returns for the year ending 5 April 2003. Having received no response, the Revenue issued notices pursuant to the Taxes Management Act 1970, s. 19A requiring the production of certain documents in connection with the enquiry.
The taxpayers appealed to the general commissioners who decided that, as a result of the May 2004 agreement, the Revenue were precluded from raising enquiries and serving notices for the tax year to 5 April 2003. The Revenue applied for judicial review of that decision.
Held, granting the application:
1. When interpreting an agreement, the court had to consider the meaning which the document would convey to a reasonable person with the background knowledge that would reasonably have been available to the parties in the situation they were in at the time of the contract. Moreover, the law excluded from the admissible background the previous negotiations of the parties and their declarations of subjective intent.
2. On the true interpretation of the agreement, the sum of £525,000 was in respect of the liabilities and potential liabilities from the tax years between 1998 and 2002 as itemised in the schedules attached to the agreement. Clause 1 of the agreement was capable of no other meaning. It was also important to have regard to cl. 2(d) which, on any view, contemplated further enquiries being raised in connection with the sale and purchase of the partnership business. Accordingly, the taxpayers' interpretation of the agreement, accepted by the commissioners, could not be correct. There would be no purpose in raising enquiries if, depending on the result of the enquiries, there was no prospect of the Revenue recovering additional sums because the agreement itself precluded it.
Wyn Williams J:
[1] By a claim form issued on 9 September 2005 the claimant seeks quashing orders and other relief in respect of:
All of the various decisions purported to have been made by the General Commissioners in respect of the three Interested Parties following the hearing on 20 June 2005 and recorded in three decision letters dated 21 June 2005.
[2] My recital of the relevant facts is taken, in the main, from the claimant's statement of facts and grounds.
[3] On 1 May 1998 Mr Stuart James Thomas (hereinafter referred to as "IP1") and Mr Roderick Christopher Thomas ("IP2") commenced trading together in partnership under the title S & R Thomas Partnership ("IP3"). The trade of the partnership was described as "consultants and seafood dealers" in the first tax return sent to the claimant on behalf of IP3.
[4] On 26 July 2002 IP3 ceased to trade. In its tax return for the period ended 5 April 2003 it described the trade in which it had engaged as "seafood".
[5] The claimant formed the view that between 1 May 1998 and 25 July 2002 IP3 traded almost exclusively with "related parties". The vast majority of purchases were from a company known as Thomas Lindh Ltd (previously known as Spring Salmon Ltd) which, at the material time, was a company owned by the members of the Thomas family. Similarly, a very significant proportion of sales were to a company known as Spring Salmon and Seafood Limited. The claimant takes the view this company was owned by the Maclennan Trust which it also alleges was an offshore settlement made by IP1 and IP2 to benefit the Thomas family.
[6] The claimant's view was and still is that the trading activities of IP3 lacked any obvious commercial purpose and that its true purpose was to allow IP1 and IP2 and the companies controlled by them to gain a series of tax advantages.
[7] On 26 July 2002 the business of IP3 was sold to Spring Salmon and Seafood Ltd as a going concern along with the assets of the partnership. Those assets included trading stock valued at £35,000 and goodwill valued at £2,800,000 giving a total of £2,835,000. According to the sale agreement the payment by the company was to be by means of a loan account entry. The result of this transaction was the potential for a significant tax advantage for both the purchaser and the vendor. The claimant alleges that the transaction was an attempt at a tax avoidance scheme.
[8] At a point in time which is unimportant, the claimant began an investigation into the tax affairs of IP1, IP2, IP3 and the two companies to which I have referred. The details of the actual investigation are unimportant. The result of the investigation was an agreement concluded on 24 May 2004. The agreement was made between the claimant on the one hand and Spring Salmon and Seafood Limited ("the Scottish Company"), Thomas Lindh Limited ("the English Company"), IP1, IP2 and IP3. I will return to this agreement, in detail in due course but it suffices at this stage that I explain that it recorded the following:
… in consideration of proceedings not being taken against any or all of the named parties in respect of the said tax and interest and penalties [the five named parties] hereby jointly and severally offer to pay the [claimant] the sum of £525,000 (five hundred and twenty five thousands pounds sterling) ("the Sum") in respect of the said tax, interest and penalties, of which £400,000 (four hundred thousand pounds sterling) was paid on 20th April 2004 and the balance of £125,000 (One hundred and twenty five thousand pounds sterling) is payable with this offer letter.
[9] I should also record that it is agreed before me that on 24 May 2004 an agreement was constituted in the terms of a written document. The passage set out immediately above, is a quotation from that document. I mention this point only because the terms of the document are couched in terms of an offer to the claimant by the five other parties named in the document. There is no doubt, however, but that on 24 May 2004 the claimant wrote to the Interested Parties and the two companies accepting the...
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