R v Commissioners of Inland Revenue, ex parte Preston
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE LAWTON,LORD JUSTICE GRIFFITHS,LORD JUSTICE DILLON |
| Judgment Date | 31 July 1984 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | 84/0342 |
[1984] EWCA Civ J0731-6
Lord Justice Lawton,
Lord Justice Griffiths
and
Lord Justice Dillon
84/0342
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL
(CIVIL DIVISION)
From: Mr Justice Woolf (Q.B.D., London)
Royal Courts of Justice,
MR DONALD POTTER, Q.C., and MR ALAN MOSES (instructed by The Solicitor of Inland Revenue; appeared on behalf of the Appellants (Respondents).
MR STANLEY BRODIE, Q.C., and MR STEPHEN NATHAN (instructed by Messrs Landau and Scanlan, W1) appeared on behalf of the Respondent (Applicant).
This is an appeal by the Inland Revenue Commissioners against a judgment of Mr Justice Woolf delivered on 24 February 1983 whereby he allowed an application by Mr Michael David Preston for judicial review in respect of action taken by the Commissioners against Mr Preston under Part XVII of the Income and Corporation Tax Act 1970 and made a declaration accordingly. The issue raised by this appeal is this: did the Commissioners in 1982 act lawfully towards Mr Preston in making inquiries about his purchase and sale of some shares and by setting in motion the procedure for the cancellation of tax advantages provided for by the said Part of the 1970 Act when, in 1978, one of their inspectors had told him that he did not intend to make any further inquiries about his tax affairs and, in reliance on that statement, he had withdrawn two claims for relief and had paid capital gains tax on the transaction about which the inspector had asked questions?
On 10 April 1974 Mr Preston acquired half the issued share capital of Gymboon Limited, which had a share capital of £100 in £1 shares. On 1 February 1975 he sold 15.4% of his interest to purchasers who had already acquired the other half of the issued share capital. In September 1976 Gymboon Limited started trading, mainly in commodities. On 11 January 1977 Mr Preston sold the remainder of his shares in Gymboon Limited to Broadforth Limited for £24,375. At that time Mr Preston's shares were in the name of a nominee, Wingmead Securities Limited.
At the beginning of May 1978 an inspector in the Special Investigation section of the Inland Revenue, named Thomas, wrote to Mr Preston telling him that he would like to discuss with him his tax returns for the years 1975–76, 1976–77 and 1977–78. When Mr Preston asked what particular matters he wanted to discuss, Mr Thomas, by letter dated 18 May 1978, identified four. Three of these are relevant to this appeal: Mr Preston's claims for relief for interest paid to Rossminster Acceptance Limited, the loss he had claimed in respect of the sale and purchase of shares in Jurby Raven Limited and his transactions in the shares of Gymboon. By letter dated 24 May 1978 Mr Preston gave Mr Thomas some of the information for which he had asked. Towards the end of his letter came this paragraph:
"As things stand today it is not a matter of great concern to me whether or not I proceed with my claims for relief for interest or capital loss. What is most certainly of greater importance is that my taxation affairs are maintained on a current basis. Accordingly, without prejudice to any claim which may have to be made for interest relief or capital loan, I am prepared to forgo such claims for the years in question on the basis that by so doing I shall facilitate the agreement of my tax affairs".
On 25 May 1978 Mr Preston and Mr Thomas talked to one another on the telephone. In the course of that conversation Mr Thomas told Mr Preston that he wanted information about his purchase and sale of shares in Gymboon Limited and why the shares had risen so much in value between September 1976 and their sale in January 1977. The next day Mr Thomas wrote to Mr Preston recording what he, Mr Preston, had said about being willing to withdraw his claims for relief for interest payments and the loss on his sale of shares in Jurby Raven Limited. The letter continued as follows:
"As stated on the telephone I should like the following factual information regarding the shares in Gymboon Ltd:
a. full details of the acquisition and disposal of these shares, including the names and addresses of the person from whom they were acquired and to whom they were sold, the relevant dates and numbers of shares involved
b. a note of the circumstances in which the value of the shares increased so quickly between September 1976 and the date of disposal. What was the precise nature of Gymboon Ltd.'s business activities?".
By letter dated 23 June 1978 Mr Preston gave Mr Thomas details about the acquisition and sale of his Gymboon Limited shares. The information included the following:
"Gymboon Limited's activity was that of a dealer in shares and commodities, the latter being traded on the London Metal Exchange, and it was as a result of the substantial profits generated by its dealings that the value of its shares increased as they did".
That information would not have amounted to such "full and accurate disclosure of all facts and considerations relating (to the transaction) which (were) material to be known to the Board" for the purposes of section 464 of the 1970 Act had Mr Preston tried to get the protection given by that section. By letter dated 21 July Mr Thomas replied as follows:
"…I have noted the information supplied regarding the shares in Gymboon Ltd. On receipt of your note formally withdrawing your claims to relief for interest paid to Rossminster Acceptances Ltd. during the two years ended 5 April 1976 and confirming that you are not pursuing the inclusion in the computation of your gains chargeable to Capital Gains Tax a loss on the disposal of shares in Jurby Raven Ltd. I propose to return your tax papers to HM Inspector of Taxes North East 5 (London) as I do not intend to raise any further enquiries on your tax affairs".
By letter dated 28 July 1978 Mr Preston wrote withdrawing his claims for relief. Thereafter he paid capital gains tax on the sale of his Gymboon Limited shares.
From about July 1979 onwards the Inland Revenue obtained more and more information about the tax avoidance schemes which had been drafted by persons connected with Rossminster Limited and sold by them to members of the public—see R. v. I.R.C. ex parte Rossminster Limited and Others (1980) A.C. 952. Many of these schemes involved dividend stripping. One of the companies involved in these stripping activities was alleged by the Inland Revenue to be Broadforth Limited, the company to which Mr Preston had sold his Gymboon Limited shares. On 8 October 1979 the Inland Revenue received information which led them to suspect that Mr Preston's sale of his shares in Gymboon Limited had been in the course of one or more of Rossminster Limited's tax avoidance schemes. They also learned, but not from Mr Preston, that the sale price of his Gymboon Limited shares, namely £24,373, had been based on an asset value which excluded a provision for corporation tax on Gymboon Limited's profits. The Inland Revenue were of the opinion that the sale at this price had given Mr Preston a tax advantage of a kind to which Fart XVII of the 1970 Act applied. The relevant provisions are set out in sections 460 to 465.
In my Judgment the information about Mr Preston's purchase and sales of his Gymboon Limited shares which the Inland Revenue had in the summer of 1982 would, in the ordinary course of tax-collecting, have Justifed their deciding that Mr Preston might be a person to whom section 460 of the 1970 Act applied. He seemed to have had a transaction in securities with results coming within section 461 and there was reason for thinking that one of its main objects had been tax avoidance. Mr Preston's case has been, however, that his case was a special one because in reliance upon what he had been told by Mr Thomas in his letter dated 21 July 1977 he had withdrawn his claims for relief and had paid capital gains tax on the sale price of the shares, and by mid-July 1982 it was too late for him to claim further relief under section 33 of the Taxes Management Act 1970.
Confident that Mr Preston's case was a proper one for the cancellation of the suspected tax advantages gained through a tax avoidance scheme the Inland Revenue decided to apply section 460. Mr Potter, on behalf of the Commissioners, submitted that the Inland Revenue had a duty to do so. In...
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