SPC00532

CAPITAL GAINS TAX – exchange of shares for loan stock – TCGA 1993 s 137 – whether the exchange was effected for bona fide commercial reasons – yes –whether one of the main purposes of the scheme or arrangements including the exchange was avoidance of capital gains tax – yes – appeal dismissed

THE SPECIAL COMMISSIONERS

	VINCENT ALAN SNELL	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 
						DR KAMEEL KHAN

Sitting in public in London on 6 to 8 March 2006

Jonathan Peacock QC, counsel, instructed by PKF (UK) LLP, for the Appellant

David Ewart, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	Mr Vincent Snell appeals against an amendment to his Self-Assessment Return for the year of assessment 1996/97.  Mr Jonathan Peacock QC appeared for the Appellant, and Mr David Ewart for the Revenue.
2.	In outline the Appellant sold his holding of 91% of his company Sovereign Rubber plc (“Sovereign”) in exchange for three different types of loan stock on 21 December 1996.  He became non-resident and non-ordinarily resident (hereafter we shall use the expression “non-resident” to mean neither resident nor ordinarily resident) on 2 April 1997, and redeemed the loan stock in the following tax year.  The issue is whether s 137 of the Taxation of Chargeable Gains Act 1992 prevents the application of s 135 under which the gain which would otherwise have arisen at the time of the exchange is deferred until redemption of the loan stocks.  Section 137(1) provides:
“(1) Subject to subsection (2) below, and section 138, neither section 135 nor section 136 shall apply to any issue by a company of shares in or debentures of that company in exchange for or in respect of shares in or debentures of another company unless the exchange, reconstruction or amalgamation in question is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax.”
3.	The dispute between the parties is mainly factual but it is convenient to deal with the law first.  It is common ground that the Appellant has to succeed on both of the limbs of s 137.  The first limb is that “the exchange, reconstruction or amalgamation in question is effected for bona fide commercial reasons.”  Mr Peacock concentrated on the reason for the issue of the loan stock, and Mr Ewart on the reason for the Appellant choosing loan stock rather than cash.  We are not convinced that one should make a comparison with a different transaction, a sale for cash, and ask if the exchange for loan stock, rather than cash, was effected for bona fide commercial reasons.  Such a comparison that can fairly easily be made for an exchange of shares for short-term loan stock but much less easily for a share for share exchange or a reconstruction (which implies continuity of ownership) or amalgamation.  We consider that one should take the actual transactions carried out, here the sale of shares to a third party in exchange for three different types of loan stock, and ask whether that was carried out for bona fide commercial reasons.  On this basis Mr Ewart concedes that it is, and in any case we so find.  In case we are wrong about this interpretation we shall make finding of fact in relation to the parties’ contentions later in this decision.
4.	The second limb of s 137 is that “the exchange in question…does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax…”.   Mr Ewart identifies the scheme or arrangements (to which we shall refer as “the Arrangements”) as the issue of each of the loan stocks with the purpose of becoming non-resident and redeeming them while non-resident.
5.	Mr Peacock raised an important issue of interpretation on the meaning of avoidance of liability to capital gains tax.  He adopts for the purposes of s 137 the definition of tax avoidance by Lord Nolan in IRC v Willoughby [1997] STC 995, 1004c: “Tax avoidance within the meaning of s 741 is a course of action designed to conflict with or defeat the evident intention of Parliament.”  In reaching this conclusion Lord Nolan adopted Mr Henderson’s submissions for the Revenue summarised at p 1003h which included that “The hallmark of tax mitigation [as opposed to avoidance]…is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.”  He contended that the structure of capital gains tax was not to charge tax on disposals by non-residents and so it could not be contrary to the evident intention of Parliament if a person did not pay tax by reason of non-residence.  In addition, the Appellant genuinely suffered the economic consequences of becoming non-resident.  Mr Ewart accepts the applicability of Lord Nolan’s definition in this context but contends that but for s 135 capital gains tax would be payable on the contract of sale; Parliament’s purpose in enacting s 135 is to allow a person to defer paying tax until he receives cash but not to create an exemption from tax.
6.	We agree with Mr Ewart.  We consider that Mr Peacock’s analysis considers the absence of liability to tax of non-residents in the abstract and ignores that tax avoidance is part of a purpose test aimed at the circumstances of the particular exchange.  It is one thing for a person to enter into an exchange knowing that the consequence may be that as a result of a relief (on death, setting the gain against losses or annual exemptions, becoming non-resident or non-domiciled) no tax will ultimately be paid.  It is another for a person to enter into the exchange with the main purpose that no tax should be paid as a result of obtaining a particular relief in a later year.  It must be within the evident intention of Parliament that reliefs may result in no tax being paid in the future.  But it does not follow that that it is within the evident intention of Parliament that that one can enter into an exchange with the specific purpose of deferring tax so as to obtain a particular relief in a subsequent year.   We see nothing inconsistent with these two propositions.  In the year of the exchange the relief is not applicable and the exchange is effected solely with the purpose of deferring the charge to tax until the particular relief is available.  There is no reason why Parliament should intend this.  Accordingly we reject Mr Peacock’s contention on the meaning of tax avoidance.  In principle, if one of the Appellant’s main purposes of effecting the Arrangements is that capital gains tax should not be paid because the loan stocks will be redeemed while he is non-resident, that is avoidance of liability to capital gains tax within s 137.
7.	We should add a word about the relationship contemplated by s 137 between a main purpose, being what is in the taxpayer’s mind, and tax avoidance, which is a course of action designed to conflict with or defeat the evident intention of Parliament.  In normal circumstances the taxpayer will by so designing the course of action have the requisite purpose, although it is still necessary to consider whether this is a main purpose for s 137 to apply.  It is possible for one person to design a course of action that conflicts with the evident intention of Parliament, and hence be tax avoidance, but for a second person, who carries out the course of action, not to have a tax avoidance purpose for this section.  Where the first person, who designes the course of action, is the adviser, and the second person is the client, who understands the advice given by the adviser, there will be a tax avoidance purpose within the section.  
8.	There was an agreed statement of facts as follows:
(1)	This is an appeal against an amendment by the Respondent (“the Revenue”) to the Self-Assessment Return of the Appellant for the year of assessment 1996/97.  The amendment was made by way of closure notice dated 21 November 2002 and the appeal lodged on 9 December 2002.  
(2)	By the closure notice the Revenue determined that s.137 TCGA 1992 applied to prevent the application of s.135 TCGA 1992 to the disposal by the Appellant of his shares in Sovereign.  
(3)	Sovereign is a manufacturer of rubber products used in sports grounds, playgrounds and other recreational areas and in other protective coverings.  Sovereign is based in Stockport, Cheshire.
(4)	By a Sale Agreement dated 21 December 1996 the Appellant and his two sons sold their shares in Sovereign to a newly formed company, Inhoco 564 Ltd, being the vehicle used in the purchase by the unrelated purchasers of Sovereign. 
(5)	The shares were sold by the Appellant and his sons for the consideration set out in the following table:
	Ord shares	Pref shares	Ordinary Loan stock	1998 Loan stock	1999 Loan stock	Deferred consid-eration	Costs	Total	
The Appellant			£5,630,000	£450,000	£500,000	£537,500	£200,000	£7,317,500	
David Snell	£10,000	£40,000	£310,000					£360,000	
Andrew Snell	£10,000	£40,000	£310,000					£360,000	
Total	£20,000	£80,000	£6,250,000	£450,000	£500,000	£537,500	£200,000	£8,037,500	
(6)	Also on 21 December 1996 the Appellant entered into a consultancy agreement with Inhoco.
(7)	The Appellant ceased to be resident in the UK on 2 April 1997 when he departed to take up residence in the Isle of Man; he subsequently moved to the Cayman Islands.
9.	We had two ring binders of documents and heard evidence from the Appellant, Mr Ian Mills (senior partner, PKF (UK) LLP, the Appellant’s personal tax adviser), Mr Alan Sutton (formerly Managing Partner, Baker Tilly, the Appellant’s corporate finance adviser), Mr Andrew Lowden (tax partner, Baker Tilly), Mr Kevin Henry (then tax manager, Baker Tilly), Mr Andrew Allcock (then Baker Tilly corporate finance department), Mr James Murphy (then Manager, Manchester Office, Coutts & Co).  We also received a witness statement from Mr Peter Gorvin (the Appellant’s solicitor) who was unable to attend.  We find the following facts:
(1)	Sovereign had been founded by the Appellant’s father.  The Appellant ran it from his father’s death in 1972.  His other business interest was in deep sea salvage for which he held a 49% interest in Deep Water Recovery Limited which chartered a salvage boat that initially operated in Scotland and subsequently in Europe, particularly Spain.  In April 1997 when the Appellant became non-resident the company was working on a wreck in either Sicily or Spain.
(2)	The Appellant mainly looked after the overseas customers of Sovereign and spent considerable periods abroad.  His sons looked after the UK side of the business.  He was comfortable with the idea of living abroad as he already spent several months abroad each year. 
(3)	He had a long-term intention to acquire an estate in Scotland and run a commercial shoot there, which he described as being his idea of Utopia.  In early 1994 he made an offer for an estate in Perthshire.  He continued to view properties in 1995 and 1996.  A number of brochures about properties in Scotland were produced, one of which had notes in the Appellant’s wife’s handwriting on it.  These brochures are dated April 1996 (three), November 1996, December 1996, and one probably prepared in late 1995 as figures for fishing are given up to 18 September 1995.  The only one stating a price is the one dated December 1996, which states a minimum of £160,000.  He realised in 1994 that he would have to sell his shares in Sovereign in order to acquire an estate and in any case he wanted to devote more time to his family and his diving interests.  
(4)	He instructed Mr Alan Sutton of Baker Tilly to market Sovereign.  An offer of £3.8m in cash was received in July 1994 which was increased to £4.6m in cash or guaranteed loan notes at the Appellant’s option in March 1995 and April 1995, but it did not go ahead as the purchaser reduced the offer price as a result of its due diligence work.  The Appellant was aware of the significance of loan notes for tax purposes.  These offers envisaged that the Appellant would continue as a consultant; the 5 July 1994 offer contains a statement that in normal circumstances he would not be required to visit the Stockport premises.  The Appellant could not explain this but it seems possible to us that that it was because he intended to live abroad.  Another offer was received on 2 March 1995 of £5m in the form of ordinary shares, preference shares and loan notes, plus deferred consideration in the form of cash or shares at the purchaser’s option.  On 10 April 1995 Baker Tilly advised the Appellant on residence saying “now that…your future intentions have become clear, in that you intend eventually coming back to the UK to live on and operate a farming business….”  The Appellant said in evidence that this was not his intention, but we find that it is likely that he told Baker Tilly what is recorded in the letter.  Mr Lowdon, the tax partner, believes that the mention in the letter of Spain as a possible residence was based on the Appellant’s diving activities there.
(5)	The Appellant resolved to restructure Sovereign and have another 12 months trading results to demonstrate its success to a prospective purchaser before marketing it again.  He approached Baker Tilly again in September 1996 and was introduced to Mr Andrew Allcock, who had joined the corporate finance department in July 1996.  Mr Allcock prepared an information memorandum based to a small extent on one written by the audit department that had been used in 1994 in the earlier negotiations.  The memorandum includes a statement that “[the Appellant] would be happy to stay on to provide consultancy services to a prospective purchaser in the UK until 31 March and thereafter in developing and supporting markets abroad.  He would be available in the UK subject to residency restrictions.”  Mr Allcock believes that this was taken from the earlier memorandum rather than something that he discussed with the Appellant at the time, and the Appellant did not think he read it, but we consider that the Appellant would have read the part of the memorandum relating to himself and would have changed it if it were wrong.  Accordingly we consider that this is a statement that the Appellant intended to become non-resident at the end of the tax year.
(6)	An offer of £7.5m in cash or guaranteed loan notes was made through Arthur Andersen on 3 October 1996.  Mr Allcock replied on 15 October 1996 saying that the Appellant “will require bank guaranteed loan notes which will be realised after 6 April.”  The Appellant thinks that this was as a result of Mr Allcock’s advice.  The offer was increased to £7.75m on 22 October 1996 and to £7.8m on 24 October 1996 but this was later withdrawn as the purchaser decided not to become involved in heavy industry.  Arthur Andersen made a further offer of £7.75m in cash or bank guaranteed loan notes (or £8m with a lower cash or loan note element and £0.5m subordinated vendor loan) in October 1996 on behalf of a different management buy-in team headed by a Mr David Wood which eventually resulted in the sale.  The Appellant was keen to conclude the deal before Christmas and was prepared to lose the sale if this could not be achieved.  Negotiations were carried on by Mr Allcock with the Appellant being kept informed about important points.  We saw an internal memorandum of Addleshaw Sons & Latham, solicitors for the purchaser, which mentions:
“There is a concern that the vendor is to go off-shore for a period of at least two years for tax purposes.  Consideration is therefore being given as to a suitable amount to be held in an escrow account for the purposes of warranty claims.”
The Appellant said in evidence that he never gave the purchaser this impression (and never spoke to the purchaser’s solicitors) and Mr Allcock considered that the solicitors thought that the Appellant was the sort of person who could live abroad, but we find that it is more probable that the Appellant did say this to the purchaser as Mr Allcock’s suggestion would not explain the reference to two years.  The topic was likely to have been discussed in relation to the consultancy, see paragraph 9(12).  The solicitors also knew about the proposal to have a Jersey company provide his services, although it is unclear whether was before or after this memorandum.  The share sale agreement mentions in a Schedule a lease by a second Jersey company (Woodville Limited) to Sovereign of land occupied by the company (see paragraph 9(10)) but in fact the lease was from the Appellant.
(7)	The sale agreement was concluded on Saturday 21 December 1996.  The Appellant immediately went on holiday with his family and told his wife on Christmas Day.
(8)	The consideration is shown in the table in paragraph 8(5) and no cash was paid on completion.  The deferred consideration of £537,500 (£500,000 plus interest of £37,500) was payable as to £262,500 on 31 December 1997 and £275,000 on 31 December 1998.  The differences between the three types of loan stock are summarised in the following table:
	Ordinary loan stock	1998 loan stock	1999 loan stock	
Longstop redemption	31.3.1999	31.3.2000	31.3.2000	
Earliest redemption date	5.7.1997	31.12.1999 (or 5.7.1997 if no NIC liabilities)	31.12.9999	
Transferable	At any time	After 31.12.1999	After 31.12.1999	
Set-off	Against any warranties	Against NIC liabilities	Against any warranty (in priority to the ordinary loan stock)	
Guaranteed	Yes	Yes	Yes	
Interest rate	4.5% variable	4.5% variable	4.5% variable	
(9)	The 1998 loan stock dealt with a potential liability in respect of National Insurance and PAYE in relation to payments of remuneration to the Appellant in gold bullion, diamond vouchers and gold coins.  Such liability was set off against this loan stock.  If the matter had not been resolved by 31 December 1998 the Appellant had to provide alternative security of £450,000.
(10)	The sale agreement provided for the following order of set-off of warranty claims:  (1) the 1997 part of the deferred consideration; (2) the 1998 part of the deferred consideration; (3) a charge over land owned by the Appellant valued at £150,000 and leased to Sovereign for £15,000 pa; (4) the 1999 loan stock; (5) “so far as possible by the exercise of the Purchaser’s contractual or other remedies available to it in law.”
(11)	Mr Allcock considered that the purchaser would not have paid £8m if the Appellant had wanted cash rather than loan stock but this was not based on any discussions with the purchaser, and so we are unable to make any finding on whether this was the purchaser’s view.  Mr Allcock considered (and we accept) that the purchaser knew that if they tried to reduce the price the Appellant would not continue with the deal and they tried to protect themselves by contractual provisions.  For example, although Mr Allcock did not notice this at the time, the agreement provided for breaches of warranties to be dealt with at the purchaser’s option either by a payment to the purchaser to reflect the loss in value of the shares or by a payment to the company, which is stricter than normal.
(12)	The Appellant also entered into a consultancy agreement with the purchaser for an initial period of two years to make himself available for approximately one week per month at such times and at such locations as they agree.  He received a fixed fee and a commission if sales targets were met plus a commission on sales in excess of the target.  A draft of this agreement provides for the Appellant’s services to be provided by a Jersey company, and such a company was acquired, but it was not used in the final version.
(13)	Two contacts of the Appellant offered him consultancy work abroad following the sale, but he did not take these up.
(14)	In the New Year when the Appellant met Mr Wood he found that the climate had completely changed and that Mr Wood then considered that he had paid too much for Sovereign and was determined to reduce the price by making claims under the warranties.  Since Christmas Day and New Year’s days were on Wednesday it is likely that this meeting was on or after Monday 6 January 1997.  In addition the exchange rate with Germany worsened in early 1997, which adversely affected the business.  A dispute arose and the Appellant and his sons eventually sued the purchaser for the first instalment of the deferred consideration of £262,500.  The purchaser counterclaimed for breach of warranties of £1.889m, which is greater than the total of items (1) to (4) in paragraph 9(10) above.  The proceedings were settled on 24 March 1998 with the Appellant transferring the land which he leased to Sovereign, valued at £150,000, to Sovereign for £1, and the Appellant being entitled to redeem the loan stocks on putting up £450,000 cash in lieu of the 1998 loan stock.  The purchaser also paid £20,833.33 in settlement of claims in respect of the consultancy agreement.  Accordingly the Appellant gave up the whole of the deferred consideration and the land.  The dispute relating to payment of remuneration in kind was eventually settled in favour of the Revenue and so the Appellant also gave up the £450,000 cash.  The ordinary loan stock had already been redeemed on 8 July 1997 without any dispute.
(15)	A note of a meeting or telephone call on Friday 10 January 1997 by Mr J A Murphy, the Manager of the Manchester office of Coutts & Co notes that “Vincent [the Appellant] is planning and seeking professional advice to mitigate CGT and this would appear to be purely and simply going to live in Jersey.”  It notes that the Appellant is to speak to Peter Hall (whose card attached to the itinerary describes him as “Client Relationship Manager”) of Coutts, Jersey on Tuesday 14 January and that Mr Sutton is accompanying him to visit the Islands to ascertain his residential status and possible tax planning effectiveness.  It also notes that the Appellant had recently drawn up a holding will “until he decides what to do with his offshore planning.”  Mr Murphy included in the note a reminder to himself: “Speak to Peter Hall.  Arrange meeting at 12.30 pm in Jersey on Tuesday 14 January and Peter Hall has offered also to introduce Mr Snell to Colin Powell, Chief Adviser to the States of Jersey re residency.”  The Appellant thought that the visit to Jersey on 14 January 1997 was Mr Sutton’s idea and Mr Sutton said it was one of his regular visits to Jersey and that he asked the Appellant to accompany him.  We find that it was more likely that the visit was arranged to follow up Mr Sutton’s letter of 18 December 1996 (see paragraph 9(17) below) as a result of which he introduced the Appellant to Coutts resulting in the meeting or telephone conversation with Mr Murphy on 10 January 1997.  The Appellant said that the purpose of the visit was to see Coutts about investments, but we find that it was more probable that the reason was as stated by Mr Murphy’s note, particularly as it was not necessary to visit Jersey to see Coutts as Mr Murphy was based in Manchester and the Appellant had either already met him or spoken to him on the telephone.  The Appellant described the visit as “a bit of a jolly” with most of the meetings taking place in a pub lasting four of five hours, and Mr Sutton agreed with this description.  A note of the travel arrangements includes a meeting (without an asterisk showing that it had been confirmed, as was the case of the meeting with Mr Hall), at 2.30 with “States Resident Committee” against which someone, presumably Mr Sutton had written Mr Colin Powell’s name; another version of this itinerary, which must have been taken on the visit to Jersey as it has a number of visiting cards attached to it, has Mr Powell’s name and “States Resident Committee” typed in, and Mr Sutton crossed out “States Resident” and substituted “Economic” in manuscript.  
(16)	Following the meeting Mr Sutton wrote to Strachans (company managers and formation agents) on 15 January 1997: 
“Thank you for your help and support on Tuesday regarding Vincent’s possible move to Jersey.  
The meeting at Coutts went quite well and although the proposed meeting with the States Department was replaced by an introduction to Maurant du Fen & Jemme [which should presumably be Mourant du Feu & Jeune, Jersey advocates, whose name is correctly written in Mr Sutton’s handwriting on the itinerary: this letter was signed on his behalf by his secretary] who made heavy weather of the discussion.”  
Mr Sutton also wrote to Strachans on 20 January 1997, possibly forgetting that he had already written, saying “I know that you gave Vincent a lot to think about think that he intends to visit Jersey again in the near future.”  According to the itinerary the Appellant and Mr Sutton met Strachans at 10.30 am and Coutts at 11.30 am (both meetings are marked with an asterisk indicating “confirmed”) and so they may at the time of the meeting with Strachans have intended to see a Jersey official about residence but the plan changed at the meeting with Coutts.  Strachans replied on 21 January saying that “I hope you had a positive response from your meeting with the Chief Adviser’s Office…”.  Mr Sutton replied on 27 January 197 that “Vincent is considering the next move and talking to the Chief Advisers Office.”  Strachans would have been unaware of a change of plan at the later meeting with Coutts, but this does not explain Mr Sutton’s reply.  He was unable to explain this in his evidence, in which he was clear that there was no contact with the Chief Adviser’s Office.  We do not find credible his suggestion that this part of Strachan’s letter related to someone else in view of his reference to “Vincent” in the reply.  Mr David Nolan, Senior Manager, Investments at Coutts in Jersey (although Mr Murphy did not know at what office, but it must be Jersey as his card is attached to the itinerary) made a telephone note on 23 January 1997 that “Vincent phoned me to tell me that he has been unsuccessful in his application for a 11K Category and therefore will be moving to the Isle of Man.  He commented that it appears that Jersey only require the Jack Walkers of this World.”  The note also mentions that the Appellant indicated that he intended to move back to the UK in due course.  The Appellant does not remember this conversation, and we did not hear evidence from Mr Nolan, but we accept his note as a contemporary record of what the Appellant said to him.  Mr Murphy wrote to Coutts in the Isle of Man on 11 February 1997 saying that the Appellant “tried to get into Jersey and did not have sufficient capital for a permanent residency so he is now, under advice from Ian Mills, moving to the Isle of Man.” The States of Jersey subsequently confirmed to the Revenue that they had no trace of the Appellant “ever having made formal application to be eligible for a consent” under the Jersey housing law.  We find that the Appellant did intend to try to obtain residency in Jersey at the time of the visit and was advised by Jersey advocates that it was not worth his making an application, hence the reference in Mr Sutton’s letter of 15 January 1997 to Strachans to Mourant du Feu & Jeune making heavy weather of the discussion.  They were not Mr Sutton’s usual legal advisers and, as that letter suggests, they must have been introduced by Coutts, which is also suggested by Mr Sutton’s letters of 20 January 1997 to Mr Perkins and Mr Hall, both of Coutts, thanking them and saying that “your support and introductions were more welcome.”  This would account for the States of Jersey having no record of the application, but it is possible that he was told that he could, if he was unhappy with the advice, have informal discussions with the Chief Adviser’s Office, which would explain the correspondence between Mr Sutton and Strachans, although it is denied by the Appellant that he ever did this (which we accept).  
(17)	Baker Tilly were not instructed to give him personal tax advice on the sale.  Mr Sutton thought that he was taking tax advice elsewhere and did not want to upset the relationship with the tax adviser who had originally introduced the Appellant.  They did, however, write one letter on 18 December 1996 (three days before the sale agreement) which Mr Lowden, the tax partner, recalled was on the request of either Mr Sutton or Mr Allcock; the Appellant did not request it.  Mr Allcock considered that the letter was written because their engagement letter required them to advise on the tax implications of the transaction, which we find unlikely as the engagement letter would have been from Sovereign, and if they were going to give unsolicited tax advice one would expect them to have advised on topics that were directly related to the transaction, such as the immediate taxability of the deferred consideration, or the dangers of s 137, rather than on his personal residence position which was separate from the transaction.  Mr Lowden was not consulted about the transaction; Mr Allcock took tax advice on the loan notes from the Watford office of Baker Tilly.  The letter is stated to be from Mr Sutton and starts: “With completion now planned for Friday, and as promised in my original letter, you need to be aware of the potential traps for the unwary once you have gone abroad.”  In the middle of the letter it states: “You are gong abroad, and as a result, hoping to avoid the liability on the cashing of the loan notes.  Because of this, the Revenue are going to try and catch you out if you don’t follow the rules precisely.”  Mr Henry, the tax manager, thought that the letter was based on a draft of his but of the first sentence quoted only the words “you need to be aware of the potential traps for the unwary” were his, and none of the second passage quoted, as this was not professional or what a tax adviser would say.  We accept that these passages were not written by Mr Henry and that a tax adviser would not be likely to say this.  Mr Lowden also identified passages that he did not think he or Mr Henry would have written, such as a statement that “Andrew Lowden currently has two or three schemes for avoiding capital gains tax entirely,” and “I hope you found this list of do’s and don’t’s useful!”  He believes that Mr Sutton made additions to a letter that Mr Henry had originally drafted and he (Mr Lowden) had reviewed.  He thought that the squiggle at the place of signing on the file copy was Mr Sutton’s and was not his or Mr Henry’s.  Mr Sutton did not recall making any amendments to the draft or signing it and he thought that the squiggle was not his (but he was not sure about other examples that were shown to him which were letters only he could have written), although he saw the letter either at the time or after it was sent out.  Mr Sutton also said in his evidence that he was “absolutely convinced” that the Appellant had not decided to go abroad at the time.  We find that it is probable that Mr Sutton did amend Mr Henry’s draft and did sign the letter, and that this demonstrates that his understanding at the time was that the Appellant was proposing to become non-resident.  If, Mr Sutton saw the letter, as he agrees he did, it is inconceivable that he would have signed it, or, if had been signed on his behalf, not done something to follow it up, if at the time he was convinced that the Appellant was not intending to go abroad.  We do not accept Mr Sutton’s statement that the reference in the letter to the Appellant going abroad was due to inadequate briefing on his part.
(18)	The Appellant first took tax advice from Mr Ian Mills of PKF on Thursday 9 January 1997.  Mr Mills had previously acted in relation to the salvage company but had not previously given him personal tax advice.  Mr Mills received copies of the sale documents on 21 January 1997.  The Appellant says that discovered for the first time at a meeting on 22 January 1997 that the gain referable to the deferred consideration was immediately taxable, and that he would have to invest the whole proceeds in the Scottish estate (or rather a company that would run the estate).  Mr Mills’ witness statement says that it was the whole proceeds rather than, as the Appellant thought, the gain that had to be invested.  The Appellant said in oral evidence that he had thought that he need only reinvest the tax but this is not in his witness statement.  We shall consider this in more detail later in this decision.  
(19)	A note of a meeting by Hilary Sharpe, then tax manager at PKF, of 28 January 1997 deals with the alternatives of staying UK resident and using reinvestment and other reliefs, or going offshore to the Isle of Man.  A note of a telephone conversation on 19 February 1997 says that the Appellant intended to leave the UK in April.  Mr Mills set out the terms of his engagement on 29 January 1997 as being to review the tax implications of becoming non resident, the preparation of his tax return for the year ended 5 April 1998 “should you become non-resident,” and agreement of residence status with the Revenue “should this be necessary.”  
(20)	Mr Mills wrote a report on 10 February 1997 setting out the prospective tax liabilities and including a section on mitigating the tax liabilities divided into a section of approximately one page on the assumption that he remained resident.  This included the general statement, not referring to a proposal to acquire a Scottish estate:
Reinvestment relief applies where ordinary shares in an unquoted trading company are acquired during the period beginning twelve months before and ending three years after the disposal.  To maximise the tax deferred the amount invested should equate to the gains arising.”
Mr Mills accepted that the last sentence should have referred to the whole proceeds.  The Appellant used reinvestment relief to avoid the tax on the deferred consideration.
(21)	Another section of the Report of approximately 8 pages (including an appendix showing dates of leaving and possible return to the UK) started by saying that “Consideration is being given to taking up these opportunities [that he had been offered to generate income from world wide sources] operating from an offshore base possibly in the Isle of Man.”  Mr Mills stated that the non-residence aspect in greater detail because it involved greater disruption to the Appellant’s life while the reinvestment relief part was given in general terms as it was less disruptive.  We accept that this is true, but we consider that the greater emphasis on non-residence also reflects Mr Mills’ understanding of what the Appellant then intended, which Mr Sutton accepted may well have been the case.
(22)	The Report also contains the following:
“It should be noted that the Inland Revenue are likely to review any documentation carefully given that it was stated by Mr Burgess in September 1994, during the course of the Special Office enquiry, that Mr Snell intended to leave the country on the same of the company to ensure the proceeds could be received tax free.”
The Appellant said in evidence that this was not true but we find that it is likely that Mr Burgess, who we believe was a colleague of Mr Mills, did obtain this information from the Appellant.  We should make clear that we did not have any direct evidence of this meeting.
(23)	The Report also considered the possibility of Baker Tilly applying for a retrospective clearance under s 137, and the effect of the Appellant becoming non-resident.
(24)	The Appellant moved to the Cayman Islands about 18 months after going to the Isle of Man and has lived there ever since.
10.	Our task is to determine the Appellant’s purpose on 21 December 1996 when he entered into the contract for the exchange.  It is made more difficult by the Appellant agreeing that he did have the purpose of becoming non-resident by 19 February 1997 and so we have to determine whether there was a change in purpose in the two month period between those dates (as the Appellant contends), or whether it was always his purpose to become non-resident (as the Revenue contend).  The second difficulty is one of determining the nature of a purpose of becoming non-resident.  There is no clear dividing line between having the purpose of becoming non-resident, and not doing so.  The purpose can vary from having the vague possibility of becoming non-resident, which the Appellant agrees he always had, through various stages of its becoming more likely that he would become non-resident, ultimately to having a fixed purpose of doing so.  In addition there can be a purpose in becoming non-resident in general but without deciding on a particular place; or the reverse of having a particular place in mind without a definite purpose of going to live there.  
11.	The Appellant’s purpose is what was in his mind on 21 December 1996.  We cannot directly determine this and we must weigh up what he says was in his mind against contemporaneous documents.  We give such documents more weight than people’s recollection as we are dealing with events more than nine years ago, and anyone’s recollections of events of 1996 and 1997 must now be unreliable.  All of the witnesses, with the exception of Mr Sutton, quite reasonably, had difficulty in remembering the events in question, and we do not accept that Mr Sutton’s definite recollections are correct.
12.	Mr Peacock submits that the Appellant’s purpose was to buy an estate in Scotland using reinvestment relief to defer the gain arising on redemption of the loan stock.  Initially the Appellant was not under any pressure to redeem the loan stock.  It was only because of the purchaser’s change attitude immediately in the New Year in 1997 that it became important to redeem it as soon as possible, the earliest possible date being 5 July 1997.  He contends that the Appellant had the misunderstanding that he needed to reinvest the tax (say £2m) in order to defer the gain.  It was only when he found out that this was wrong and that he would have to reinvest the whole proceeds, which was not likely to be possible (and would leave him with no funds with which to run the estate even if it were possible), that he turned to consider becoming non-resident, ultimately deciding to do this on 19 February 1997.
13.	In our view the Appellant always had the purpose of becoming non-resident which became firmer over time, so that, for example, in his meeting with Hilary Sharpe on 28 January 1997 and in Mr Mills’ report of 10 February 1997 there were references to the possibility of remaining resident, but by the 19 February 1997 telephone call remaining in the UK was no longer a possibility.  We do not accept that there was a sudden change to deciding to become non-resident based on the Appellant’s new understanding of reinvestment relief coupled with the commercial need to redeem the loan notes as soon as possible.  We base this finding on suggestions that he would become non-resident as early as 1994 (which in itself is very weak evidence); the 10 April 1995 letter saying that his future intentions had become clear that he intended to return to operate a farming business, thus showing that, at least at the time, farming (and consequently reinvestment relief) was not seen as an alternative to non-residence; the statements in the information memorandum implying that consultancy work had to be consistent with non-residence; Mr Allcock’s 15 October 1996 letter that the Appellant required loan stock redeemable after 6 April; the purchaser’s solicitors being under the impression that the Appellant might go non-resident about which they must have informed by the purchaser, which was the reason for the deferred consideration; the consultancy agreement provided for agreement about the place of performance, which suggests that the Appellant wanted to avoid an obligation to work in the UK (although we accept that the main focus of his work had always been outside the UK); the acquisition of Jersey companies to provide his services and hold the land (which we presume would not have been proposed if he were to remain resident); the 18 December 1996 letter from Mr Sutton, which, as we have found, indicates that Mr Sutton considered that the Appellant had then decided to become non-resident; the fact of the visit to Jersey on 14 January 1997 with Mr Sutton and the advice that he obtained about residence in Jersey; Mr Sutton’s letters following the visit to Jersey; and the evidence from the Coutts documents that suggest a change from intending to go to Jersey to the Isle of Man caused by advice that he could not obtain residence in Jersey.  Although evidence of his intentions at times other than 21 December 1996 are not strictly relevant to his purpose on that date, the totality of the evidence is consistent with a long-term intention to become non-resident after selling Sovereign in order to redeem loan notes while non-resident.
14.	We do not accept that there was a change of plan by the Appellant on discovering that he had to reinvest the whole proceeds (or more likely the gain, which was the (incorrect) advice in Mr Mills Report of 10 February 1997, although in this case there is little difference between them).  There is little support for his understanding that he had to reinvest the cash; it is not mentioned in either the Appellant’s or Mr Mills’ witness statements, although it was mentioned in oral evidence.  The Report makes no mention of Scottish estates either.  We believe that the Appellant did have a purpose of buying a farm in Scotland but this was originally a purpose relating to the time after he returned to the UK, as he originally intended to do.  This is consistent with the 10 April 1995 letter saying that his future intentions had become clear.  Although he was collecting brochures about Scottish properties in late 1996 this is not inconsistent with wanting to buy one while he was non-resident after redeeming the loan stocks (which could be on 5 July 1997), or on his return (which could be on 6 April 1998 if he had been employed abroad).  We find that there is nothing inconsistent with having the intention of becoming non-resident and buying a Scottish estate.  Obviously such intentions could change but we do not believe that they did, except later to give up the idea of returning and buying a Scottish estate.  The Appellant’s evidence about his late change of intentions would have been more credible if backed up by evidence from his family but there was no such evidence. 
15.	The visit to Jersey must have been fixed before Friday 10 January 1997 as Mr Murphy’s note of a meeting or telephone conversation on that date records that the Appellant would be speaking to Mr Hall next Tuesday [14 January 1997] and, in view of the holiday season, was probably fixed on or after Monday 6 January 1997, immediately after the holiday season.  We consider that the purpose of the visit was to discuss residence in Jersey (as opposed to residence abroad in general), and that the Appellant never made a formal application for residence because he was advised that there was no point in his doing so.  Even if he had heard about the conditions for reinvestment relief at his first meeting with Mr Mills on 9 January 1997, and certainly if, as he says, he only discovered this at a meeting on 22 January 197, it is unlikely that he would be talking to Mr Murphy at Coutts on 10 January about a visit to Jersey on 14 January 1997 wanting Coutts to arrange a meeting with the Jersey housing authorities.  The documentary evidence supports a purpose of becoming resident in Jersey and is contrary to the Appellant deciding to become non-resident following discussion with Mr Mills on 22 January 1997.  When it became clear from the advice he received that he did not qualify for residence in Jersey, he then changed his intention to the Isle of Man.  Throughout this period there was still a possibility that he would remain resident, or at least Mr Mills thought that there was sufficient of a possibility that it should be dealt with in his Report, but we regard this as much less probable than his becoming non-resident, hence the greater emphasis of non-residence in the Report.  It is difficult to measure a purpose of becoming non-resident in terms of probability but we consider that from 1995 onwards he intended, at least on the balance of probabilities, to become non-resident for the purpose of redeeming loan stock on an eventual sale.  On 21 December 1996 there was still a possibility that he would not become non-resident, but the far greater probability that he would become non-resident dictated that he wanted loan stock in the expectation that it would be redeemed when he was non-resident.  He might possibly have initially envisaged becoming non-resident in 1998-9, rather than 1997-98, but becoming non-resident in the earlier year was required by the deteriorating relationship with the purchaser.
16.	Accordingly, on 21 December 1996 we find that he had the purpose of becoming non-resident before redeeming the loan notes and accordingly that one of his main purposes (indeed the only main purpose) of effecting the Arrangements was avoidance of capital gains tax, and we dismiss the appeal.
17.	In relation to the first limb of s 137, if we are wrong on our interpretation and it is necessary that the decision to take loan stock instead of cash was made for bona fide commercial reasons, we do not find that it was.  We consider that the Appellant wanted loan stock for tax reasons and would not have agreed to cash.  The purchaser found that loan stocks were to its advantage in providing it with more security, but loan stock was not necessary to this, as is demonstrated by the deferred consideration.

JOHN F. AVERY JONES

KAMEEL KHAN

SPECIAL COMMISSIONERS
RELEASE DATE: 5 April 2006

SC 3034/05

Authorities referred to in skeletons and not referred to in the decision:
Furniss v Dawson [1994] STC 13
New Angel Court Ltd v Adam [2004] STC 779