Sanderson v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Briggs,Lord Justice Simon |
| Judgment Date | 21 January 2016 |
| Neutral Citation | [2016] EWCA Civ 19 |
| Docket Number | Case No: A3/2014/0945 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 January 2016 |
[2016] EWCA Civ 19
Lord Jutice Patten
Lord Justice Briggs
and
Lord Justice Simon
Case No: A3/2014/0945
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE NEWEY
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Keith Gordon and Miss Ximena Montes Manzano (instructed by Bramhall Solicitors) for the Appellant
Mr David Yates (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date : 15 December 2015
This is an appeal by the taxpayer, Mr David Sanderson, against a decision of the Upper Tribunal (Tax and Chancery Chamber) (Newey J) released on 6 December 2013 dismissing Mr Sanderson's appeal from the earlier decision of the First-tier Tribunal (Tax Chamber) which upheld a discovery assessment made pursuant to s.29 of the Taxes Management Act 1970 (" TMA"). The appeal turns on whether the second condition imposed by s.29(5) TMA for the exercise of the power to issue a discovery assessment has been satisfied in this case.
The relevant facts can be stated quite shortly. On 24 February 2003 Mr Sanderson submitted late his tax return for the year ended 5 April 1999. The return disclosed a chargeable gain of almost £1.8m against which were set losses of more than £2m. Details of the losses were contained in the white space section of the return in which Mr Sanderson inserted a specific form of wording settled by leading tax counsel that had been supplied to him by Hanover Veriti Limited, the promoter of the tax scheme used by Mr Sanderson to reduce his liabilities in respect of the chargeable gain.
The disclosure was in these terms:
"EUROPEAN AVERAGE RATE OPTION (TRADE NO. 82831)
I am entitled to the loss of £1,825,663 by virtue of the provisions of TCGA 1992 s.71(2). The loss is part of a loss of £1,000,000,000, which accrued to the Trustees of the Castle Trust on 8th April 1997, on the disposal of a European Average rate Option (Trade No. 82831) relating to shares in Deutsche Telecom.
BENEFICIAL INTEREST IN THE CASTLE TRUST
On 24th November 1998, I purchased for a fee (part of which is contingently payable) from the Trustees of the Charter Trust 2.273% of their beneficial interest in the Trust Fund of the Castle Trust. The interest determined on 25th November 1998, when I became absolutely entitled to receive from the Trustees of the Castle Trust the sum of £16.04."
The Castle Trust Scheme ("the Scheme") was set up in 1997 and has been considered by a Special Commissioner (Mr Charles Hellier) in Corbally-Stourton v HMRC [2008] STC (SCD) 907. It is convenient (as in the Upper Tribunal decision) to summarise the Scheme by reference to the findings made in that case by the Special Commissioner:
"11. I find that scheme was intended to operate in the following manner:
"(1) On 11 March 1997 Mr Tanreer Makhdumi executed a deed under Guernsey law settling £125,000 on Legis Trust of Guernsey as trustee of the Castle Trust. The principal beneficiary was the settlor's mother who was resident in Pakistan.
(2) It was expected by those involved in the promulgation of the scheme that, through the agency of Exco Bierbaum Securities GmbH, (a derivatives broker and member of the Frankfurt Stock Exchange) … the trustees would enter into two reciprocal derivative contracts. Under the first contract the trustees were to become obliged to make a set payment to the counterparty (PDR) if the average price of Deutsche Telecom Shares over the set life of the contract exceeded a set figure, and if the average was lower than that figure then the counterparty would make payment of the same sum to the trustees. Under the second contract the obligations to pay were the reverse.
(3) The terms of the derivative contracts expressed that both would expire on 8 April 1997 when settlement would be made. The set payment was £1 billion.
(4) On 4 April 1997 the trustees, through the agency of Exco, arranged to terminate the option which was then in the money, and in consequence £999,288,500 was to be paid by PDR to an account of the trustees with UBS. Because the trustees retained the other, out of the money, contract under which they had a contingent liability of £1 billion which would mature on 8 April 1997, the UBS bank account was assigned by way of security to PDR.
(5) On 7 April UK resident trustees were appointed in place of the Guernsey resident trustees.
(6) On 8 April 1997 the out of the money derivative matured and the trustees were to pay PDR £1 billion of which the vast majority would come from the £999,288,500 which was to have been paid to them on 4 April 1997.
12. The object of these transactions was to give rise to an allowable loss of £1 billion in the hands of the trustees when they were UK resident, but for the gain of £999,288,500 to fall outside the UK capital gains net-being realised by non-UK resident trustees for the benefit of non-UK resident beneficiaries. The next steps involved the parcelling up of the allowable loss and the making of arrangements to enable it to accrue to UK taxpayers. These arrangements relied on the provisions of s 71(2) TCGA as they stood prior to their amendment in 1999. Under those provisions, where a person became absolutely entitled to trust property as against the trustees, any allowable loss which had accrued to the trustees which was represented in that property and could not be used by the trustee in the year in which the person became absolutely entitled was to be treated as accruing to the person who so became entitled. Thus if a taxpayer acquired an absolute interest in part of the trust property he would become entitled to part of the allowable loss which would otherwise have accrued to the benefit of the trustees.
13. This parcelling up and allocation was to take place by the following steps:
(i) later in 1997 three new trusts, the Charter Trust, the Magnus Trust, and the Zennith Trust were created;
(ii) the trustees of the Castle Trust made appointments of parts of the Castle Trust property to each of these new trusts.
The appointments were made contingent upon Mr Makhdumi's mother surviving until noon on 25 November 1998;
(iii) the trustees of the three new trusts sold shares of their contingent interests in the Castle Trust to UK taxpayers;
(iv) on 25 November 1998, Mrs Makhdumi being still alive, the UK taxpayers became absolutely entitled as against the Castle trustees to parts of the Castle Trust property, and thus eligible under s 71(2) to inherit the unused allowable losses of the Castle Trust."
One can see that the efficacy of the Scheme depended on the existence of two reciprocal derivative contracts which in effect guaranteed the existence of a net liability of £1 billion as at the expiry date in April 1997 but which facilitated a change from offshore to UK resident trustees between the termination of the in the money option and the maturity of the out of the money option. The net loss occurring to the UK trustees could then be allocated between the participants in the Scheme.
The Scheme was the subject of an investigation by HMRC's Special Compliance Office ("SCO") and Specialist Investigation Services from 1999 to 2007. This included a review of the tax returns of its members in which more than £200,000 had been claimed by way of capital losses. As of July 1999, the SCO had obtained from the Office of Supervision of Solicitors a list of the names and addresses of the participant members which had included Mr Sanderson and his file was forwarded to Mr Peter Thackeray, one of the officers in the SCO team.
At this stage Mr Sanderson had not filed his return and, as already mentioned, this did not occur until February 2003. Further checks on Mr Sanderson's self-assessment records were carried out between June and September 2000 but no further checks were carried out until October 2004 when Mr Thackeray was able to obtain from Mr Sanderson's accountants a copy of the return filed in 2003. Mr Thackeray accepted in evidence that had a search of Mr Sanderson's records been carried out in 2003 an enquiry could and would have been made within the period allowed under s.9A TMA. It would also have been possible to make an assessment under s.9C TMA before April 2004 based on the information contained in the return. But by November 2004 the time limits for either a s.9A inquiry or a s.9C assessment had expired leaving a discovery assessment under s.29 as the only means of challenging the capital loss claimed in the return. The discovery assessment was issued on 11 December 2005.
It was common ground between the parties both before the First-tier Tribunal and the Upper Tribunal that the Scheme was not effective to reduce the amount of Mr Sanderson's chargeable gain for the tax year 1998/1999. HMRC discovered that there was no record at Exco of the transaction in the derivatives between the trustees and PDR and on 27 November 2003, following negotiations between the trustees of the Scheme and HMRC, a closure notice was issued reducing the Trustees' loss claim from £1bn to nil. Hanover Veriti Limited wrote to Mr Sanderson on 7 January 2004 that:
"As you are aware, the Inland Revenue challenged the Castle Trust losses on the basis firstly that the transaction leading to the loss was in law, a sham and, secondly, that it lacked a commercial purpose. The Castle Trustee took advice from Leading Tax Counsel and he expressed the view that there was insufficient evidence and witnesses to show that the...
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