Raymond Davies v Novatrust Ltd
| Jurisdiction | England & Wales |
| Judge | Jarman |
| Judgment Date | 25 May 2023 |
| Neutral Citation | [2023] EWHC 1196 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: PE-2021-000006 |
[2023] EWHC 1196 (Ch)
HIS HONOUR JUDGE Jarman KC
Sitting as a judge of the High Court
Case No: PE-2021-000006
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Rolls Building
Fetter Lane, London, EC4 1NL
Mr Jeffrey Bacon (instructed by direct access) for the claimant
Mr Jonathan Nash KC and Mr Calum Mulderrig (instructed by Taylor Wessing LLP) for the defendant
Hearing dates: 25–26 April 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 25 May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
HIS HONOUR JUDGE Jarman KC
Introduction
The claimant Mr Davies is the beneficiary of a pension administered by the defendant (Novatrust), which is a trust company registered in Jersey, under two agreements between the parties in April 2008 and June 2016 (the 2008 and 2016 Novatrust agreement respectively). Novatrust is trustee of a trust known as the Chemwern Trust, and the agreements provide that Novatrust will make pension payments to Mr Davies. He claims that he has been underpaid by £78,615 and seeks damages in that sum, as well as a declaration that future payments should be grossed up at the highest marginal rate of income tax in the UK as his place of residence, regardless of his effective rate of income tax. Novatrust counterclaims for declarations that his net pension payment should be grossed up by reference to the highest effective marginal rate of income tax actually payable by him and that there is an implied term in the agreements that he will provide relevant income information to Novatrust for the purposes of calculating the appropriate grossing up rate of his pension in the future.
The reason for this dispute is that the parties have applied different interpretations of grossing up clauses in the Novatrust agreements. The 2008 Novatrust agreement (which so far as material the 2016 Novatrust agreement replicates) provides as follows:
“The amount that will be paid to [Mr Davies] in each year will be that gross amount which, after deduction of tax levied at the highest rate applicable to [Mr Davies] in the country of [his] residence in that year, will result in a net (after-tax) amount of…”
“…the Initial Net Amount is to be grossed up such that, after payment of tax on it, [Mr Davies] will be left with the Initial Net Amount…
Background
The factual background is largely uncontentious. Mr Davies was employed by and was a director of Oceana Retail Holdings Limited (Oceana) and related companies, which are owned by Michael Lewis and members of his family. The directorship finished in April 2007 and Mr Davies was planning to retire at the end of that year. The agreement which governed his pension at that time was one which he had entered into with Oceana in 2005, under which he was entitled to receive a pension in the sum of £181,000 per annum after tax. In November 2007, a memorandum of understanding was prepared between Oceana and Mr Davies, whereby his entitlement was to a pension which would result in his receiving an after-tax amount of £196,000 per annum. However, at that time the auditors of Oceana informed him that payment of such a pension would present various accounting difficulties. The capital value of the pension liability of about £5 million would have a dramatic effect on Oceana's balance sheet, and because the pension was unapproved and unfunded, there was no specific statutory provision allowing tax deduction of the payments. There was also concern that HMRC might query the amount of such payments.
Accordingly Mr Davies agreed that his pension would be paid as to half by Oceana and as to the other half from the Chemwern Trust, which was one of the trusts set up by the Lewis family. That arrangement was put into effect by two agreements which Mr Davies entered into, the first on 13 March 2008 with Oceana (the Oceana agreement) and the second by the 2008 Novatrust agreement. Also on 13 March 2008, Mr Davies entered into a consultancy agreement with Oceana. The pension under the 2008 Novatrust agreement did not become payable until the conclusion of a consultancy agreement on 1 April 2016.
By clause 2.2 of the Oceana agreement, Mr Davies was entitled to be paid by way of pension the gross amount which, after deduction of tax levied at the highest rate applicable to him in the country of his residence that year, will result in his retaining a net (after tax) amount of £99,000. By clause 3.3, the pension from Oceana increases annually by reference to the rate of inflation amongst other factors. By clause 4, no variation is valid unless it is in writing and signed by or on behalf of each of the parties.
Mr Davies has taken no issue in respect of his pension payments under the Oceana agreement. Those are treated as the highest part of his income for the purpose of grossing up, and attract the additional rate of income tax because pension payments under the Novatrust agreements will move it into that rate. Payments under the Oceana agreement have been grossed up at the additional rate of income tax.
In March 2016, a dispute arose between Mr Davies and Oceana as to payments which he claimed were owed to him on his retirement, and solicitors became involved. Solicitors for Novatrust by letter dated 24 May 2016 offered him a gratuitous lump sum payment, on condition that he agreed terms set out in the letter in satisfaction of all claims which he may have for any payment or to be considered for any discretionary payment from Lewis family trusts. The letter was headed “Novatrust Ltd – Lewis Family Trust Your Pension and Proposed gratuitous lump sum payment.” No reference was made to the Oceana agreement or payments made thereunder. The letter referred to the sum payable being based on the 2008 Novatrust agreement, which had escalated since 2008, and the fact that the initial net amount was “advised by Michael Lewis, as Chairman of Oceana.” The terms then set out in relation to the pension from Novatrust included that the initial net amount is to be grossed up such that, after payment of tax on it, he would be left with the initial net amount and that the grossing-up “would be adjusted whenever tax rates and/or [Mr Davies'] tax status changes…” A counterpart agreement was enclosed.
On 26 July 2016, Mr Davies' solicitors responded, saying that the grossing up formula had been used in Oceana and Novatrust agreements from 2008, and that it was understood that the parties are agreed that the notional net amount should be grossed up based on the following formula:
“1. 100% — Applicable Tax Rate %=X
2. Notional Net Amount / X=Y
3. Y*100 = Grossed Up Amount”.
On 30 June 2016, Mr Davies' solicitors replied accepting the offer of the gratuitous lump sum in settlement of any discretionary payment from the Lewis family trusts enclosing the counterpart agreement signed by Mr Davies, which is the 2016 Novatrust agreement. Mr Davies wrote to a director of Novatrust, Ian Crosby, on 16 August 2016 referring to the “grossing up or down of both pensions for any changes in the highest tax bracket applicable to me (presently 45%).”
In December 2017, Novatrust's solicitors wrote to ask Mr Davies for information as to his other taxable income for the tax year ended in 5 April 2017, and said this:
“Essentially, the problem is that the appropriate grossing-up rate will depend on the amount of your other (non-pension) income and the rates of tax applicable to that other income. This will not be known with any certainty until after the pensions payments have been made as it will depend on your income for the then current tax year.”
To solve the problem, they suggested the following approach. In each year, it would be assumed provisionally that grossing-up was required at the highest marginal rate and monthly payments would be made on that basis. Mr Davies would then be asked for confirmation of his actual income and tax computations for the last complete tax year, and adjustments would be made in respect of any past overpayments during that tax year out of the next monthly payment. It was explained that such a process would favour Mr Davies because any discrepancies as at the time of initial payment would be in his favour. The marginal disadvantage to the trust was likely to be more than offset by the cost savings of avoiding frequent adjustment. Should it turn out that overpayments became substantial, the process could be reviewed.
The following month Mr Davies wrote to reject that proposal. After a chasing letter, his solicitors responded in February 2018 simply confirming that he was resident in the UK and the highest rate of tax applicable to him was 45%. It was denied that Novatrust was entitled to make any provisional adjustment to his pension payments. Its solicitors however continued to press for information, and in April 2018, whilst maintaining that there was no obligation on him to do so, his solicitors confirmed that his other income for 2016–17 exceeded the threshold of £150,000, which was then the threshold for the top rate of income tax.
The following year a similar request was made for the 2017–2018 tax year, but was met with a refusal on the basis that Novatrust had no right to such information contractually or otherwise. The request was pressed, however, and it was stated that Novatrust had fiduciary duties to its beneficiaries and could not go beyond its contractual obligation to Mr Davies. It was also asserted that the intent of the grossing-up provision was to achieve the result that Mr Davies would receive the relevant net sum after he had paid the tax attributable to it. That request was also refused and so it was indicated on behalf of Novatrust that without such information...
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