R v Commissioners of Inland Revenue, ex parte Matrix Securities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 01 November 1993 |
| Date | 01 November 1993 |
| Court | Queen's Bench Division |
Queen's Bench Division (Crown Office List) and Court of Appeal.
Laws J; Dillon, Nolan and Roch L JJ.
David Goldberg QC and John Walters at the High Court hearing; David Goldberg QC, David Pannick QC, Hugh McKay and John Walters at the Court of Appeal hearing (instructed by Theodore Goddard) for Matrix Securities Ltd.
Lord Lester QC and Charles Flint at the High Court hearing; Charles Flint at the Court of Appeal hearing (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgments:
Denton Road, Re 56, Twickenham ELR[1953] 1 Ch 51
Ensign Tankers (Leasing) Ltd v Stokes (HMIT) ELRTAX[1992] AC 655; [1992] BTC 110
R v IR Commrs, ex parte MFK Underwriting Agencies Ltd & Ors and related applications WLRTAX[1990] 1 WLR 1545; [1989] BTC 561
R v IR Commrs, ex parte Preston ELRTAX[1985] AC 835; [1985] BTC 208
Income tax - Tax avoidance scheme - Clearance by inspector - Withdrawal of clearance by Financial Institutions Division - Whether Revenue entitled to withdraw assurances given by inspector - Whether unfair and abuse of power - Whether adequate disclosure made by applicant in seeking clearance - Capital Allowances Act 1990 section 10A subsec-or-para (2) section 10A subsec-or-para (9)Capital Allowances Act 1990, sec. 10A (2)(b), (9).
This was an application for judicial review which was dismissed by the High Court, and an appeal from that decision by the applicants who were the sponsors of a tax avoidance scheme. The applicants had obtained clearance for the scheme from their tax inspector but the Financial Institutions Division of the Revenue had withdrawn the assurances given by the inspector after expense had been incurred relying on the inspector's assurances.
The applicants were the sponsors of a unit trust called Matrix South Quay Trust which was formed in September 1993 to acquire certain buildings in the course of construction in London Docklands. The object was to claim the 100 per cent capital allowances available under theCapital Allowances Act 1990 section 1Capital Allowances Act 1990, sec. 1 for construction of buildings in an enterprise zone, by virtue of Capital Allowances Act 1990 section 10A subsec-or-para (2) section 10A subsec-or-para (9)sec. 10A (2)(b) and (9). By those provisions the "net price" paid for the purchase of a relevant interest in a building was deemed to be expenditure on construction of the building.
The sum of £95m was to be raised for the purposes of the scheme. However, the vendor, the receiver of a company which owned the building, was to receive only £8m, the balance being used, apart from £10m to complete building operations, in financial arrangements pursuant to the tax avoidance scheme.
Units of £1,000 were to be offered. The package provided for a bank, Hill Samuel, to lend 67 per cent of the purchase price which, because of "exit arrangements", including a put option to repurchase the investor's interest after ten years, would not have to be repaid. Interest on the loans was to be paid to Hill Samuel by the assignment of rent paid under a lease of the building to a Jersey company, Newco, which had been set up by the applicants to participate in the scheme. The first year's rent of £5.7m was to be paid out of a reverse premium of £70m paid by the receiver to Newco. The result was that an investor would have put up only 33 per cent of the price of his interest while claiming 100 per cent capital allowances. If clearance for the scheme could be obtained from the Revenue there would be no tax risk and the exit arrangements eliminated any investment risk.
The applicants submitted an outline of the scheme in a letter to the inspector on 15 July 1993 seeking clearance for the scheme, which the inspector gave without referring the matter to the Financial Institutions Division of the Revenue, although an extra copy of the letter had been sent to him for that purpose. The letter of 15 July mentioned the fact that the applicants had seen a letter from the Financial Institutions Division raising a question about allowances where a put option was granted. The applicants said that the letter raised different issues but in the prospectus for the scheme the term "put option" was used to describe the exit arrangements.
The inspector confirmed the clearance on receiving a copy of a draft prospectus. The applicants then issued the prospectus, spending substantial amounts on marketing the scheme, and contracts were exchanged with the receiver for the purchase of the building. On 22 September the trust opened for subscription and applications for half the necessary funds had been received by 8 October.
Comment in the press alerted the Financial Institutions Division who, on 8 October, withdrew the assurances given by the inspector.
The applicants, relying on R v IR Commrs, ex parte MFG Underwriting Agencies Ltd & Ors TAX[1989] BTC 561, challenged the withdrawal of clearance on the ground that the Revenue was not entitled to attempt to collect any tax after an assurance had been given in response to a request relating to a specific transaction if full disclosure had been made, and the assurances had been relied on. To do so would be unfair and an abuse of power. They contended that they had disclosed all the facts relating to the scheme, and that was all they were required to do. They could not have been expected to set out in their request for clearance the legal arguments that might be raised against them.
Held, dismissing the application:
1. The circumstances in which the Revenue would be bound by its assurances were not satisfied. The primary factual aspects of the scheme could have been traced in the letter of 15 July 1993, but it would have required an extremely vigilant eye to do so. Further, the solicitors were aware of the existence of the letter about put options written by the Financial Institutions Division on 9 May 1993. They did not tell the inspector that there might be a question whether the scheme involved a put option element which would have attracted the attention of the Financial Institutions Division. They should at least have provided him with a copy of the letter about put options from that division. The letter of 15 July did not fulfil the notion of equitableness, of fair and open dealing, to which the Revenue were as much entitled as the citizen.
2. The applicants had in effect treated the decision in ex parte MFG Underwriting Agencies Ltd as if it established something akin to an estoppel against the Crown. That was a fundamental mistake which betrayed a misunderstanding of the public law principles underlying that decision which was an application of the doctrine of legitimate expectation. No estoppel was available to prevent an authority such as the Revenue from carrying out the duty to collect tax imposed on it by statute.
Held, dismissing the applicants' appeal by a majority:
1. For an assurance given by the Revenue to be relied on, the person seeking it must have placed before the Revenue all the relevant facts. He must have been completely frank, and there could be no duty on the Revenue to make further inquiries to elicit further information. The burden would be entirely on that person to explain all the considerations material to the Revenue's decision, and those considerations were not limited to matters of fact. The Revenue should be appraised in general terms of the legal position relied on.
2. Per Dillon LJ: the applicants should have drawn the inspector's attention clearly to the letter from the Financial Institutions Division indicating that full capital allowances would not be allowed in a case such as the present, and they should have made it clear that the receiver was only to receive £8m of the £95m to be raised. The price received by the vendor was important and should have been disclosed so that the inspector could have considered whether the so-called price of £95m was really the "net price" paid by the buyer of the relevant interest within the meaning of Capital Allowances Act 1990 section 10Asec. 10A of the 1990 Act. It should have been explained in clear terms exactly what the receiver was getting for the property.
3. Per Nolan LJ: It should have been made clear to the inspector that the proposal was a tax-planning exercise in which the purchase of the building was only one of a number of complex and inter-dependent arrangements. The court was bound to uphold the principle that taxpayers might only rely on an informal advance clearance if the critical issues were stated clearly in the clearance application - or were so obvious that no express statement was needed. The clearance application in the present case did not satisfy that high standard.
R v IR Commrs, ex parte Preston TAX [1985] BTC 208 and R v IR Commrs, ex parte MFK Underwriting Agencies Ltd & Ors TAX [1989] BTC 561 considered and applied.
4. Per Roch LJ, dissenting: the applicants had satisfied the requirement of making full disclosure. The proof of that was that the details given by the applicants to the inspector enabled the Financial Institutions Division to formulate the grounds on which it was alleged that the scheme would fail to achieve the tax advantages claimed for it. The unqualified assurances were given not because of any failure of the applicants to provide the necessary details but because the inspector did not read the information provided with proper care, and failed to send the papers to his head office as he should have done. The applicants and their advisers did not have to raise possible arguments against the fiscal consequences of the scheme. They were entitled to assume that the Revenue would be astute to see whether the proposals they were being asked to consider were unacceptable.
Laws J: This case concerns a scheme called the "Matrix South Quay...
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