Spc00675

Capital Gains Tax – Allowable loss – Taxpayer entering into series of transactions to create a loss on disposal of endowment policy – Whether taxpayer had shown that endowment policy acquired before disposal – Held on burden of proof : no – Whether if so acquired loss arose as claimed – Held no
Assessment – Discovery – Whether inspector made ‘discovery’ – Held : Yes – Whether further assessment prevented by TMA section 29(2) – Prevailing practice – Held : No – Whether negligent conduct within section 29(4) – Held : Yes

THE SPECIAL COMMISSIONERS

	DAVID ROY COLLINS	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioners:  THEODORE WALLACE
						 	      CHARLES HELLIER

Sitting in public in London on 26 and 27 November 2007

The Appellant was neither present nor represented

Philip Jones QC, instructed by the Solicitor to HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

1.	Mr Collins appeals against assessments made by the Respondents pursuant to TMA 1970 section 29 for additional tax of £906,944.80 in respect of the year ending 5 April 2000.  Mr Collins maintains that he made a capital loss of £2,260,264 in that year which offset a capital gain of £2,326,385 in the same year. The Respondents assert that no such loss arose.

2.	Mr Collins asserts that the loss arose in the following way.  He says that on or about 2 April 2000 he acquired an asset, an Endowment Trust Policy (“the Endowment Policy”) for £2,400,000, and on 3 April 2000 he disposed of that asset in return for a Capital Redemption Policy.  The value of the Capital Redemption Policy he says was only £139,736, and therefore on the disposal he claims an allowable loss of £2,260,264.

3.	The Respondents contend as follows: (i) these were sham transactions in that no premium was paid for the Endowment Trust Policy, no such policy was issued, and therefore there could be no disposal of it for the Capital Redemption Policy; (ii) the Capital Redemption Policy was in fact issued for the cash payment of £2,400,000 (and that no loss arose on that transaction); (iii) even if the transactions were not shams and took place as maintained by Mr Collins, no such allowable loss arose because the Capital Redemption Policy was in fact worth something close to £2,400,000; and (iv) any disposal of that policy was not, in the circumstances, and applying the principles of the Furniss v Dawson line of authority, a “disposal” within the meaning of the TCGA so that no loss could arise upon it.

4.	Mr Collins also maintains that the assessments made by the Respondents (there were two assessments one in 2005 and one in 2006 – made in the alternative) were not authorised by the provisions of TMA section 29.

5.	The issues for us are therefore:-

(i)	to determine on the balance of probabilities from the evidence before us what actually happened;

(ii)	to determine the legal consequences of what happened and if necessary whether any of the transactions were shams;

(iii)	to infer from the terms of the Capital Redemption Policy and any relevant circumstances what the value of that policy was;

(iv)	to consider whether there was for the purposes of TCGA 1992 a disposal of the Endowment Trust Policy in consideration for the Capital Redemption Policy or any gain or loss for those purposes; and

(v)	to assess whether the conditions in TMA section 29 for the issue of the assessments were satisfied.

The hearing and the evidence

6.	The Appellant did not appear and was not represented at the hearing.  In the period before the hearing leading counsel had been instructed on his behalf and had prepared and submitted the Appellant’s Statement of Case in response to the Respondents’ Statement of Case of 30 May 2007.  The Appellant also provided to the Tribunal a Witness Statement through his solicitors.  Four days before the hearing however Mr Collins wrote to the Office of the Special Commissioners to indicate that after detailed and deep consideration he had decided that there was no point in his attending the hearing, and indicating that he would not be represented at it.  He invited the Special Commissioners to decide the Appeal on the basis of his Statement of Case and Witness Statement.  He made no admissions as to the points made by the Respondents.  He said:

“I have not acted dishonestly, and have at all times relied upon professional advice before acting.  I was abandoned at a very early stage by those who advised me to enter the scheme, and I still have no clear way to extricate myself from it.  The effects of the whole affair have been very detrimental to me and financially disastrous.  I have not benefited in any way from doing any of the things I was advised to do.”

Regulation 16(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 provides that if a party fails to attend or be represented at a hearing of which he has been duly notified, the tribunal may determine the proceedings in his absence unless it is satisfied that there is good reason for his absence.  Whilst Mr Collins’ frustration was no doubt personally a good reason for not attending it did not seem to us to be a good reason for his absence within the meaning of that regulation, furthermore he did not ask for an adjournment.  We decided to continue the hearing.

Rule 16(2) requires us in these circumstances to consider any written representations of or on behalf of Mr Collins.  We have taken into consideration Mr Collins’ Statement of Case and Witness Statement and other documents written or provided by him or on his behalf in the bundle before us.

7.	We had before us a bundle of copy documents including copies of the relevant policies. This bundle included a set of copies of documents provided by the Appellant to the Respondents. We heard oral evidence from Nicholas Branigan, the officer who made the decision to make the 2005 assessment and notified it to Mr Collins, and who also made the 2006 assessment. Mr Branigan provided a witness statement.  We also had a witness statement before us of Kevin Walker, another officer engaged in this case.  We did not hear oral evidence from him.

8.	From that evidence we make the findings of fact which appear below.

Findings of fact

9.	From Mr Collins’ witness statement we find that:-

(i)	In November 1999 and January 2000 Mr Collins sold shares which realised a total capital gain of £2,333,485;

(ii)	before 5 April 2000, as the result of a conversation with his accountants, Mr Collins was referred to Kidsons as a firm which might help him reduce his tax liability;

(iii)	Chris Steele of Kidsons contacted him and, probably at some time in mid-March 2000, Mr Collins had a meeting with Mr Steele;

(iv)	Mr Collins agreed with Mr Steele at that meeting that Kidsons would arrange for him to acquire a capital redemption contract creating a capital loss to offset the capital gain arising on the share disposals; he would acquire for £2.4m an endowment trust policy and Kidsons would arrange for this to be exchanged before 6 April 2000 for a capital redemption contract.

10.	On 14 March 2000 Kidsons sent a fax to Mr Collins describing the Capital Redemption Policy.  The essential features of what was proposed to Mr Collins were as follows:-

(i)	The Capital Redemption Policy was a deferred annuity; the annuity payments would start 80 years after issue of the policy; the amount of that annuity would depend upon the performance of the investments attributed to the policy but there would be a guaranteed minimum annuity;

(ii)	the investments attributed to the policy would be held by a custodian trustee nominated by the policy holder;

(iii)	“following the making of the investment, it [was] possible for withdrawals, loans and grants to be taken from the contract … grants [could] also be made to third parties during the deferment period …”;

(iv)	the annuity would be paid by five equal instalments over the five years starting with the 80th anniversary of the inception of the policy;

(v)	there was a guaranteed minimum for the annuity; this was a total amount (to be paid in such instalments) equal to seven times the value given for the policy;

(vi)	“in order that the insurance company can fulfil its guarantee to pay at least a multiple of 7 times the value of the original investment” only “up to 93% of the investments” would be loaned or granted out;

(vii)	there was reference to the appointment of a ‘protector’ who would advise on the making of grants.

11.	Mr Collins had made manuscript notes on this fax.  We find that it is likely that they were  made at or shortly after his meeting with Mr Steele.  We find that they indicate that he was given to understand that:-

(i)	93% of the value of the fund held by the insurance company and attributable to the policy could be accessed to make loans to him or gifts to others;

(ii)	the value of the policy would be based on discounting the guaranteed minimum annuity at a discount rate of 6.75% over the 80 year period to commencement of the annuity payments;

(iii)	he would be charged 12% of his contribution as a cost of the scheme.

12.	On 23 March Mr Collins faxed to Mr Steele details of the source of the £2,400,000.  And on the same date he signed an “Application For a Deferred Annuity Certain” made to Foundation Insurance (Capital Redemptions) Limited (“Foundation”).  This was an application for the Capital Redemption Contract Policy.

13.	Aidanfield 14 Limited was incorporated on 28 March 2000.  We shall return to its role later.

14.	On 31 March 2000 HWT Services, a Scottish limited partnership sent Mr Collins a bill for £288,000 (being 12% of £2.4m – see paragraph 11(iii) above) for:-

“Introductory commission in respect of Paulden Activities/Foundation/Capital Loss”.

There was no evidence before us which linked HWT Services to Kidsons.  HWT Services’ invoice however indicated an address in England at 1-5 Oakfield, Sale, Cheshire (which appeared to be a correspondence address shared by Foundation – see para 25 below), and an Isle of Man address.

15.	On Monday, 3 April 2000, Kidsons wrote to Mr Collins as follows:-

“Capital Redemption Contract

In order to facilitate this arrangement it is now necessary to transfer the relevant funds to the following account:-

Barclays Bank Warrington
Sort Code				20-91-48
Account Name			TPD Taylor Client Account
Account Number			60873551

We can confirm that this is the client’s account of Mr T.P.D. Taylor, Solicitor.”

We conclude that no money was paid by Mr Collins before Monday 3 April 2000 and that his payment of £2.4m was made to this account on or after this date.

16.	We now turn to the preceding day, Sunday 2 April 2000.  An undated document issued under the common seal of Paulden Associates Ltd (“Paulden”) records that the document:

“is issued by the Company on the basis of an Agreement made on the 2nd day of April between the Company and [Mr Collins]”.

This document we call the Endowment Policy although it calls itself “This Capital Redemption Contract”. We use Endowment Policy to distinguish it from the later contract issued by Foundation. This was the asset said to have been disposed of. The document described at paragraph 10 was in exchange for it.

17.	There was no evidence before us (other than the words quoted above and the references in the assignment referred to at paragraph 22 below) that there had been any agreement between Paulden and Mr Collins made on 2 April or otherwise. Mr Collins made no reference to it in his witness statement or his Statement of Case. We conclude that it is unlikely that he was personally involved in making such an agreement.  It is possible however, although there was no evidence to this effect and it was a Sunday, that someone at Kidsons acted as Mr Collins’ agent in making such an agreement on 2 April.

18.	This Endowment Policy records that “in consideration of the transfer to the Company of  [£2.4m] the Company will on the Maturity Date” hold certain assets for the assured.  There is no indication that the transfer had been made on 2 April nor did it appear when the document was executed. Our finding that Mr Collins made no payment until 3 April at the earliest is therefore not wholly at variance with a contention that the asserted agreement was made on 2 April and that the consideration was to be paid later, but it does, together with the fact that 2 April was a Sunday, raise  substantial doubt in our minds as to whether such an agreement was made on that date, and that doubt has not been dispelled by any other evidence.  The Respondents assert that the Endowment Policy was not issued on 2 April. The burden of persuading us that there was such an agreement on that date is on the Appellant.  The Appellant has not discharged that burden.

19.	The Endowment Policy bears no date.  It was clearly not made before 2 April.  The recital of 2 April as the date of the agreement pursuant to which it was made suggests that it was in fact made after that date.  We conclude that it is likely that it was executed on or after 3 April.

20.	We return to Monday 3 April.  On that day Kidsons sent (or gave) to Mr Collins an engagement letter which he signed in fairly standard terms setting out the basis on which “we are to act for you in connection with your proposed investment in a Capital Redemption Contract.”

21.	On the same date, 3 April, we find that Mr Collins signed an agreement with Foundation under which:-

(i)	it was recited that he was the owner of an Endowment Policy issued by Paulden;

(ii)	he agreed to transfer that Policy to Foundation on 3 April;

(iii)	Foundation agreed to issue a Capital Redemption Policy in exchange.  The form of that Policy was set out in a schedule to the agreement.

22.	Also on 3 April Mr Collins formally assigned to Foundation:

the Endowment Policy “granted by Paulden Activities Limited to [Mr Collins] dated the 2nd day of April 2000 numbered PA/ET1/001A and the premium of £2,400,000 stg and all  money and other benefits to become payable under the said Policy and the full benefit thereof.”

We note that this appears to be the only other reference in the documents before us to 2 April.  But the reference is to the policy being “dated” 2 April rather than made on that date, and the policy itself refers to no date of execution but merely that it was pursuant to an agreement of 2 April.

23.	We also note with some surprise that the premium of £2.4m was specifically assigned.  It is difficult to see why this was needed if the premium had been paid and the cash belonged to Paulden; since Mr Collins would then have had no interest in it.  It is possible that there may have been in those words some recognition that the premium had yet to be paid or was being paid substantially contemporaneously.

24.	These considerations reinforce the conclusions we have drawn in paragraphs 15 and 18 above.

25.	At some time on or after 3 April 2000 we find that Foundation executed a deed granting to Mr Collins a deferred annuity.  This was the Capital Redemption Policy.

26.	On 5 April Kidsons faxed Mr Collins to confirm “that Mike Ford has received the sum of £2.4m.”  Michael Ford appears as a witness to the signature of the transferee in the agreement of 3 April noted at paragraph 21 above.  He gives his address as Foundation at Holland House, 1 Oakfield, Sale, Cheshire.  We conclude that he was employed by or acted for Foundation.  It is not clear that he also acted for Paulden.  We conclude that Mr Collins’ £2.4m was paid between 3 and 5 April, and that it was paid to Mr Taylor’s client account.

27.	The accounts for Paulden Activities Ltd for the years ending 31 March 2001, 2002, and 2003, were audited by Harold Sharp, Son & Gresty of the same address in Cheshire as Foundation, and HWT Services.  The accounts for each year show “Current Assets – Investment capital redemption policy [Endowment Trust Policy] – at cost £2,400,000”, and under capital and reserves “Capital Redemption Fund £2,400,000.” The accounts were signed by TPD Taylor. We conclude that the directors recognised the possession of £2.4m.  The accounts recognise no income for the years in question.

28.	On 30 May 2000 Mr Steele of Kidsons wrote to Mr Collins about establishing a Custodian Trustee Company for his policy.  He asked for details of a person to be a co-director, and said that “As soon as this is completed Mike [Ford] should be able to provide you with the cheque book you have recently requested.”

29.	Mr Collins’ witness statement indicates that he made a request for a loan of £100,000 to purchase a classic car.  He said he made the request to Kidsons and that it was granted.  He said that the funds were provided by Monarch Loans Ltd not by Foundation or Paulden and were secured on his interest in the Capital Redemption Policy not drawn from it.  He says that the loan bore 10% interest and was repaid in 2004.

30.	A letter dated 29 June 2000 from Chris Steele of Kidsons to Mr Collins confirms “that the loan arrangement is with Monarch Loans Ltd in respect of which any loan is secured upon cash funds within your CRC policy.  Interest at the rate of 10% is accrued but not charged – the benefit of this being accrued to your policy.”

We conclude that a loan of £100,000 was made to Mr Collins before 29 June 2000.  We find Mr Steele’s description of the accrual of interest somewhat confusing.

31.	There was a meeting at Kidsons in Birmingham on 18 September 2000.  It was attended by Chris Steele (Kidsons), Mr Collins, and by Mike Ford (who as we have found had some connection with Foundation).  The minutes record that:

“With regard to loans [Mike Ford] commented that taking loans in excess of the discounted value of the policy is not advisable and that it would be preferable not to take further loans against the policy until such time as the tax return was accepted by the Inland Revenue … with respect to the timescale between request and loan, [Mike Ford] expected 10 working days to be reasonable.”  [our emphasis]

The minutes also acknowledged that a loan of £100,000 was outstanding.

32.	We find in this record, evidence that Mr Collins, Kidsons and Foundation regarded Mr Collins as being likely to request and to be granted loans in relation to the policy, and that Mr Collins’ understanding in March (see paragraph 11 above) that he could access the fund through loans was shared by the other parties.  That it was “preferable” not to take loans until the tax return was agreed indicated that Mike Ford regarded Mr Collins as having something which (whether or not, a legal right to a loan) was something in practice very close to such a legal right. The reference to loans “in excess of the discounted value of the policy” suggests concern about an argument that if loans of a greater amount were taken it could affect the viability of an argument that the value of the policy was limited to its discounted value.

33.	The meeting of 18 September 2000 also dealt with the Custodian Trustee.  It appears that this was Aidanfield 14 Ltd (see paragraph 13 above).  Mr Collins completed details on Companies House Form 288A.  Mike Ford is recorded as confirming that until directorships and bank details were updated any transactions would take place directly with Foundation and that the delays would not affect Mr Collins’ “ability to use his contract”. On 10 October Monarch Administration Services wrote to Kidsons giving details of Aidanfield 14 Ltd’s bank account, directors and members.  It stated that “the net assets held by the Company are valued at circa £2.15 million”, and asked for a signature from Mr Collins on a bank mandate so that he could be made a signatory on its bank account.  On 15 November 2000 Chris Steele of Kidsons wrote to Mr Collins about the arrangements with Aidanfield 14 Ltd; an account at the brokers Brewin Dolphin had been opened for Aidanfield and Mr Steele explained that Aidanfield would purchase on behalf of Foundation; he wrote that the “bank account is open and a cheque book will be forwarded to you shortly.”

34.	The focus of the exchanges in relation to Aidanfield appears to be its role in making investments within the ring fenced fund of assets held by Foundation but hypothecated to Mr Collins’ policy.  It appears that Mr Collins intended to take a hand in the selection and management of those assets. There is nothing in this which unequivocably points to the cash or assets applicable to Mr Collins’ policy being freely available for his own use. Nevertheless there is a strong indication that in broad terms Mr Collins had or was to have the controlling hand in relation to the investments. This feature, together with the evidence already recited in relation to the making of loans, suggests that Foundation, Mr Collins and Kidsons acted as if, and expected in April that they would thereafter act as if, Mr Collins had the right to determine what was done with the funds representing the £2.4m.

Mr T P D Taylor

35.	For the following reasons we conclude that it is likely that Mr T P D Taylor was a director of Foundation, a director of B&T Directors (1) Ltd, which was a director of Paulden, and acted as solicitor to at least one of those companies:-

(i)	the accounts of Paulden for 2001 to 2003 are indicated to have been signed by “T P D Taylor Director of B&T Directors  (1) Ltd”.  This appears as a typed legend below the balance sheet;

(ii)	the copy of the Endowment Policy before us indicates that Paulden’s common seal was affixed in the presence of a signatory for B&T Directors (1) Ltd as director of Paulden. The manuscript signature looks likely to be that of T P D Taylor;

(iii)	the signature page of the assignment agreement bears the same manuscript signature on behalf of Foundation; and

(iv)	the copy of the Capital Redemption Policy issued by Foundation bears the same manuscript signature attesting to the affixing of the seal under the description “Director”;

(v)	the fax of 3 April 2000 from Kidsons to Mr Collins indicating to which account the £2.4m should be paid indicates that it should be to T P D Taylor’s client account.

Conclusions  in relation to planning and Mr Collins’ intent

36.	In his witness statement Mr Collins admits that the exchange of the Endowment Policy instrument was intended to follow its acquisition.  Mr Collins also says that the purpose of the Endowment Policy instrument was to enable the Capital Redemption Policy to be acquired.  He then sets out the advantages of the Capital Redemption Policy (and not the Endowment Policy).  The benefits he refers to include the potential growth of the fund of assets, and the possibility of negotiating acceleration of benefit and of loans.  From his manuscript notes on the document of 14 March the “Access to 93% of fund and growth” appears also to have been in his mind in relation to that policy.  Mr Collins made a formal application for the Capital Redemption Policy on 23 March; there was no evidence of any application for the Endowment Policy. Mr Collins made his payment of £2.4m at about the time the Capital Redemption Policy was agreed to be issued.  

37.	In order for the intended loss to be of any use to Mr Collins it had to arise before 6 April 2000. The transactions were therefore intended to ensure that the Endowment Policy was disposed of before that date. We find that the acquisition of that policy and its disposal were planned to happen in the few days before 6 April and that there was never any intention on behalf of Mr Collins or Kidsons that the Endowment Policy, once acquired, would be retained by Mr Collins.

38.	The schedule to the Capital Redemption Policy which we believe was annexed to the assignment agreement of 3 April, indicates that the annuity consideration was an Endowment Policy dated 31 March. The final Policy also indicates that the consideration was an Endowment Policy of 31 March. The fees charged to Mr Collins of £288,000 were detailed in an invoice dated 31 March.

39.	It appears to us to be likely that Mr Collins’ advisers original intentions were that the policy should be issued on Friday 31 March and that after a decent three day interval it should be disposed of to Foundation on Monday 3 April.  However it seems that this plan was not followed.  Instead everything (bar possibly an agreement on Sunday 2 April between Foundation and someone acting as Mr Collins’ agent) happened on Monday 3 April with the cash moving then or shortly thereafter.

40.	We conclude that by the morning of 3 April Kidsons planned and intended that Mr Collins acquire the Endowment Policy on 3 April and immediately dispose of it to Foundation in return for the Capital Redemption Policy, and that that intention was put into practice in the documents executed on that day.  In our view, on the evidence before us, there was never any practical likelihood that Mr Collins would retain the Endowment Policy for any more than at most a few hours after its issue.

41.	There are additional findings of fact later in this decision in relation to the issues surrounding TMA section 29.

The consequences of our Conclusions

42.	We have concluded above that it is more likely than not that:

(i)	the Endowment Policy document was executed on or after 3 April;

(ii)	that it was not executed pursuant to an agreement made on or before 2 April;

(iii)	that the agreement to assign the Endowment Policy and the assignment of it were executed on 3 April; and

(iv)	that Mr Collins made payment of £2.4 million to the specified account between 3 and 5 April inclusive.

43.	These conclusions expose three possibilities.

First:	It is possible that the Endowment Policy was executed, and the money paid on 3 April before the execution of the assignment agreement.  If that was the order of events then although the transactions were speedy and sequential there is nothing to suggest that the documents, and in particular the assignment agreement, were anything other than they purported to be.

Second:	 If however the Endowment Policy was executed after the assignment agreement, then the assignment agreement must be a nullity for there was no Endowment Policy to assign.  Nor can it be saved by any contention that there was a prior agreement to issue the policy, because the agreement clearly assigns or purports to assign the policy rather than an agreement to issue it.  This conclusion therefore encompasses the consideration of the possibility that we were wrong in our conclusion at 41(ii) above.

Third:	The final possibility is that the Endowment Policy was executed on 3 April before the assignment agreement but that the payment for it was made after the assignment agreement was executed.  That this is a possibility is as mentioned earlier potentially hinted at by the words of the assignment which assign the premium of £2.4m.

44.	This appeal is made under the provisions of the Taxes Management Act 1970.  Section 50(6) of that Act provides:-

“If, an appeal, it appears to … the Commissioners … by evidence – (c) that the Appellant is overcharged by an assessment … the assessment shall be reduced accordingly, but otherwise the assessment …. shall stand good.”

45.	This provision was considered by the Court of Appeal in Wood v Holden [2006] STC 443.  The Court of Appeal accepted that the effect of this provision was to place a burden on the taxpayer to show that the assessment was wrong, but Chadwick LJ noted with apparent approval Park J’s statement that “there plainly comes a point when the taxpayer has produced evidence which, as matters stand then, appears to show the assessment is wrong.  At that point the evidential basis must pass to the Revenue.”  In other words where the taxpayer could say: I have done enough to raise a case what more can be expected from me? The burden must pass to the Revenue to produce some material to support its case.  Later at [33] Chadwick LJ noted the statement of Lord Brandon in Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 at 955-956 in which he pointed out that a judge is not bound, always to make a finding one way or the other with regard to facts averred by the parties.  Chadwick LJ then said “But that is not a course which should be adopted unless (citing Lord Brandon):

“owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.”

46.	Against that guidance we look again at these possibilities.  There is no direct evidence before us as to when the Endowment Policy was executed: the document itself is silent and Mr Collins says nothing about it in his witness statement.  Its description in the assignment as made on 2 April is difficult to pray in aid against an argument that that assignment is devoid of effect.

47.	The evidence is unsatisfactory and were it necessary to determine this appeal solely on the question of whether the Endowment Policy was executed before the assignment or the assignment agreement we would hold that it had not been shown that it was so executed and consequently that the assignment and the assignment agreement were devoid of any effect since they purported to do something which could not be done namely to assign or agree to assign an asset (the policy) which did not exist.  In coming to this conclusion – that because there was no asset there could not be any disposal of it – we do not make any express finding that the assignment agreement and the assignment were shams in the sense described by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 and as adumbrated by Arden LJ in Hitch v Stone [2001] STC 214 at paragraphs 64 to 69.  There is no need for us to determine whether or not the intention of the parties was to create documents giving the appearance of rights or obligations different from those actual rights or obligations the parties intended to create; we simply find that whatever the intention of the parties these documents did not effect the disposal of any asset and the reason for that, whether it be ineptitude, muddle or intentional deception, is irrelevant to that conclusion.

48.	However, it seems to us that even if the First or the Third possibilities were accurate descriptions of reality, that the taxpayer did not sustain the loss claimed.  That is for reasons which follow.

49.	Accordingly in paragraphs [50] to [80] below we proceed on the basis that the Endowment Trust Policy was executed on 3 April before the assignment agreement and consider in the alternative the effect of the cash being paid before or after the execution of that agreement.

The terms of the Endowment Policy

50.	We now turn to the terms of the Endowment Policy.  We do this for two purposes.  First to determine the extent to which those terms are consistent with its being issued pursuant to an agreement under which the consideration would (or could) be paid after its issue; and second to consider some of the rights Foundation would have in it after it was assigned to Foundation (assuming of course that it was so assigned).

51.	The Endowment Trust is governed by Isle of Man law.  There was no evidence before us that this would have led to a different construction of any of its provisions than English law.  Accordingly we proceed on the basis that there would have been no difference. It provides for a “Specified Account” to which is to be credited the premium paid under the policy.  Thereafter dealings in, and profits and losses from, assets representing that account are to be reflected in it.  Paulden is permitted to deduct from the account a quarterly charge of 5% of the increase in value of the assets in the account (this clause has a drafting infelicity but we find that this is its meaning).  On 2 April 2080 Paulden is to hold the assets in the account on trust for the assured but until then it is not stated to hold them on trust for the assured.  There is a provision that if the value of the assets is, on 2 April 2080, less than £16,800,000, then Paulden will make up the difference but only from assets representing its capital and reserves and not from assets of other Capital Redemption contracts. We note that Paulden’s accounts at 31 March 2003 show share capital of £Nil.

52.	The front page of the Endowment Policy “witnesses that in consideration of the transfer to [Paulden] of the assets comprising the Premium” the company will hold the assets in the Specified Account on trust for the assured on the maturity date (2 April 2080).  Special Condition (2) provides that:

“(a)	On receipt of the Premium the Company shall open in its accounting record books an account bearing the name of the Assured (the ‘Specified Account’) 
(b)	The Specified Account shall be credited initially with the assets paid by way of premium …”

53.	It may be seen that until the premium is paid Paulden has no economic liability to the assured.  It is therefore possible that Paulden intended the instrument to embrace the possibility that the premium would be paid after its execution.  However two aspects of the instrument point away from that conclusion.  First the opening words that “in consideration of the transfer of … the Premium” which suggest that the transfer is not a future event but a contemporaneous one; and second the guarantee of £16,800,000 at maturity : if the premium could be paid at any time during after execution of the instrument this would be a very generous provision.  There is also no clause dealing with the time or method of payment and the instrument itself is not executed by and imposes no obligations on Mr Collins.  We conclude that the policy should be construed as assuming payment on execution or as made subject to an agreement requiring payment substantially contemporaneously therewith.

54.	Our Third possibility in paragraph 43 was that the Endowment Policy instrument was executed before the assignment and the assignment agreement but that the premium was paid after those documents were executed.  To the extent that there was some prior agreement which obliged Mr Collins to make payment of the premium soon after execution of the policy, the policy may, at least on a step by step approach, then be regarded as an asset for which Mr Collins gave consideration and which he assigned to Foundation.

55.	If there was no such agreement and the policy is simply to be construed or providing that, if shortly after its execution Mr Collins paid the premium; Paulden would provide the benefits (but without providing for any obligation on Mr Collins to pay the premium) in that case all Mr Collins assigned by way of the deed of assignment was a latent right for which he had not given and was not required to give consideration.  His subsequent payment of the premium (whether made because the assignment document compelled its payment or otherwise) was not therefore made for the Endowment Policy.  As a result he would have had no base cost in that policy and would suffer no loss on its disposal.  In the remainder of this decision we therefore proceed on the basis that there was some such prior agreement to pay the premium as is mentioned in paragraph 53 above.

56.	We now turn to the interest in the policy which Foundation would have after its assignment to Foundation. Clause 5 of the Special Conditions of the policy deals with the making of loans to the Assured.  It provides that the company “will” grant loans to the assured or his successors in title “at any time” during the currency of the contract.  We need to set out Clause 5 in full:-

“5.	Loans

(a)	The Company will grant the Assured or his or her successors in title a loan or loans at any time during the currency of this contract.  Such loans shall be met by the Company on the security of a charge on this Contract for such maximum aggregate amount at such rate of interest and on such terms as to payment of interest and repayment of principal and for such period as the Company shall from time to time determine.  The repayment of such loan shall be a personal obligation of the borrower.

(b)	Any or all loans granted under the provision of sub-clause (a) of this Clause shall except at the discretion of the Company only be made out of any cash held in the Specified Account at the time.

(c)	In the event of the non-payment in the period stipulated of any of the interest due on any loan made in accordance with sub-clause (a) of this Clause the Company may in lieu of payment of such interest reduce the benefits under this Contract by an equivalent amount being such amount as the Actuary of the Company shall determine.

(d)	The Company may at its discretion at any time request payment in full of the loans made under the provisions of sub-clause (a) of this Clause together with any interest accruing due thereon and if the borrower is unwilling or unable to make such repayment and only in that event the Company may effect such repayment by cancellation of such proportion of the benefits provided by this Contract as the Actuary of the Company shall determine.

(e)	The Company shall be entitled to deduct from the assets held by it on trust on the Maturity Date such sums required to discharge the whole or any part of any liability owed to the Company by the Assured or any person entitled to the benefit of this Contract whether such liability shall have arisen by reason of any loan granted pursuant to sub-clause (a) of this Clause or otherwise and whether such liability shall represent principal or interest.

(f)	Until such time as all liabilities due to the Company from the Assured or any person entitled to the benefit of this Contract shall be discharged in full the entitlement of the Company contained in sub-clause (e) of this Clause shall have priority over any right of the Assured or any person entitled to the benefit of this Contract.

(g)	For the avoidance of doubt the amount of any liability owed to the Company shall only be reduced hereunder by and to the extent of any amount retained by the Company hereunder.”

57.	Thus although under clause 5(a) the granting of loans was mandatory, Paulden was entitled to set a maximum aggregate loan. To the extent that the holder of the policy was “unwilling or unable” to make repayment, the benefits under the policy would abate – i.e. the value of the Specified Account to the holder would abate.

58.	Since for each of the years 2001 to 2003 Paulden’s accounts show no change in the value of its assets – no income profits, expenses, gains or losses, we conclude that it is more likely than not that the entirety of the £2.4m premium was lent by it on interest free terms to the holder, Foundation.  Because Foundation would suffer no economic loss by continuing to hold on to the £2.4m until 2080 we conclude that it was likely that it would do so.  (This of course is on the assumptions that the £2.4m was paid to Paulden rather than Foundation, that the Endowment Policy was granted prior to 3 April, and that it was assigned to Foundation on 3 April).

59.	We also find that on 3 April 2000, at the time of the assignment of the Endowment Policy it was highly likely that Paulden would lend the entirety of the premium to Foundation.  We so find because:-

(i)	Mr Collins was given to understand by Kidsons that the £2.4m would be available to him;

(ii)	Mr Collins entrusted Kidsons with organising the Policies and Kidsons are likely to have arranged them so that Mr Collins understanding would fructify; 

(iii)	Paulden’s director was B&T Directors Ltd of which Mr P Taylor was a director;

(iv)	Mr Taylor also appears to have been a director of Foundation (and was the signatory of the Capital Redemption Policy as director of Foundation);

(v)	the £2.4m was paid to Mr Taylor’s client account;

(vi)	it is therefore likely that Mr Taylor would arrange for Paulden’s £2.4m to be lent to Foundation soon after 3 April 2000.

The Terms of the Capital Redemption Policy and its value

60.	In the bundle before us there were two slightly different versions of this policy.  One version was we believe annexed to the agreement between Mr Collins and Foundation for the assignment of the Endowment Policy; the other was we believe the policy actually granted.  There were some differences between the General and Annuity Conditions to the Policy and in the Schedules but, save as noted, the clauses discussed below were the same.  The following provision we find formed part of the contract between Foundation and Mr Collins:-

(i)	“In consideration of the transfer … of the Annuity Consideration the Company” would pay the Deferred Annuity.  The Annuity Consideration was declared in one document to be the Property assets “per Deed of Agreement schedule 1 dated 31 March 2000”, and in the other document as the Endowment Policy issued on 31 March 2000 by Paulden.

It seems to us likely, as noted above, that it had been originally intended to complete the transaction for the Endowment Policy on Friday 31 March 2000, but this was not done, and the necessary change in the dates was overlooked. 

It seems to us that the Endowment Policy described at paragraph 16 above is intended to be the consideration.

(ii)	The Deferred Annuity was the greater of £783,350 or 5% of the value of the fund payable each quarter for 5 years.  The annuity would thus exhaust the fund.

(iii)	The Company was required to credit the consideration received to a separate “Specified Account” linked to Mr Collins’ policy. Assets representing the account were to be identified.  Income, expenses, losses and profits from investments representing that account were to be credited and debited to it.  The rights of Mr Collins were determined by the balance on that account.  If there was not enough money in the account at the end of 80 years to pay the Guaranteed Minimum Annuity (the £783,350 per quarter), then Mr Collins had no right to any top up from Foundation’s other assets other than its share capital and general reserves (see clause 5.5 of the General Conditions).

In effect a pot of assets was to be created, managed and kept for 80 years, and Mr Collins would become entitled to whatever was in the pot in 80 years time paid in 20 quarterly instalments.  The “guaranteed” part of the annuity was commercially illusory:  there was no guarantee that there would be any share capital or general reserves available to make up any deficit.

(iii)	Clause 7 of the Annuity Conditions is entitled “Loans”.  Clause 7.2(a) to (e) need to be produced in full:

“7.2(a)	The Company will grant the Annuitant or his successors in title a loan or loans at any time during the currency of this Contract.  Such loans shall be made by the Company on the security of a charge on this Contract for such maximum aggregate amount at such rate of interest and on such terms as to payment of interest and repayment of principal and for such period as the Company shall from time to time determine.  The repayment of such loans shall be a personal obligation of the borrower.

7.2(b)	Any and all loans granted under the provisions of sub-clause 7.2(a) of this Clause shall except at the discretion of the Company only be made out of any cash attributable to the Specified Account at the time.

7.2(c)	In the event of the non-payment within the period stipulated of any of the interest due on any loan made in accordance with sub-clause (a) of this Clause the Company may in lieu of the payment of such interest reduce the benefits payable under this Contract by cancelling units of an equivalent amount being such amount as the Actuary shall determine.

7.2(d)	The company may at its discretion at any time request repayment in full of any of the loans made under the provisions of sub-clause 7.2(e) of this Clause together with any interest accruing due thereon and if the borrower is unwilling or unable to make such repayment and only in that event the Company may effect such repayment by cancellation of units of such proportion of the benefits provided by this Contract as the Actuary shall determine.

7.2(e)	The Company shall be entitled to retain for its own benefit so much of any sum or sums payable hereunder or any benefit or benefits provided hereunder as shall be required to set off and discharge the whole or any part of any liability owed to the Company by the Annuitant or any person entitled to the benefit of this Contract whether such liability shall have arisen by reason of any loan granted pursuant to sub-clause 7.2(a) of this Clause or otherwise and whether such liability shall represent principal or interest or both.”

So the company was obliged to grant loans (“will” in 7.2(a)) but the document gave it discretion as to the terms of the grant and the maximum aggregate loans.  And if the loan was not repaid the company could cancel units  - i.e. take the money out of the limited fund.  And if a borrower was “unwilling or unable” to repay a loan the company could do the same.

(iv)	Clause 4.2c of the Annuity Conditions provided for a quarterly charge to be made against the Specified Account of at least 0.5% of the value of the property attributable to the account of £150 if greater.

61.	So what were the essential economic features of this bunch of rights?  In effect Mr Collins was entitled to the accumulated pot in 80 years’ time and in the meantime had a right to have loans advanced to him in circumstances where, if he chose not to repay them the pot would most likely be reduced.  It is true that on the black letters of the contract the company could set the terms of the loans and the aggregate maximum loans, and might, rather than reducing the pot, sue for repayment, but it seems to us that it would have been unlikely that it would do so, or do so successfully. That is for the following reasons:-

(i)	although the company had a financial interest in the amount standing to the credit of the Specified Account (since it was entitled to a fee by reference to it) there was [no provision] for the debiting to the Specified Account of the costs of enforcing repayment of any loan which costs would therefore fall on the company;

(ii)	the Key Features document records the aim of providing access to the funds held within the contract as and when required. It seems to us that if the company demanded repayment the policyholder could immediately require a fresh loan with which to repay the old one – thus providing access to the funds as required but also avoiding the consequence of enforced unfunded repayment;

(iii)	Mr Collins might be successful in a claim that a representation was made before he entered into the contract that he would have access to 93% of the funds.  An enforced repayment of a loan (or a limit on the aggregate loans of less than 93% of the fund) would breach that representation. In his witness statement Mr Collins says that Kidsons did not advise him that the whole or most (or any part) of the value of the deferred annuity would be available to him when he chose and that was not his understanding of what Kidsons arranged for him nor was it borne out in practice.  Mr Collins did not give oral evidence: he could not be cross-examined.  We conclude on the material before us that it was his understanding and that he was advised that the funds would be available to him.

62.	What was the value of Mr Collins’ interest in the Capital Redemption Policy?  Mr Collins asserts that its actuarial value was £139,738.  We saw no valuation and no instructions to an actuary.  We had therefore no evidence as to the assumptions under which the actuary who is said to have produced this value worked.  And we have no clear idea of what was meant by actuarial value. We consider that it would be wholly irrational to exchange within days an asset acquired for £2.4 million for one only worth £139,738.  There is no evidence that there ever was a proper valuation.

63.	A simple exercise on a calculator shows that £139,738 compounded at 6% for 80 years will yield a sum approximately equal to 20 quarterly payments of £783,350.  If all “actuarial valuation” means is that the present value of the so called guaranteed annuity payments discounted at 6% for 80 years is £139,738, then it is of little relevance to the question of what the value of the contract is.  That is because:

(i)	there is no real guaranteed annuity – the final annuity is effectively limited by what is in the pot;

(ii)	it takes no account of what else might be in the pot; and

(iii)	most importantly, it takes no account of a holder’s right to, or expectation of, loans under the policy of amounts in aggregate up to the value of the pot.

64.	In Jones v Garnett [2007] STC 1536 Lord Hoffman made the point that the value of a share depends upon the expectation of future yield and that, in the circumstances of that case, because there was an expectation that Mr Jones would work for the company and generate profits, the value of the share was greater than the £1 of net assets it represented.  The same principle is relevant here.  The value of the policy depends upon what may be expected to be received under it, not simply upon a mathematical discounting of a purported guaranteed deferred minimum payment.  What could be received under the policy was in reality substantially all of the value in the Specified Account and that, for the reasons set out elsewhere, was £2.4m.

65.	If one asks the question: what would you give to stand in Mr Collins’ shoes, the answer is almost £2.4m.  That is because, in his shoes you could access £2.4m or thereabouts and have no economic need to return it to the Company.  Some discount from £2.4m might need to be applied to reflect the complexities of getting the money, but we cannot see that a market value of much less than £2.3m could be justified.

Was there a gain or loss for TCGA purposes? Furniss v Dawson : the Ramsay Doctrine

66.	At paragraph 42 above we concluded that there were three possible analyses of what happened.  The result of the second possibility was that there was no assignment of the Endowment Policy so that could be no loss as claimed.  The first and third possibilities left open the possibility of such a disposal (the third permitting an allowable loss only on the basis and to the extent set out in paragraph 53 above); at paragraph 46 we indicated that the Appellant had not shown that the first possibility was not the only one, but we said at paragraph 48 that we would consider the position if the situation were as the Appellant appeared to aver. In this section we thus consider what the proper result of the application of the TCGA would be if we had found that the Endowment Policy was executed before the assignment agreement (i.e. on either 2 or 3 April) and the £2.4m was paid either just before the execution of that agreement or after it but pursuant to a prior agreement with Paulden to make payment very soon afterwards.

67.	This basis however for our consideration is subject to the findings of fact we made at paragraphs 35 to 39 above : that these transactions were preordained, that, once started there was no practical likelihood that they would not finish the course; and that Mr Collins’ main purpose in paying the £2.4m was to obtain a tax loss on the acquisition and disposal of the Endowment Policy.

68.	Mr Jones took us to a number of the cases in which the Ramsay principle has been discussed.  We draw the following principles from those cases:-

(1)	the “Ramsay doctrine” is an approach to statutory interpretation applicable generally.  It consists, as in truth does any exercise of applying a statute to a factual situation, in deciding on a purposive construction what is intended by the words of the statute and what transaction will answer to the statutory description, and deciding on an unblinkered realistic approach to the facts whether the transaction in question does so;

(2)	For the doctrine to apply there are no preconditions.  It is not necessary that there will be a series of preordained steps, or inserted steps without a commercial purpose;

(3)	However, where the facts are such that there is a preordained series of transactions, or a combination of transactions intended to operate as such, where it can be said that there is a composite transaction, it may be appropriate to have regard to the whole to determine how the statute applies.  This may in particular be proper where once a scheme has been set in motion there is no practical likelihood that it will not be carried through.

69.	Mr Jones says that “even if there were a genuine Endowment Policy, and it had been exchanged for the Capital Redemption Contract, this would simply have been a preordained series of transactions which had no commercial purpose and was designed purely for tax avoidance purposes.  Looking at the transactions realistically there would have been no disposal of any asset within the meaning of the TCGA, merely a cash premium paid to acquire a Capital Redemption Contract”.

70.	The Appellant’s Statement of Case indicates that the Capital Redemption Policy could not have been granted for cash consideration because, as is recited in the Capital Redemption Policy itself, Foundation would not accept a sum of money as a premium otherwise than from an authorised person under Schedule 2 of the Banking Act 1987 “so that in consequence the Company does not carry on any business consisting of the taking of deposits for the purposes of that Act.”  Mr Jones regards this as fatuous.

71.	The Appellant says that the purpose of the Endowment Policy was to enable Capital Redemption Contract to be acquired “with the very real advantages which that contract would provide for the Appellant”.

72.	The Appellant says that the acquisition and disposal of the Endowment contract were real transactions between Foundation, Paulden and the Appellant.  Because Foundation was not a party to the provision of the Endowment Contract by Paulden (and vice versa) there was no single composite transaction.

Discussion

73.	Before turning to the provisions of the statute and their application we should deal with the Appellant’s last mentioned point.  It is clear that the Ramsay doctrine is not concerned with whether or not all the parties to each transaction in a series were each a party to every such transaction.  Instead it is concerned with taking a view as to whether the series of transactions was planned and executed as such and what recognising that the transactions are so linked means for the application of the statute (and also, even if they are not so planned or executed, considering them realistically and whether they fulfil the statutory words).  The Appellant’s submission might cast a factual doubt over whether the transactions were pre-planned or preordained but it does not prevent the Ramsay approach being applied; and in our view despite the lack of contractual nexus between the three parties, these transactions truly were preordained or were a single composite transaction.

74.	TCGA Section 1 charges tax on gains “computed in accordance with this Act and accruing … on the disposal of assets”.  The Act contains no prescription for the computation of any gain: it does not say in terms that the gain is the consideration received from a disposal less the allowable expenditure – although it does provide in some particular circumstances for the determination of the consideration received (e.g. in section 17) and for the sums which may be deducted (in section 38).  Likewise there is no definition of disposal (although section 21(2) extends its ambit).  With regard to losses, section 16 merely provides that a loss accruing on the disposal of an asset shall be computed in the same way as a gain accruing on a disposal is computed.

75.	It seems to us that the Ramsay doctrine might potentially be deployed in three ways in the circumstances of this case:-

(i)	first, as Mr Jones submits, it might be said that there was no disposal of the Endowment Policy as is meant by ‘disposal’ in section 1;

(ii)	second, it might be said, although Mr Jones did not advance this argument, that section 38(1)(a) of the TCGA limits the deductible sums to:

“the amount or value of the consideration given [by the taxpayer] wholly and exclusively for the acquisition of the asset …”,

and that Mr Collins gave none of his £2.4m “for” the Endowment Policy; and

(iii)	third, it might be said that, as was held in Burmah Oil and Ramsay, the arithmetical difference between the value of the consideration received by Mr Collins when he disposed of the Endowment Contract, and the amount be paid for it, was not a “loss” within the meaning of the Act.

We consider below the first and third of these approaches.  In view of our conclusions and the fact that Mr Jones did not advance the second, we do not consider it further.

(i)	disposal

76.	We are not convinced that if there was an acquisition of the Endowment Policy by Mr Collins the assignment cannot be termed a disposal. On 3 April he transferred his interest in the policy to Foundation. If he had an interest that was a disposal.  His assignment was preordained, but it was still an assignment. If you could say that he never truly owned the Endowment Contract, then truly he could not have disposed of it; but our assumption here is that he did really own it although it was preordained he would dispose of it.

77.	“Disposal” is a word of wide import.  It does not seem to us that its meaning is intended to be limited or diminished because the actual disposal is preordained or for tax avoidance purposes.

(ii)	a real loss

78.	In IRC v Burmah Oil Co Ltd [1982] STC 30 the House of Lords held that the arithmetical difference between the consideration received and given was not a loss for the purposes of the predecessor of the TCGA:  Lord Fraser at p.39 said that there the taxpayer had not achieved the result of creating a magical loss because “when the scheme was carried through to completion there was [there] no real loss and no loss in the sense contemplated by the legislation”.  In the TCGA “loss” and “gain” are not restrictively defined, and there is an element in the words which has the flavour of something which has real economic consequences which the Act seeks to tax or relieve.  The acquisition and disposal of the Endowment Policy by Mr Collins were not separate transactions divorced from each other.  They were part of a preordained series of transactions involving the acquisition of the Capital Redemption Policy to which an artificially low value was attributed. No real economic or commercial consequences can be attached to Mr Collins’ brief period of ownership of the Endowment Policy:  no real loss or gain arose to him on its disposal.

79.	It may also be said that, realistically viewed, Mr Collins did not dispose of the Endowment Policy for the Capital Redemption Policy: to say that would be to make the mistake of analysing each step in a composite transaction as if it were truly separate from all the others.  There was a single composite transaction in which on the same day the Endowment policy was acquired and disposed of and the Capital Redemption Policy received and (within the compass of a few days) the money was paid. The issue of Capital Redemption Policy was not simply the consideration for the assignment of the Endowment Policy but was in practice and reality substantially in consideration of the payment of premium: the consideration for the disposal of the Endowment policy was in reality for no more or less than whatever consideration had been given for it.  There was neither gain nor loss on the Endowment Policy.

80.	If the £2.4m was not paid until after the Capital Redemption Policy was issued or the assignment executed the position seems clearer still.  In reality neither policy would have had any value until the premium was paid, and no real gain or loss could have arisen on the disposal of the Endowment Policy.

Summary

81.	HMRC assert that Mr Collins never truly acquired the Endowment Trust Policy and thus that he cannot have disposed of it or made a loss on that disposal.  They raise on the evidence before this Tribunal a respectable argument that the policy was never owned beneficially by Mr Collins.  The onus of proof is on the Appellant to show that HMRC are wrong, but the Appellant brought before the Tribunal no cogent evidence that the policy was owned by Mr Collins before the time of the assignment agreement.  If Mr Collins did not own the policy before the time of the assignment agreement, then the assignment (or the assignment agreement) cannot have been a disposal of it.  There is no room in this case for any argument (based on paragraphs 65 or 68 of Jonathan Parker LJ’s judgment in Jerome v Kelly [2003] STC 206, or otherwise) that the Policy was contracted to be disposed of before it was acquired and that the time of disposal is thereby removed to the later time of acquisition, because what was agreed to be assigned, and what was purportedly assigned was not a policy (as a market maker might short sell particular shares) but a particular policy with a specified date which did not exist and never existed.  On this ground we would dismiss the appeal.

82.	But if this were too heavy handed an approach then we have considered what the answer would be if the Appellant had acquired and assigned the Endowment Policy.  In this case we find, first that the value of the Capital Redemption Policy was almost £2.4m and accordingly that very little loss would have arisen, and second that it could not be said that these transactions gave rise to a real loss constituting a loss on a disposal within the meaning of the Act.

83.	Therefore we would dismiss the appeal even if we were not to rely on the Appellant having the onus of proof.

84.	But that leaves the question of whether the Respondents were entitled to assess under section 29.  If they were not this appeal must be allowed.

TMA 1970 Section 29 

85.	Mr Collins’ 1999/2000 tax return was prepared for him by his accountants Heathcote & Coleman. Under “Losses arising” appears the figure £2,260,262; under a heading seeking a full description of the asset disposed of appear the words “Paulden Activities Ltd – Endowment Trust Inst”; under a heading “Losses” appear the information that the asset disposed of was “Paulden Activities Ltd – Endowment Trust Inst”, that a valuation was used, that the date of acquisition of the asset was 30 March 2000, that it was disposed of on 3 April 2000 and that the disposed proceeds were £139,736; under a heading asking whether an estimate or valuation has been used in the CGT computation (and asking for a copy of any valuation obtained to be attached) appear the words: “03/04/00 Capital Redemption Policy received in exchange for Endowment Trust Instrument (Paulden Activities) – Actuarial Value £139,738.”, and under ‘Additional Information’ the following appears:

“David Collins exchanged an Endowment Trust Instrument with Paulden Activities Limited for a Capital Redemption Policy (Deferred Annuity Certain – guaranteed minimum value payable quarterly for 5 years certain), the current market value of the right to receive the guaranteed value at maturity date 4 April 2080, calculated actuarially is £139,738.”

86.	There was no other information provided in relation to the transaction in question. There was in our bundle a copy of a letter which Mr Collins later provided to HMRC from Kidsons to Heathcote & Coleman which set out the entries to be made and the words to go in the Additional Information box quoted above.  This letter gave the 30 March 2000 date italicised above.  Mr Collins accepts that this date was a mistake.

87.	Mr Collins asserts that these entries were in accordance with the practice generally prevailing at the time. The Respondents gave no notice of any intention to enquire into the return in accordance with TMA 1970 s. 9A.

88.	On 15 December 2005 the Respondents through Mr Branigan assessed Mr Collins for additional tax of £906,944.80.  This assessment (the 2005 assessment) was stated to be made under the discovery provisions of TMA 1970 s.29.

89.	The Appellant contested the validity of this assessment and sought to have this issue tested as a preliminary issue.  His application to that effect was rejected by Dr Brice in January 2007.

90.	In the meantime the Respondents made, on 30 November 2006 a fresh assessment (the 2006 assessment) in the same sum and in the same terms as a belt and braces alternative.

91.	The Appellant contends that neither assessment is authorised by section 29.  Section 29 provides so far as relevant:-

“29.	Assessment where loss of tax discovered

(1)	If an officer of the Board or the Board discovers; as regards any person (the taxpayer) and a year of assessment – 

(a)	that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax have not been assessed,  
…

the officer or, as the case may be, the Board may, subject to subsection (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.

(2)	Where – 

(a)	the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment; and
(b)	the situation mentioned in subsection (1) above is attributable to an error or mistake in the return as to the basis on which his liability ought to have been computed,

the taxpayer shall not be assessed under that subsection in respect of the year of assessment there mentioned if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.

(3)	Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above – 

(a)	in respect of the year of assessment mentioned in that subsection; and
(b)	in the same capacity as that in which he made and delivered the return,

unless one of the two conditions mentioned below is fulfilled.

(4)	The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.”

Thus for present purposes it is necessary: first that an officer discovered that the original self assessment was insufficient; second, because no enquiry had been opened; that in relation to the 2005 assessment either of the conditions in (4) or (5) applied and in relation to the 2006 assessment that the condition in (4) applies (since s.36 TMA precludes reliance on (5) given the date of the 2006 assessment); and third that if the insufficiency was due to an error or mistake the return was not made on the basis or in accordance with practice generally prevailing at the time the return was made.  We take these conditions in order.

A discovery that there was an insufficiency

92.	In the Appellant’s Statement of Case it is contended that the 2005 assessment is void because Mr Branigan merely had a suspicion that there had been an insufficiency of tax, and a mere suspicion is insufficient to permit section 29(1) to operate.  So far as the 2006 assessment is concerned it is said that it was not based on any discovery.  The Appellant’s skeleton argument served on 6 December 2006 in preparation for an application that the discovery issue be determined at a preliminary hearing (an application which was dismissed by Dr Brice), makes the following arguments:-

(i)	that “discover” in section 29(1) is not a loose word: the words used are not “have reasonable cause to believe or suspect” or “discover or reasonably consider”, but “discover … an assessment has become insufficient”.  Any latitude as to opinion is given only by the tailpiece which permits assessment of the further amount which in the inspector’s “opinion” ought to be changed;

(ii)	on 25 August 2005 Mr Branigan had given notice to Mr Collins under section 20(1) TMA for the production of documents and particulars relating to the transactions. That notice was given with the consent of the General Commissioners. Mr Branigan’s summary of the reasons given to the General Commissioner made it plain that Mr Branigan “believed” that the 1999/2000 self-assessment “might” be insufficient and that he required the particulars “to establish whether the believed insufficiency … exists”;

(iii)	those words made it plain that Mr Branigan had not made a discovery when the 2005 assessment was made on 15 December 2005: all he had was a suspicion, and a suspicion that tax had been under-assessed was not a “discovery” that it had been.

93.	Mr Branigan gave evidence of how he came to be involved in the tax affairs of Mr Collins and what prompted him to make the 2005 assessment. We accept his evidence. He said that prior to making the 2005 assessment he considered on the evidence available to him that it was more likely than not that there had been no allowable loss and that in consequence there had been an underpayment of tax.  He frankly admits that on the information then available to him he could not be certain that he was right.

94.	The Respondents had prior to December 2005 sought certain documents from Mr Collins in exercise of their powers under TMA 1970 s.20.  Mr Collins challenged by way of judicial review the section 20 proceedings. The application was dismissed. Following the failure of the judicial review proceedings Mr Collins provided certain documents and information to the Respondents. Mr Branigan concluded on the basis of this further information that he was correct in concluding that there was no allowable loss suffered by Mr Collins.  Knowing that the 2005 assessment had been challenged by Mr Collins he made a further assessment in the alternative to the 2005 assessment.

95.	Mr Jones took us to the judgment of the Lord Chief Justice in R v Commissioners of Taxes for St Giles and St George Bloomsbury, ex parte Hooper (1915) 7 TC at 61-62 and to the decision of Stephen Oliver QC in Hancock v Inland Revenue Commissioners [1999] STC (SCD) 287.  It seems clear to us that Mr Branigan can properly be said to have “discovered” that there was an insufficiency of assessment within any of the meanings described in that judgment and that decision: Mr Branigan in our view honestly arrived at the conclusion based on the material before him that the Appellant had been under assessed; he came to that conclusion from the examination of information he had received; he had reason to believe that there was no allowable loss; and he found or satisfied himself that there was no loss.  We do not believe that the provision requires the inspector to be certain, rather, it requires that he be convinced that his conclusion is more likely than not. Thus in relation to the 2005 assessment we find that the first requirement was satisfied.

96.	On this basis we do not need to consider the 2006 assessment.  

97.	We consider that subsection (4) is satisfied.  The failure to disclose  (i) that cash was paid on or after 3 April 2000, (ii) that the Endowment Trust Policy was made on or after 2 April (and not as stated 30 March), and (iii) the absence of any proper valuation of the Capital Redemption Policy was at the lowest misleading. In circumstances where the proper tax analysis of transactions is dependent upon the precise facts and an analysis different from that adopted by the taxpayer is reasonably tenable on those facts, and where the assessment return provides an opportunity to set out those facts, the provision of incorrect information and the omission of potentially relevant information is in our view negligence because it fails to give the inspector sufficient accurate information to enable him to consider whether or not he should consider investigating further or upon which he could reasonably take a view different from that taken by the taxpayer of the tax consequences.  The provision of misleading information where relevant to the computation of a tax liability is negligent conduct.  This makes it unnecessary to consider subsection (5).

Practice Generally Prevailing

98.	The tailpiece of subsection (2) affords two forms of escape for the taxpayer: if the return was made on the basis generally prevailing, or if it was made in accordance with practice generally prevailing at the time it was made.  The reference to “basis” appears to be a reference back to the use of that word in paragraph (b): “the basis on which his liability ought to have been computed”.  It seems therefore to refer to the basis of computation rather than the basis on which disclosure is made in the return.  It is less clear whether the reference to “practice” is to the method of computation rather than the practice of disclosure.

99.	Mr Collins in his witness statement asserts that the entries in his tax return “were in accordance with the practice generally prevailing at the time”.  No evidence was offered by the Appellant of what such practice was.

100.	Both “basis” and “practice” are qualified by “generally prevailing at the time”.  This seems to us to refer to HMRC’s practice and probably (because of the word “generally”) also to the normally accepted practice of the tax profession.  There was no evidence before us that there was any generally prevailing practice or basis under which any particular view would be taken of the tax results of such an avoidance scheme as was represented in Mr Collins’ transactions.  It follows that the entries were not in accordance with any such practice or basis.

101.	If “practice” generally prevailing refers to the practice of disclosure in the tax return, Mr Collins would have to show that in situations such as these there was a general practice of mealy-mouthed disclosure giving no real hint to the inspector of the underlying factual and legal difficulties.  Not only was no evidence advanced that this was the case but we do not believe that such was the general practice at the time.  It is most unlikely to have been the practice promulgated by HMRC, and our experience is that although accountants and others preparing tax returns may wish to present their facts in the best light possible, they do not generally shrink from words which give the inspector a chance to realise that there may be difficulties of fact or interpretation.

102.	We therefore find that Mr Collins cannot rely on subsection (2).

Conclusions

103.	We conclude:

(i)	that, for the reasons in paragraphs 81 and 82 above that no allowable loss occurred to Mr Collins on the transactions involving the Endowment Policy at the beginning of April 2000;

(ii)	that, in consequence, the conditions in section 29(1)(a) and (b) were satisfied: chargeable gains which ought to have been assessed had not been, and Mr Collins’ self-assessment was insufficient;

(iii)	an officer of the Board made a discovery that this was the case and accordingly that subject to subsection 29(2) and 29(3) an assessment could be made (paragraph 95);

(iv)	subsection 29(2) did not prevent the making of an assessment because, to the extent the insufficiency of assessment was caused by an error or mistake, the return was not made on the basis or in accordance with the practice generally prevailing at the time (paragraph 98-102);

((v)	subsection (3) did not prevent the making of the assessment because the condition in subsection (4) was satisfied:  the under-assessment was attributable to negligent conduct on the part of the taxpayer or a person acting on his behalf (paragraph 97);

and accordingly that the assessment should be upheld and the appeal dismissed.

104.	We therefore dismiss the appeal.

105	Cases referred to in skeletons or in argument not mentioned above:-

Langham v Veltema (2004) 76 TC 259
IRC v Scottish Provident Institution [2004] 1 WLR 3172
IRC v McGuckian [1997] 1 WLR 991
Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684

THEODORE WALLACE

CHARLES HELLIER
SPECIAL COMMISSIONERS

RELEASED: 11 March 2008

SC 3179/2006