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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Paulden Activities Ltd & Ors, Re Judicial Review [2009] ScotCS CSOH_55 (15 April 2009)
URL: http://www.bailii.org/scot/cases/ScotCS/2009/2009CSOH55.html
Cite as: 2009 SLT 900, [2009] STI 1591, [2009] CSOH 55, 2009 GWD 29-462, [2009] ScotCS CSOH_55, [2009] STC 1884

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OUTER HOUSE, COURT OF SESSION

[2009] CSOH 55

OPINION OF LORD KINCLAVEN

in the Petitions of

PAULDEN ACTIVITIES LIMITED AND OTHERS

Petitioners;

for

Judicial Review of the issue of Notices under Section 20(1) of the Taxes Management Act 1970

­­­­­­­­­­­­­­­­­________________

Petitioners: Tyre, Q.C.; Morton Fraser, LLP

Respondents: Moynihan, Q.C., Paterson; Acting Solicitor (Scotland), HM Revenue & Customs

15 April 2009

Introduction
[1] This opinion relates to a continued first hearing in fourteen petitions for Judicial Review of the issue of notices addressed to each of the petitioners under Section 20(1) of the Taxes Management Act 1970. In essence, the notices require the production of certain documents and the furnishing of certain information considered to be relevant to their respective tax liabilities.

[2] The petitioners are Paulden Activities Limited, Eastbay Enterprises Limited, Eastpark Enterprises Limited, Northbay Enterprises Limited, Paulden Associates Limited, Paulden Enterprises Limited, Paulden Interests Limited, Southbay Enterprises Limited, Alcester Enterprises Limited, Cotteridge Enterprises Limited, Marlbrook Enterprises Limited, Northpark Enterprises Limited, Southpark Enterprises Limited and Eindhoven Enterprises Limited. They are all companies incorporated under the Companies Acts having their registered offices at 7 West Park Road, Dundee.

[3] Mr Tyre, Q.C., appeared for those companies. In overview, each of the petitioners contended that there was no basis upon which the General Commissioner who gave consent to the issue of the notice addressed to it could reasonably have been satisfied that in all the circumstances the respondent's officer was justified in seeking consent to the issue of the notice. Reduction of all fourteen notices was therefore sought. In relation to the six petitioners which are trustee and nominee companies, it was submitted by the petitioners that there was sufficient information before the court to entitle it to grant the applications without further procedure. Decree of reduction was therefore sought in those applications. In relation to the eight petitioners which have issued bonds, it was submitted that proof before answer at a second hearing is required in order to determine whether or not the Commissioner could reasonably have been so satisfied.

[4] Mr Moynihan, Q.C. appeared for the Advocate General for Scotland, for and on behalf of H.M. Revenue and Customs ("the Respondents"). In overview, the Respondents contended that the court should dismiss all fourteen petitions. Which failing, the court was invited to dismiss those petitions which it was satisfied are irrelevant.

[5] In the whole circumstances, and for the reasons outlined below, I have decided that the respondents' arguments prevail. Having heard counsel, I propose (i) to sustain the first plea-in-law for the respondents to the relevancy of each of the petitions, (ii) to repel the pleas-in-law for each of the petitioners and (iii) to dismiss all fourteen petitions. As requested at the hearing, I shall put the case out By Order so that counsel can address me on the interlocutors to be pronounced. I would explain my decision as follows.

The Background

[6] Mr Moynihan opened the debate and outlined the background for the respondents along the following lines.

[7] As at 25 August 2005 the respondents were aware of 14 companies with close associations, sharing the same registered office, with the same directors, company secretary and auditors and all limited by guarantee. These companies fell into two broad categories, namely, (i) bond issuing companies and (ii) trustee companies.

[8] Eight (the bond issuing companies) bore by their financial accounts to have issued one capital redemption policy each in 2000, with no other transactions recorded. These companies bore to have generated no income and all expenses were said to have been paid by unidentified third parties. The bond issuing companies are:

[9] Six (the trustee companies) bore to be nominee or trustee companies. They are:

The accounts of Eindhoven record that no transactions took place in any year other than in the capacity as a trustee or nominee. Notwithstanding the occurrence of transactions, that company was stated to have earned no income and all expenses were borne by a third party. In relation to the remaining five, they bore to have carried out no transactions, generated no income, and again their expenses were borne by a third party.

[10] Within each of the categories there is one exception with specialities differentiating it from the rest, otherwise the remainder in each category are sufficiently similar to be debated by reference to one example.

[11] In the case of the bond issuing companies the exception is Paulden Activities Limited ("Paulden"). Eastbay Enterprises Limited ("Eastbay") is taken as typical of the rest. Paulden is special because the identity of the individual taxpayer engaged in the transaction with the petitioners (Mr Collins) was known to the officer of HMRC (Dr Branigan) who served the Notice. The identity of the persons with whom the remaining companies transacted (referred to as the bondholders) are not known to him.

[12] In the case of the trustee companies it is Eindhoven Enterprises Limited ("Eindhoven") that is the exception and Alcester Enterprises Limited ("Alcester") the typical example. Again Eindhoven is special because the person for whom that company says that it acts is named in the petition: Monarch Associates. For the remaining companies the ultimate "beneficiary" (if there be one) is not disclosed.

[13] By agreement Answers have been lodged in only those four cases.

[14] While recognising the differences between the two categories, and within each category the speciality that makes one company exceptional, the respondents' primary position was that all 14 cases can be viewed together (for reasons that were explained when addressing the Paulden case - see further below). If, however, the court were to reject that primary position the respondents invited the court to differentiate as appropriate.

The Respondents' Motion

[15] The respondents' primary motion was that the court should sustain their plea to the relevancy (plea 1) and dismiss all fourteen petitions. Which failing, if I differentiate among them, I was invited to dismiss those petitions that I was satisfied are irrelevant.

[16] While the petitioners' primary position had been to offer a Proof Before Answer, the respondents were aware that as the debate developed the petitioners might seek decree de plano in some of the cases, for example in the petitions concerning the trustee companies.

The Statutory Background

[17] Each of the fourteen petitions seeks reduction of a Notice dated 25 August 2005 issued by an "inspector" (now an officer of Revenue and Customs) under section 20(1) of the Taxes Management Act 1970, there being a separate notice in respect of each petitioner. Each Notice was accompanied by a statement of reasons.

Section 20 of the Taxes Management Act 1970
[18] Section 20 of the Taxes Management Act 1970 as amended ("TMA") provides, inter alia, as follows:

"20(1) Subject to this section, an inspector may by notice in writing require a person -

(a) to deliver to him such documents as are in the person's possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to -

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of any such liability, or

(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability. ...

(3) Subject to this section, an inspector may, for the purposes of enquiring into the tax liability of any person ('the taxpayer'), by notice in writing require any other person to deliver to the inspector or, if the person to whom the notice is given so elects, to make available for inspection by a named officer of the Board, such documents as are in his possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to any tax liability to which the taxpayer is or may be, or may have been, subject, or to the amount of any such liability ...

(6) The persons who may be treated as 'the taxpayer' for the purposes of this section include a company which has ceased to exist and an individual who has died.

(7) Notices under subsection (1) or (3) above are not to be given by an inspector unless he is authorised by the Board for its purposes; and -

(a) a notice is not to be given by him except with the consent of a General or Special Commissioner; and

(b) the Commissioner is to give his consent only on being satisfied that in all the circumstances the inspector is justified in proceeding under this section. ...

(7AB) A Commissioner who has given his consent under subsection (7) above shall neither take part in, nor be present at, any proceedings on, or related to, any appeal brought -

(a) in the case of a notice under subsection (1) above, by the person to whom the notice applies, or

(b) in the case of a notice under subsection (3) above, by the taxpayer concerned,

if the Commissioner has reason to believe that any of the required information is likely to be adduced in evidence in those proceedings.

(7AC) In subsection (7AB) above 'required information' means any document or particular which were the subject of the proposed notice with respect to which the Commissioner gave his consent.

(8) Subject to subsection (8A) below, a notice under subsection (3) above shall name the taxpayer with whose liability the inspector ... is concerned.

(8A) If, on an application made by an inspector and authorised by order of the Board, a Special Commissioner gives his consent, the inspector may give such a notice as is mentioned in subsection (3) above but without naming the taxpayer to whom the notice relates; but such a consent shall not be given unless the Special Commissioner is satisfied -

(a) that the notice relates to a taxpayer whose identity is not known to the inspector or to a class of taxpayers whose individual identities are not so known;

(b) that there are reasonable grounds for believing that the taxpayer or any of the class of taxpayers to whom the notice relates may have failed or may fail to comply with any provision of the Taxes Acts;

(c) that any such failure is likely to have led or to lead to serious prejudice to the proper assessment or collection of tax; and

(d) that the information which is likely to be contained in the documents to which the notice relates is not readily available from another source.

(8B) A person to whom there is given a notice under subsection (8A) above may, by notice in writing given to the inspector within thirty days after the date of the notice under the subsection, object to that notice on the ground that it would be onerous for him to comply with it; and if the matter is not resolved by agreement, it shall be referred to the Special Commissioners, who may confirm, vary or cancel that notice. ...

(8E) An inspector who gives a notice under subsection (1) or (3) above shall also give to -

(a) the person to whom the notice applies (in the case of a notice under subsection (1) above), or

(b) the taxpayer concerned (in the case of a notice under subsection (3) above),

a written summary of his reasons for applying for consent to the giving of the notice."

List of Authorities and References

[19] In addition to the various processes, I was provided with copies of the following authorities and references:

1. Section 20 of the Taxes Management Act 1970, as amended (outlined above);

2. R v Inland Revenue Commissioners ex parte T.C. Coombs & Co [1991] 2 A.C. 283 particularly Lord Mackay of Clashfern LC at page 288D-289B, Lord Jauncey of Tullichettle at page 298E-H, and Lord Lowry at pages 300C-F and 305E-H;

3. R v Inland Revenue Commissioners ex parte T.C. Coombs & Co 64 T.C. 124 particularly Schiemann J at page 132E-H;

4. R v Commissioners of Inland Revenue ex parte Banque Internationale a Luxembourg 72 T.C. 597, particularly Lightman J at pages 610G-611C;

5. R (on the application of Malcolm Arthur Johnston & others) v Branigan (HMIT) [2006] EWHC 885 (Admin), Mr Justice Stanley Burnton at paragraph 11;

6. Lord Advocate v McKenna 1989 S.C. 158;

7. Kildrummy (Jersey) Ltd v Inland Revenue Commissioners 1991 S.C. 1;

8. McGuckian v Commissioners of Inland Revenue 69 T.C. 1;

9. MacLeod & Levitt - Taxation of Insurance Business (4th ed., 1999), at paragraphs 3.02 - 3.03 and 3.05 - 3.07 (pages 36-38) paragraphs 9.05 and 9.08 (pages 221-222) and Appendix 5 (page 412);

10. Scottish Union and National Insurance Co v Inland Revenue (1889) 16 R. 461, particularly the Lord President at page 474-475; and

11. Revell v The Edinburgh Life Insurance Company (1906) 5 Tax Cases 221, the Lord President (Dunedin) at pages 226-227.

[20] Against that background, I turn to mention the pleadings and the productions - before outlining the respective submissions of the parties.

The Pleadings:

[21] Given that questions of relevancy and lack of specification arise, it might be helpful to set out some of the features of the pleading which were specifically highlighted by counsel. I would do so as follows. I should also mention that during the debate it was pointed out that the person referred to as "Mr" Branigan is more correctly referred to as "Dr" Branigan. I have corrected the text accordingly.


Paulden Activities Limited - The Pleadings

[22] In Paulden Activities Limited counsel highlighted the following averments in the petition, namely:-:

"5. ... On 20 July 2004 an inspector of taxes gave notice of his intention to enquire into the company's return for the period ended 31 March 2001. The inspector requested certain information and documentation, including a copy of the instrument and the name and address of the person to whom it was issued, all of which was provided to him by the company's accountants and auditors on 9 September 2004. Copy correspondence is produced. No enquiry has been made by the Respondents in respect of any subsequent accounting period. With reference to the averments in answer, the documents produced are referred to for their terms. Quoad ultra denied.

6. The issue of an endowment trust instrument is a transaction whereby, in consideration of a lump sum, the issuer obliges itself to transfer assets to the policy holder at a specified future date or dates. It differs from a life assurance contract in respect that it has no life risk: the transfer of assets specified in the contract takes place regardless of whether the person to whom the policy was issued is still alive. As is the case with a capital redemption policy, it produces no income chargeable in the hands of the issuer of the instrument. The Respondents are well aware of the nature of capital redemption policies. Such policies have been the subject of specific taxation provisions since 1937 and 'capital redemption business' is presently defined for income and corporation tax purposes in section 458 of the Income and Corporation Taxes Act 1988 as 'any business in so far as it (a) consists of the effecting on the basis of actuarial calculations, and the carrying out, of contracts of insurance under which, in return for one or more fixed payments, a sum or series of sums of a specified amount become payable at a future time or over a period; and (b) is not life assurance business.' ...

11. The Petitioner submits that the General Commissioner could not reasonably have been satisfied that in all the circumstances the Respondents' officer was justified in proceeding under section 20. In particular, there are no circumstances which could reasonably justify the officer's belief that the company has had any income which ought to be subject to tax but has not been assessed. ... With reference to the averments in answer, admitted that the Petitioner is not authorised under the Financial Services and Markets Act 2000 under explanation that it is not carrying on any regulated activity requiring authorisation. Admitted that the Petitioner is not chargeable to tax under the provisions of section 458. The letter dated 9 September 2004 from agents for the Petitioner is referred to for its terms beyond which no admission is made. Quoad ultra denied except in so far as coinciding herewith. The Respondents are called upon to explain the basis upon which Dr Branigan reasonably considered that the Petitioner is chargeable to corporation tax on income from investments held or made. The copy signed document produced by Mr Collins is a copy of the policy issued to him. There is no difference between the description given by Mr Collins and the averments in these proceedings. The endowment trust instrument issued by the Petitioner was exchanged by Mr Collins for a capital redemption policy which was not issued by the Petitioner. ...

12. ... Reference is made to the whole of Mr Waller's affidavit for its terms. Having regard to the foregoing, the Petitioner believes and avers that the true reason for issue of the Notice is to enable the Respondents to investigate the tax liability of the policy holder. If that is so, it is an improper use by the Respondents of their powers under section 20(1). That subsection permits recovery of documents containing information relevant to the tax liability of the person from whom the documents are sought. ... The averments in answer are denied except in so far as coinciding herewith. The endowment trust instrument issued by the Petitioner was a genuine instrument issued by a genuine issuer. No loan was made to Mr Collins by the Petitioner and no interest on any such loan has been paid or received by the Petitioner.

Pleas-in-law for Petitioner

1. There being no basis upon which the General Commissioner could reasonably have been satisfied that in all the circumstances the Respondents' officer was justified in proceeding under section 20(1) of the Taxes Management Act 1970, the Notice issued to the Petitioner on 25 August 2005 should be reduced; and in the meantime suspension ad interim thereof should be pronounced.

2. The Respondents' averments in answer being irrelevant et separatim being lacking in specification, decree should be pronounced for reduction of the said Notice."

[23] Counsel also highlighted the following averments in the Respondents' Answers, namely:-

"5 ... The copy instrument provided by the petitioner's accountants is produced (7/1 of Process). It bears to be a 'capital redemption contract'. The copy produced by the bondholder (Mr Collins) similarly bears to be a 'capital redemption contract'. Reference is made to Answer 11. ...

11. Explained and averred that by letter dated 9 September 2004 (6/10 of process), the Petitioner's agents provided certain information, including the identity of the person to whom the policy was issued, namely Mr Collins. The letter also disclosed that the premium amounted to £2.4m and that it was paid in cash. Under cover of that letter the petitioner's agents provided 'a copy of the policy'. The copy provided to the Respondents by the petitioner's agents was an unsigned document, bearing to have been issued in April 2000 by the Petitioner and termed a 'Capital Redemption Contract'. The contract related to payment by a bondholder of £2,400,000. The Petitioner's accounts for the year to 31 March 2001 reflect the issue of a single capital redemption policy, with an asset (there described as the capital redemption policy but more correctly the premium received) of £2,400,000 and a liability of £2,400,000. To carry on capital redemption business within the meaning of section 458 the petitioner would require to be an insurance company registered with the Financial Services Authority. The petitioner is not believed to be registered with the FSA and therefore section 458 is inapplicable. Whether section 458 applies or not, a capital redemption contract is one in which the 'insurer' undertakes for a consideration (or premium) to pay a sum (ordinarily a multiple of the premium) to the 'assured' at a future date. The copy contract provided by the petitioner bears a maturity date of 3rd April 2025. Ordinarily the 'insurer' will invest the premium in order to meet its future liability to the 'assured'. Over the financial years to maturity it is ordinarily to be expected that in the financial accounts the liability will be shown as an increasing amount rising to the maturity value at the maturity date. Equally, it would ordinarily be expected that the assets in the accounts would reflect their current value. Even if section 458 does not apply, the petitioner (as a company resident in the UK) is liable to corporation tax on the income from investments held or made. In light of these circumstances, it was reasonable for the Respondents to serve the notice for the reasons set out in the Summary of Reasons. Reference is made to R, on the application of Malcolm Arthur Johnston and others v Branigan (Inspector of Taxes) [2006] EWHC 885. Further explained and averred that since the notice was issued the bondholder (Mr Collins) has produced a copy of the document that he maintains to be the policy issued to him. A copy of it (the Collins' copy) is produced. The Collins' copy is different in material respects from the copy provided to the Respondents by the petitioner's agents. Mr Collins has given a description of the transaction which differs from that advanced in these proceedings by the Petitioner. By his account he exchanged an Endowment Trust Instrument with the Petitioner for a Capital redemption policy. Reference is made to the excerpt from his tax return quoted in paragraph 4 of the judgment in R, on the application of Malcolm Arthur Johnston and others v Branigan (Inspector of Taxes). By his account there are two instruments, not one as the Petitioner avers. The Petitioner is called upon specifically to admit or deny the description of the transaction advanced by Mr Collins. The Petitioner's failure to do so will be founded upon. Further explained and averred with reference to Code of Practice 8, that by proceeding under that code the respondents are to be understood as indicating only that they do not possess information sufficient to found a suspicion of serious fraud.

12. ... With reference the quotation from paragraph 33 of Dr Branigan's affidavit, the Petitioner is called upon specifically to admit or deny the suggestion that 'the capital redemption bonds were not genuine contracts issued by a genuine issuer and that the monies might in fact have been lent interest free to the policy holder Mr Collins'. The Petitioner's failure to answer this call will be founded upon.

Pleas-in-law (for Respondents)

1. The Petitioner's averments being irrelevant et separatim being lacking in specification, the petition should be dismissed.

2. The Respondents having complied with the provisions of section 20(1) of the Taxes Management Act 1970, the prayer of the petition should be refused.

3. The General Commissioners being entitled to be satisfied that in all the circumstances the Respondents were justified in proceeding with the Notice dated 25 August 2005, the prayer of the petition should be refused.

4. There being no grounds for reduction of the Notice issued on 25 August 2005, the prayer of the petition should be refused.

5. There being no grounds for suspension ad interim, suspension should be refused."

Eindhoven Enterprises Limited - The Pleadings

[24] In Eindhoven Enterprises Limited the petitioner avers inter alia:- ...

"5. The Petitioner was incorporated on 13 March 2001 and is limited by guarantee. Since its incorporation it has filed annual reports and financial statements in accordance with the requirements of the Companies Acts. Since its incorporation the company has never traded or carried on any other activities. Its accounts have been audited each year by a firm of chartered accountants and registered auditors. ...

6. ... The company holds assets as a nominee for Monarch Associates, an English partnership. The company makes no charge for or profit from acting in this capacity. ..."

Alcester Enterprises Limited - The Pleadings

[25] In the petition of Alcester Enterprises Limited it is averred, inter alia, that:- ...

"5. ... Since its incorporation the company has never traded or carried on any other activities. Its accounts have been audited each year by a firm of chartered accountants and registered auditors. ...

10. ... The company has never been party to arrangements involving the issue of a capital redemption bond and is unaware of any circumstances which might lead the Respondents reasonably to believe that it has been a party to any such arrangements. It does not hold and has never held income-bearing assets in any capacity and is unaware of any circumstances which might lead the Respondents reasonably to believe that it has been a party to any such arrangements. It does not hold and has never held income-bearing assets in any capacity and is unaware of any circumstances which might lead the Respondents reasonably to believe that it may be or may have been a beneficial owner of such assets. Holding of assets in the capacity of trustee or nominee would not in any event create income chargeable in the company's hands or give rise to an obligation to make a return. The company's audited accounts disclose no income. By proceeding under Code of Practice 8 the Respondents have indicated that they do not suspect serious fraud. Concealment of income by the company from its auditors or, alternatively, a false certification by the auditors of the financial statements as giving a true and fair view of the state of the company's affairs would constitute serious fraud. There is no basis for the 'beliefs' of the officer summarised in the Summary of Reasons and, accordingly, consent to the issue of the Notice should not have been given."

[26] The Respondents aver, in their Answers to the petition of Alcester Enterprises Limited, inter alia:-

"10. ... Explained and averred that the respondents became aware of arrangements designed by Mr. T.P.D. Taylor, a solicitor resident in the Isle of Man, to use capital redemption policies to avoid capital gains tax. As part of the investigation into those arrangements the respondents became aware of 14 companies (of which the petitioner is one) sharing the same registered office with the same directors, company secretary and auditors and incorporated at about the same time. ... The respondents reasonably believed the 14 companies to be linked. ... Until the role and status of the trustee companies is investigated it is not known what part they play in the arrangements."

Eastbay Enterprises Limited - The Pleadings

[27] In Eastbay Enterprises Limited, the Petitioner also avers:-

"1. The Petitioner submits that the General Commissioner could not reasonably have been satisfied that in all the circumstances the Respondents' officer was justified in proceeding under section 20. In particular, there are no circumstances which could reasonably justify the officer's belief that the company has had any income which ought to be subject to tax but has not been assessed. As the Respondents are or ought to be well aware, capital redemption policies do not produce income chargeable to corporation tax in the hands of the insurer of the policy. There is no inconsistency between 'the nature of the bond' and the Petitioner returning no income."

The Productions:

[28] It might also be helpful to set out some of the features of the productions which were highlighted by counsel during the debate - by way of background. I mention productions for completeness. The relevancy or otherwise of the pleadings falls to be determined by the pleadings.

Production No. 6/9 - Notice under section 20(1) of the 1970 Act

[29] Production No 6/9 (in Alcester Enterprises Limited) bears to be the "Notice under section 20(1) Taxes Management Act 1970 dated 25 August 2005".

[30] It was the Notice selected to be representative of the others.

[31] It contains the following "Summary of Reasons", namely:-

"The reasons given to the General Commissioner in application for consent to issue you with the S.20(1) Notice are:

·       That the company is party to arrangements involving the issue of a capital redemption bond for the purpose of enabling the holder to avoid tax.

·       That the contractual relationships between the company and other persons involved in these arrangements is unknown.

·       That the documents and particular requested are required to determine these contractual relationships.

·       That, dependant on the nature of the contractual relationships, I believe that the company's description of its activities may be misleading and that the company may be a beneficial owner of income-bearing assets giving rise to a tax liability.

·       That I believe that the returns submitted may be incorrect and there may be an insufficiency in the self-assessment.

·       The documents and particulars requested are required to establish whether the believed insufficiency in the self-assessments exists and, if they do, to enable the insufficiencies to be quantified."

Production No 6/14 - Statement of Nicholas Branigan dated 11 December 2006

[32] Production No 6/14 (in Paulden Activities Limited) bears to be a Statement of Nicholas Branigan dated 11 December 2006. Dr Branigan is an officer of Revenue and Customs working as an investigator with Special Civil Investigations ('SCI') He states inter alia:-

"7. TPD (Patrick) Taylor is a solicitor, now based in the Isle of Man, who has been selling tax avoidance schemes since the 1970's. ...

14. On 23 September 2004 HMRC decided that a risk assessment of TPD Taylor activities should be carried out jointly by Large Business Service ('LBS') (Jeremy Tyler) and SCI (me).

15. In December 2004, it was agreed that AAG (Anti-Avoidance Group) would continue to work the capital redemption policy cases already known to them but that SCI in Edinburgh would take responsibility for all newly identified cases. SCI would also seek to identify these unknown participants.

19. On 10 February 2005 my Registration Report for opening an investigation into the arrangements was approved. The investigation was given the reference SC08/01/176352/NPB. At the same time a Scheme Approval request was made. The stated purpose of the SCI investigation was to identify and recover tax from unidentified participants in the capital redemption bond scheme marketed by TPD Taylor. Based on intelligence available a further 58 participants required to be identified. An estimate of the potential tax at risk was £46,400.00.

20. The company files provided by Mr Waller were reviewed by me on receipt. All 14 companies shared the same registered office address, 7 West Park Road, Dundee. All were incorporated in March 2000. All are companies were limited by guarantee.

21. The 14 companies could be divided into 2 groups based on the description of the nature of the company's activities as disclosed in the statutory accounts. ...

33. I would have expected to have seen investment income and gains generated by the capital redemption fund. A rough calculation would show that assuming a 5% annual growth, the potential income over the 3 year period generated by the fund would be £378,300. This was all highly suspicious and suggested that the capital redemption bonds were not genuine contracts issued by a genuine issuer and that the monies might in fact have been lent interest free to the policy holder Mr Collins. ...

64. Furthermore, it was clear from the investigation that had been carried out in respect of other participants in schemes promulgated by Mr Taylor that they were sold to the participants on the basis that they would have access to all or most of the value subscribed by means of interest free loans or grants. I considered it likely that such an arrangement had been entered into with Mr Collins. The availability of such interest free loans or grants would mean that the capital redemption bond had considerable value, indeed the likely value would not be significantly less than the amount subscribed. No information of this nature had been provided in Mr Collins' return. An officer examining Mr Collins' return could not reasonably have expected that such a facility would have been available."

Production No.7/1 - Capital Redemption Contract (unsigned)

[33] Production No.7/1 is described as "Capital Redemption Contract issued by Paulden Activities Limited to David Roy Collins (unsigned)".

[34] The section headed "General Conditions" in the unsigned document includes the following:-

"(4) STATUS OF ASSETS IDENTIFIED WITHIN A SPECIFIED ACCOUNT

(A) All assets or monies vested in the Company and identified within the Specified Account are held by it for the sole purpose of calculating the benefits hereunder. Accordingly, and for the purposes only of resolving any doubts on the matter, the Company hereby declares that the assets or monies identified within the Specified Account are held by the Company subject to its rights to debit the Specified Account with the charges and disbursements including taxation which are under the terms of this Contract authorised to be so debited and with liberty to apply all or any part or parts of such assets or monies in accordance with the terms of this Contract are held for the specific purpose of satisfying its liabilities to the Contract Holder/Assured."

Production No 7/2 - Capital Redemption Contract (signed)

[35] Production No.7/2 is described as "Capital Redemption Contract issued by Paulden Activities Limited to David Roy Collins (signed)".

[36] The section headed "General Conditions" in the signed document includes the following:-

"(4) STATUS OF ASSETS IDENTIFIED WITHIN A SPECIFIED ACCOUNT

(A) All assets or monies vested in the Company and identified within the Specified Account are held by it for the sole purpose of calculating the benefits hereunder. Accordingly, and for the purposes only of resolving any doubts on the matter, the Company hereby declares that the assets or monies identified within the Specified Account are held by the Company subject to its rights to debit the Specified Account with the charges and disbursements including taxation which are under the terms of this Contract authorised to be so debited and with liberty to apply all or any part or parts of such assets or monies in accordance with the terms of this Contract are held for the specific purpose of satisfying its liabilities to the Contract Holder/Annuitant."

[37] The section headed "Special Conditions" includes the following:-

"(3) ACCOUNTS AND VALUATIONS

(a) The Actuary of the Company shall attribute to the Specified Account all income from gains and losses from any assets held in the Specified Account and shall make such deductions therefrom of whatsoever nature as in the opinion of the Actuary of the Company may be properly attributed to the holding making managing exploiting enhancement or realisation of such assets. Such exercise shall be undertaken by the Actuary of the Company on 31st March, 30th June, 30th September and 31st December in any year.

(b) On each 31st March, 30th June, 30th September and 31st December that this contract is in force the Actuary of the Company shall deduct from the Specified Account an amount equal to 5% of the excess (if any) of the value of the assets held in the Specified Account as certified by him over the value of the premium or the value of the assets held in the Specified Account on any such previous accounting date less the deductions made in such previous date in accordance with this sub-clause."

The Submissions for the Respondents

[38] In outline, the submissions for the respondents were to the following effect.

[39] As set out in the petitions, the officer who issued the Notices was Dr Branigan. There is no suggestion the Dr Branigan was not an appropriate official in terms of section 20(1) TMA. Rather each of the petitions centres on the distinction between the proper subject of a notice under subsections (1) and (3).

[40] Subsection (1) authorises a notice to be served on any person for documents and information relevant to any tax liability to which that person is or may be subject.

[41] Subsection (3) applies to a notice served on one person for documents relevant to the tax liability of another person.

[42] The thrust of the complaint is the contention (in Statement 12 of the petitions) that the "true reason for issue of the Notice" in each case was to investigate the tax liability of a third party (the bondholder) and not that of the petitioner.

[43] The respondents dispute the petitioners' contention and hence defend the Notices.

[44] However, in order correctly to identify the issue in these petitions it is necessary to note that subsection (7) provides that a Notice may only be issued with the consent of a General or Special Commissioner, who may only give consent "on being satisfied that in all the circumstances the inspector is justified in proceeding under this section" (subsection (7)(b)). It is not in dispute that Dr Branigan sought and was given the consent of a General Commissioner under section 20(7). The question is whether the General Commissioner could reasonably have been satisfied in the circumstances that the officer was justified in proceeding under section 20(1). The averments (but not the plea) mirror the statutory provision and refer to section 20 in the generality but the true issue (as the plea reflects) is whether the inspector was entitled to proceed under subsection (1), as opposed to subsection (3). The issue is focused by plea-in-law 1 in the petitions. The supporting averments are in Statements 11 and 12 in the cases of Paulden and Eastbay and Statements 10 to 12 in the cases of Eindhoven and Alcester. In short, the proposition is that there are no circumstances which could reasonably justify the officer's belief that the petitioners had any liability to tax. The petitions refer to tax on income but for the purposes of section 20 "tax" is defined to include corporation tax, covering both income and capital gains: section 118(1) TMA.

[45] The respondents' submission is that the averments do not relevantly support that plea or, in any event, are essentially lacking in specification.

The Respondents' Submission on General Legal points

[46] There is a strong presumption of regularity both on the part of the officer and the Commissioner. In other words there is a presumption that the Notices are intra vires and the onus is on the petitioners to show that at the time of giving the Notice the officer could not reasonably have held the requisite opinion, due consideration being given to the fact that the Commissioner has acted as an independent monitor: R v IRC ex parte Coombs [1991] 2 A.C. 283 per Lord Lowry at pages 300-304; and R v CIR, ex parte Banque Internationale a Luxembourg S.A. (2000) 72 T.C. 597, 610G-611C, per Lightman J..

[47] The Notices are served at the preliminary stage of investigation and at that stage all that the officer requires is to have a reasonable opinion. It need not be shown to have been correct: Coombs at 301E-F and H.

[48] There is no onus on the respondents to place before the court evidence of liability to tax: Banque Internationale at 614B-D.

[49] It is competent for the respondents to make alternative assessment (eg Lord Advocate v McKenna 1989 S.C. 158) and therefore at the preliminary stage of investigation it is open to an officer to entertain alternative possibilities.

The Respondents' Submissions on "Point in Time"

[50] As mentioned above (in paragraph 45) the respondents submitted inter alia that the validity of the Notices falls to be determined as at their date. The petitioners have produced Affidavits by officers of Revenue and Customs, including an affidavit by Dr Branigan, in proceedings concerning Mr Collins. The affidavit by Dr Branigan includes material post-dating the Notices and reflecting the product of ongoing investigations. That material is of limited relevance to the present proceedings because it is not directed to the opinion that he held as at the date of the Notices. Viewing matters as at that date the respondents are entitled to the benefit of the presumption that the Notices are intra vires.

[51] Where the material referred to in the petitions, including affidavits, is of some relevance is in considering whether or not the petitioners have averred a prima facie case sufficient to rebut that presumption.

The Respondents' Submissions on Paulden

[52] The respondents suggested that all eight bond-issuing company petitions follow a similar style and rely on three broad points in submitting that the General Commissioner could not reasonably have been satisfied in the circumstances that the officer was justified in proceeding under section 20(1):-

(1) The nature of the transaction itself, the proposition being that capital redemption policies do not produce income chargeable to tax in the hands of the issuer of the policy;

(2) The petitioners' audited accounts disclose no income; and

(3) The contention that the affidavits disclose that the true reason for the Notices is to investigate the tax affairs of the bondholders.

[53] The six trustee companies similarly follow a style relying on (1) the normal nature of the activities of a trustee company, in addition to points (2) and (3) in paragraph [52] above.

[54] The respondents submitted that the significance of the Paulden case is that the pleadings go beyond a bare style because there has been limited disclosure of the background facts. That limited disclosure reveals what were described as "murky depths" to these transactions with substantial unanswered questions. Viewing matters as at the date of the debate by reference in particular to the Paulden case the court can properly conclude that the petitioners have not even begun the task of seeking to discharge the onus of proof incumbent on them necessary to rebut the presumption.

[55] This can be seen by considering what Paulden itself discloses about the three matters referred to in paragraph [52].

[56] The other three petitions which are being used as "test" cases can be viewed as dependent on Paulden because they cross-refer to the affidavit evidence cited in that case. The respondents submitted that if the circumstances in Paulden are insufficient to justify reduction of the Notice in that case, then cross-reference to the self-same circumstances should not justify granting the other petitions.

The Respondents' Submissions on the Nature of the Transaction

[57] The respondents noted that the Paulden petition contains averments (in Statements 6 and 11) about the respondents' knowledge of transactions known as "capital redemption policies", being a specific type of business covered by section 458 of the Taxes Act.

[58] However, so suggested the respondents, the petitioner does not even maintain that it issued a "capital redemption contract". The petitioner describes the instrument that it issued as "an endowment trust instrument" and it is apparent from Statement 5 that even the petitioner regards such an instrument as distinguishable from a "capital redemption policy". The petitioner adheres to that description of the instrument despite the fact that the petitioner produced to the respondents an alleged copy of the contract which plainly bears on its face to be a "capital redemption contract" (see 7/1 of Process).

[59] To the respondents' averments in Answer 11, that Mr Collins has given a different description of the transaction, the petitioner responds (in Statement 11) by averring that Mr Collins exchanged the endowment trust instrument issued by the petitioner for a capital redemption policy issued by someone else, thereby reinforcing the inference that the two instruments are of a different type.

[60] In these circumstances, submitted the respondents, the critical averments in Statement 11 about the respondents' knowledge of a contract properly called a "capital redemption policy [or contract]" are irrelevant because the petitioner is averring that it entered into a difference contract properly described as "an endowment trust instrument" without offering to prove what the respondents knew about such an instrument (see also Statement 6).

[61] In any event, so argued the respondents, the averment that capital redemption policies do not produce income chargeable to tax in the hands of the issuer of the policy is irrelevant. It might as well be said that an insurance policy does not produce income in the hands of the insurance company. That is doubtless strictly true but the fact is that the income earned by an insurer includes the investment yield from premiums received, not from the policy. Thus section 458(2)(a) TA refers expressly to "any profits derived from investments held in connection with the capital redemption business". Paulden admit receipt of a premium of £2.4m (see Statement 5) and denies that that sum has been lent back to Mr Collins (Statement 12). Any reasonable person would be entitled to be of the opinion that, like an insurance company that received premiums from which it may have to meet future liabilities, the petitioner may have invested that sum and thereby generated taxable income. That is the subject of the investigation.

[62] The respondents have produced a second copy of the Paulden contract which has subsequently been provided to them by Mr Collins and it is 7/2 of process. It differs from the copy supplied by the petitioner (7/1). It is referred to in the pleadings (Statement and Answer 11) and the petitioner coyly avers that "The copy signed document produced by Mr Collins is a copy of the policy issued to him" without advancing any explanation for the differences between the two documents. Nonetheless, the Collins' copy bears to show that in return for the premium the petitioner has assumed a liability to pay £16.8m at the maturity date of 2 April 2080. That is consistent with the officer's belief that a company entering into such a contract would invest the premiums because otherwise it is impossible to see how it can discharge its liability to repay the bondholder a multiple of his initial "investment".

[63] There is a dispute between the respondents, on the one hand, and Paulden and Collins, on the other, as to whether or not the transaction achieves its tax avoidance purpose. Paulden maintains that the transaction is genuine and the respondents, who may issue alternative assessments, are entitled to investigate the transaction on the hypothesis on which it is defended by Paulden. On that hypothesis Dr Branigan, as the responsible officer (and for that matter any reasonable officer), would have expected the premium to have been invested by Paulden to have yielded a taxable return of income or capital. The officer is entitled to investigate that alternative.

The Respondents' Submissions on the Audited Accounts

[64] The respondents submitted that the averments regarding the content of the accounts and the fact that they have been audited take the petitioner no further because it is averred (in Statement 5) that the accounts erroneously misdescribe the transaction as a "capital redemption policy" when in fact it is "an endowment trust instrument".

[65] Similarly reference to Code of Practice 8 is irrelevant, so say the respondents, in circumstances in which there is an admitted error in the accounts. The respondents are not obliged to treat every case of error as one involving fraud.

The Respondents' Submissions on the Interest in Mr Collins

[66] In the Eastbay, Eindhoven and Alcester petitions the petitioner quotes from the affidavits as support for the inferential averment that it is believe and averred that the true reason for the Notices is to ascertain the name of the bondholder. In the Paulden petition (Statement 12) the averment is a variant: it is that the Notice was intended to investigate the tax liability of the bondholder (ie Mr Collins). The respondents respond that in Paulden they know the name of the bondholder and still they have served a Notice on that company. They have also served a separate Notice on Mr Collins and it is discussed in the case of R (on the application of Malcolm Arthur Johnston & Others) v Branigan [2006] EWHC 885. For the reasons advanced above, in particular paragraph [63], the respondents are entitled to investigate the affairs of Paulden even when they know the name of the bondholder and are independently investigating his affairs.

The Respondents' Submissions on Eastbay
[67] The respondents' submissions on Eastbay were as follows.

[68] Eastbay is the typical bond issuing company. Its petition discloses receipt of a premium of £884,294 with not a shred of explanation as to what has happened to that sum.

[69] The transaction is said to be a capital redemption policy and parties are at one (see Statement 6) that it is a contract whereby, the "insurer" undertakes for a consideration (or premium) to pay a sum to the "assured" at a future date. The respondents would add, as is borne out by the Collins contract, that ordinarily the insurer repays a multiple of the sum. Ordinarily, the "insurer" invests the premium in order to meet its future liability to the assured. A UK resident insurer is liable to corporation tax on the income from its investments.

[70] Absent any explanation for where that substantial sum has gone it is not unreasonable for the officer to investigate the possibility that it has been invested by Eastbay and is yielding a taxable return to that company.

[71] The petitioner advances no positive explanation relating to the disposal of that sum. In these circumstances the petitioner has not pled a prima facie case sufficient to rebut the presumption that the Notice is valid.

The Respondents' Submission on the Trustee Companies
[72] The respondents' submissions on the Trustee Companies were as follows.

[73] It is evident that the transactions involving the bond issuing companies are far from ordinary. Even trustee companies sometimes fail to operate as they were fiscally intended to do: eg Kildrummy (Jersey) Ltd v IRC 1991 S.C. 1. There are clear points of association between the bond issuing companies and the trustee companies. Substantial funds (£2.4m in the case of Paulden) have been received and ordinarily would be invested. If, as is averred in the Paulden petition, those funds have not been returned to the bondholder or invested by the bond issuing company, then logically the next alternative hypothesis to be considered is the possibility that the funds may have been invested by the "trustee" companies.

[74] Again the respondents are entitled to the presumption of regularity.

[75] Eindhoven discloses in Statement 10 that it acts as nominee for Monarch Associates but it says nothing about the nature of the transactions in which it is engaged. The pleadings lack any proper basis for inferring a prima facie case sufficient to rebut the presumption.

[76] Alcester is totally unforthcoming as to the nature of its activities. It has not even got to first base in an attempt to rebut the presumption. So submitted the respondents.

The Respondents' Submissions on General Lack of Specification
[77] The respondents submitted that, as at 25 August 2005 (the date of the Notices), Dr Branigan was aware:

·       That Mr TPD Taylor was involved with all of the petitioner companies;

·       The accounts of each of the bond issuing companies showed a similar pattern with substantial "premiums" received for similar transactions but no investment yield, contrary to what would normally be expected of such transactions; and

·       There were a number of associated companies bearing to be trustee companies whose accounts disclosed no economic activity.

In the light of the information known to Mr Branigan, he was entitled to hold a reasonable opinion that the documents sought by him might be relevant to any liability of the petitioners, or the amount thereof.

[78] Information which has subsequently been provided is contradictory. A copy of an executed capital redemption contract issued by Paulden was produced by Mr Collins (and discussed in R on the application of Malcolm Arthur Johnston and Others v Branigan (Inspector of Taxes) [2006] EWHC 885). The copy contract produced by Mr Collins (7/2 of Process) differs from that previously produced by the petitioners' agent (7/1 of Process). In particular, the maturity date is 2 April 2080, the guaranteed minimum value is £16,800,000 Sterling, and the General and Special Conditions are different.

[79] Mr Taylor is a man well known to the respondents who has attracted adverse comment by Lord Browne-Wilkinson in the House of Lords in McGuckian v CIR (1997) 69 T.C. 1 at 77A-B for "dubious stalling tactics". In these circumstances, all the more so given the presumption of regularity in favour of the validity of the Notices, the court is entitled to expect full and frank pleadings on the part of the petitioners explaining their activities and also showing why the Notices should be set aside.

[80] That is lacking. The petitioners fail to set out a prima facie case (1) to challenge the reasons and basis therefore the Notices and (2) to discharge the onus which is upon them.

The Submissions for the Petitioners

[81] In now turn to the submissions for the petitioners which were to the following effect:


The Petitioners' Submissions on the Statutory Power to Issue Notices

[82] In relation to Section 20 of the Taxes Management Act 1970, the petitioners submitted that it should be noted at the outset that there are two separate powers, in subsections (1) and (3) respectively. Subsection (1) empowers an inspector [i.e. officer of Revenue & Customs] to require a person to deliver documents or furnish information relating to the tax liability of the person to whom the notice is addressed. Subsection (3), on the other hand, empowers an inspector to require the person to whom the notice is addressed to deliver documents containing information relevant to the tax liability of another person. Certain provisions in section 20, notably subsections (8), (8A) and (8B), apply only to notices under subsection (3).

[83] Notices under both subsections (1) and (3) are subject to subsection (7), which requires the consent to issue of the notice of a General or Special Commissioner who may give his consent only on being satisfied that in all the circumstances the inspector is justified in proceeding under this section. This latter condition is a reference back to the terms of the subsections themselves. In the case of subsection (1), the inspector may only require delivery of such documents in the addressee's possession as in the inspector's reasonable opinion contain, or may contain, information relevant to the addressee's tax liability or the amount thereof, and may only require the addressee to furnish such particulars as the inspector may reasonably require as being relevant to such liability or the amount thereof.

[84] An application for authorisation to issue a notice under either subsection (1) or (3) is made at a hearing at which the taxpayer is not present or represented. It follows from the statutory provisions described above that the inspector must, at a hearing in relation to a notice under subsection (1), satisfy the Commissioner that he has reasonable grounds for his opinion that the addressee of the notice possesses documents relevant to that person's tax liability, or that his requirement to furnish particulars in relation to the addressee's tax liability is reasonable. Lord Mackay of Clashfern LC in R v IRC ex parte Coombs & Co [1991] 2 A.C. 283 at 288G.

[85] The petitioners accept as the test which they must satisfy in these proceedings in relation to section 20(1) the dictum of Lord Lowry in R v IRC ex party Coombs & Co, supra at 300C-F.

The circumstances of the present applications
[86] The petitioners outlined the circumstances of the present applications as follows.

[87] On 25 August 2005 the respondents' officer, Nicholas Branigan, obtained the consent of a General Commissioner to the issue of notices under section 20(1) to the 14 companies who are the applicants in these petitions. In their pleadings and their note of argument, the respondents refer to these companies as falling into two categories, 'the bond issuing companies" and "the trustee companies", sharing the same registered office, with the same directors, company secretary and auditors and all limited by guarantee, the implication being that all 14 companies should be regarded as an inter-related group. No further explanation is given for the respondents' belief that the companies are in any way linked to one another and this is disputed by the respective petitioners. The petitioners submit that the inference that all 14 companies are somehow linked to one another has no proper basis in the pleadings or documentation and that the reasonableness of Dr Branigan's opinion must be examined with regard to each company individual.

[88] The statutory accounts of eight of the companies disclose that they have issued a bond (as described below), and the accounts of each of the remaining six companies state that the company is a nominee and a trustee. In these circumstances the petitioners agree with the respondents that for the purposes of these proceedings one company, Alcester Enterprises Limited ('Alcester'), may be taken as representative of those companies which are nominees and trustees and that one company, Eastbay Enterprises Limited ('Eastbay') may be taken as representative of those companies which have issued bonds. The petitioners also agree that in each category there is a company which has a specialty (as described at paragraph 2 of the respondents' note of argument) requiring it to be addressed individually: Eindhoven Enterprises Limited ('Eindhoven') in the case of the trustees and nominees, and Paulden Activities Limited ('Paulden') in the case of those companies which have issued bonds.

[89] A considerable amount of background information in relation to the issuing of the notices may be obtained from two affidavits (productions 6/10 and 6/11 in the Alcester process) lodged by Nicholas Branigan and Kevin Waller respectively in connection with proceedings before the Special Commissioners at the instance of David Collins (the individual to whom Paulden issued an endowment trust instrument, as discussed below). Dr Branigan explains in his affidavit (para 14) that in 2004 the respondents' anti-avoidance group ('AAG') were in the course of investigating the affairs of a number of taxpayers who had sought to use capital redemption policies to avoid capital gains tax, and that it was known that these arrangements were designed by Mr TPD Taylor, a solicitor resident in the Isle of Man. For his part, Mr Waller, an investigator with AAG, describes how in August 2004 he arranged for letters to be issued to all taxpayers who had taken part in a capital redemption policy scheme promoted by a firm of accountants inviting them, in substance, to abandon their claims for allowable capital losses on the understanding that there would be no imposition of penalties. Mr Waller further explains (para 17) how he received an email from a colleague in east Scotland who had seen a website entry by Mr Waller about the scheme, drawing Mr Waller's attention to 15 companies which had issued capital redemption policies. Mr Waller asked his colleague to open enquiries into the companies' accounts and to seek information including the identities of persons to whom the policies were issued. Mr Waller subsequently passed the papers in relation to 'the 15 Dundee companies' to Dr Branigan early in 2005.

[90] Dr Branigan records (para 19) that on 10 February 2005 he registered the opening of an investigation into the arrangements designed by Mr Taylor. He narrates that '... The stated purpose of the SCI investigation was to identify and recover tax from unidentified participants in the capital redemption bond scheme marketed by TPD Taylor.' In the context of his affidavit, Dr Branigan's reference to 'participants' is to individuals with accrued chargeable gains who have purchased capital redemption policies with a view to creating allowable losses to set against these gains for tax purposes.

[91] As narrated in the petitions, Dr Branigan wrote to each of the petitioners on 15 March 2005 advising that it was under investigation, and that the investigation would be carried out under Code of Practice 8. Reference is made to Code of Practice 8 (production 6/12 in the Alcester process) which is adopted by the respondents where serious fraud is not suspected. In his letter, Dr Branigan sought certain documents and information and, when this was not provided, obtained a Commissioner's consent on 19 April 2005 to issue notices under section 20(1). Those notices were subsequently withdrawn because they were not accompanied by a summary of the reasons for applying for consent. Notices issued by Dr Branigan following a further hearing before a Commissioner on 25 August 2005 are the subject of these proceedings.

[92] The petitioners submitted that it is readily apparent from the above chronology and from the supporting documents that throughout the material period the concern of the respondents, and in particular the concern of Dr Branigan, was the tax liability of the individuals to whom capital redemption policies were issued and who were claiming to have sustained losses thereon for capital gains tax purposes. As the affidavits make clear, in most though not all cases, the identity of the individual concerned was not known to the respondents and in such cases the respondents' first priority was to identify the taxpayer.

[93] In their Answers to the petition, the respondents acknowledged that they would be interested to know the identities of bondholders, but aver that the reason for the issue of the notices to the petitioners was to investigate their own respective tax affairs. It is therefore necessary to consider, in relation to each of the petitioners, whether at the material time, i.e. when consent to the issue of the notices was given on 25 August 2005, the inspector could reasonably have held the opinion:

·       in the case of particulars sought, that these were relevant to a tax liability to which the company might be subject; or

·       in the case of documents, that these contained or might contain information relevant to such tax liability.

The respondents do not aver what information or documentation was in fact provided by Dr Branigan to the Commissioner who consented to the issue of the notice. It is therefore appropriate to consider the whole circumstances in relation to each of the categories of company (and the two exceptional cases) mentioned above.

The Petitioners' submissions on Alcester
[94] Alcester is a trustee or nominee company. The petitioners submitted that the following circumstances are relevant:

(i) The company's accounts for all material accounting periods disclose that it had no income, no assets or liabilities and no capital, and that no transactions took place other than in the capacity as a trustee or nominee. These accounts were signed by the directors and audited by a firm of chartered accountants and registered auditors in the usual way. By proceeding under Code of Practice 8, the respondents acknowledge that serious fraud (such as concealment of income by the company from its auditors, or false certification by the auditors) is not suspected.

(ii) The director's report describes the company as a nominee and trustee. There is nothing to suggest that in any accounting period it had any involvement with a capital redemption policy issued by any person.

(iii) By letter dated 21 October 2003 (production 6/7), the respondents had noted that the company was dormant and confirmed that no tax returns or self assessments were required for the period to 31 March 2003.

(iv) The first reason in the Summary of Reasons given by Dr Branigan when the notice was issued states 'That the company is party to arrangements involving the issue of a capital redemption bond for the purpose of enabling the bond holder to avoid tax'. Firstly, the company avers that it is not and never has been party to any such arrangements, and the respondents have not provided any explanation as to the basis upon which this assertion of fact could be made by Dr Branigan. Secondly, the assertion would be relevant to tax liability of the bond holder mentioned and not the company. The Summary of Reasons then refers to 'contractual relationships'. There are no such contractual relationships and, again, the respondents have failed to explain how Dr Branigan could feel able to assert that such relationships exist. On the basis of these unfounded assertions of fact, Dr Branigan then states that 'I believe that the company's description of its activities may be misleading and that the company may be a beneficial owner of income-bearing assets giving rise to a tax liability'. The petitioner submits that this is a wholly insufficient foundation for such a belief. The meaning of the phrase 'beneficial owner', as applied to a Scottish company, is not explained.

(v) In Answer 10 to the petition, the respondents aver that:

'... Until the role and status of the trustee companies is investigated it is not known what part they play in the arrangements. If the Petitioner was being operated in a way (the manner of which is unknown to the Respondent) in a series of transactions such that holders of assets exchanged for a capital redemption policy in fact retained control of those assets, the Petitioner would not be a nominee or bare trustee. In those circumstances, the Petitioner may have a liability to tax.'

Firstly, the averment makes the assumption that this company is playing a role in 'the arrangements'. As already noted, it is not and there was at the material time no basis for any reasonable belief that it was. Secondly, in the circumstances described by the respondents, the company would indeed be a nominee or bare trustee and would not have a liability to tax.

[95] In the foregoing circumstances, and in the absence of any further explanation from the respondents as to the basis for Dr Branigan's opinion and his requirements, the petitioners submitted that there is sufficient material before the court to enable it to conclude that at the time when consent was given he could not reasonably have held the opinion that the documents which he sought might contain information relevant to a tax liability of the company, nor that the particulars which he sought were reasonably required as being relevant to such a liability. The notices issued to this category of petitioners should therefore be reduced.

The Petitioners' submissions on Eindhoven
[96] The only difference between Eindhoven and Alcester is that Eindhoven has the following averment in Article 10 of its petition:

'The company holds assets as a nominee for Monarch Associates, an English partnership. The company makes no charge for or profit from acting in this capacity.'

It is not suggested by the respondents that this fact was known to Dr Branigan at the time when he was given consent to issue the notice to Eindhoven. The averment is therefore irrelevant to the reasonableness of Dr Branigan's opinion and requirements at the material time, and for the purposes of these proceedings the company is in no different position from Alcester. In any event, even if Dr Branigan's opinion had been aware of this fact at the material time, it provides no basis for any belief that the company might have a tax liability. The notice issued to Eindhoven should also therefore be reduced. So submitted the petitioners.

The Petitioners' submission on Eastbay
[97] This company is representative of those which have each issued one capital redemption policy. The petitioners submitted that the following circumstances are relevant:

(i) The company's accounts for all material accounting periods disclose that it had no income and contain no profit and loss account as would be required if the company was carrying on an activity capable of producing income or gains. The point made above regarding Code of Practice 8 applies mutatis mutandis.

(ii) The nature of a capital redemption policy is as described briefly in Article 6 of the petition. The first reason given by Dr Branigan in his Summary of Reasons in relation to this company was 'That the issue of the capital redemption bond contract was part of a preconceived series of transactions designed to enable the bond holder to avoid tax', which supports the petitioners' position that the respondents' concern in relation to all of these cases is with the tax liability of the bond holders. This is further supported by paragraph 33 of Dr Branigan's affidavit in the Collins case that the absence of any declared income within Paulden '... was all highly suspicious and suggested that the capital redemption bonds were not genuine contracts issued by a genuine issuer and that the monies might in fact have been lent interest free to the policy holder Mr Collins'.

(iii) The third reason given by Dr Branigan was that 'the company has not returned any income. I believe that this is inconsistent with the nature of the bond.' There is no such inconsistency. Any prospectively taxable profit of the company is balanced by its actuarial liability and accordingly it has no income. There was thus no reasonable basis for the belief which Dr Branigan asserted.

(iv) The fourth reason given by Dr Branigan was that he believed (a) that there was a possibility that income derived from the fund may be received by another person and (b) that this income may be correctly attributable to the company and ought to be subject to tax. No explanation is given for the second of these beliefs and there was no reasonable basis for it. The first stated belief supports the petitioners' position in these proceedings.

(v) In the respondents' Answers and in their statement of case, the position of Eastbay is likened to that of an insurer. That comparison is inappropriate. By issuing a single capital redemption policy Eastbay is not carrying on insurance business; nor is it chargeable to tax under section 458 of ICTA 1988.

[98] In all of the foregoing circumstances, Eastbay avers (Article 12) and offers to prove that the true reason for issue of the notice was to enable the respondents to ascertain the identity of the policy holder and, it is further submitted, to investigate the tax liability of the policy holder with a view to challenging any claim which he or she may have made to set a loss against capital gains. Eastbay further avers (Article 11) and offers to prove that there is no basis for the beliefs summarised in the Summary of Reasons. The respondents' averment that the reason for the issue of the notice was to investigate Eastbay's tax affairs is denied. Proof before answer is therefore required both of the reasons for the issue of the notice and of the reasonableness of Dr Branigan's opinion and his requirement to furnish particulars. (In the event that decree of reduction is not granted in the Alcester category of companies, the same applies mutatis mutandis as regards proof before answer in these cases too.)

The Petitioners' submissions on Paulden
[99] Paulden differs from the other policy issuing companies in respect that the identity of the policy holder was known to Dr Branigan at the time when consent to issue of the notices was given, and the documents and particular required are therefore different. These are set out at Article 9 of the Paulden petition. The petitioners submit that the following matters are relevant:

(i) It is clear from the terms of the documents and particulars sought that the target of Dr Branigan's investigation is not Paulden but the policy holder, Mr Collins. Details of loans to Mr Collins are sought with a view to demonstrating that Mr Collins has not sustained the loss which he had claimed. Reference is made to the Summary of Reasons given by Dr Branigan in a notice given under section 20(1) to Mr Collins and reproduced in the decision of Stanley Burnton J in R (Johnston & others) v Branigan, 5 April 2006 (unreported) at paragraph 11. These reasons are not consistent with the beliefs expressed in the Summary of Reasons given by Dr Branigan to Paulden that income has accrued to Paulden.

(ii) The reasons given by Dr Branigan in the Summary of Reasons given to Paulden are the same as those given to Eastbay. The arguments outlined above apply equally to Paulden.

(iii) As with the other companies, Paulden's accounts for all material accounting periods disclose that it had no income and contain no profit and loss account as would be required if the company was carrying on an activity capable of producing income or gains. The point made above regarding Code of Practice 8 applies mutatis mutandis.

[100] In their pleadings and in their note of argument, the respondents found upon three matters which they say supports their position:

(i) The policy issued by Paulden is described in its accounts as a capital redemption policy whereas in these proceedings Paulden has referred to it as an endowment trust instrument and has accepted that it was incorrectly described as a capital redemption policy in the accounts. It is submitted that this is a distinction of no materiality in relation to these proceedings. The difference between the two types of contract is merely that the policy holder under a capital redemption policy is entitled on maturity to a payment whereas the policy holder under an endowment trust instrument is entitled to a transfer of assets. This casts no doubt upon the accuracy of the figures in Paulden's financial statements. In any event, Paulden does not conduct, and never has conducted, capital redemption business taxable under s.458 ICTA 1988 as it has only ever issued one contract.

(ii) The respondents have lodged (production 7/1) an unsigned capital redemption contract between Paulden and Mr Collins whose terms differ from a signed contract (production 7/2) between the same parties. As the petitioner has confirmed in its averments, the signed document is the one which was issued by Paulden to Mr Collins. The petitioner is unaware of the circumstances in which an unsigned document containing different terms came into existence. No policy in those terms was issued by the petitioner.

(iii) The respondents aver (Answer 11) that Mr Collins' description of his transaction in the judicial review proceedings referred to above differs from that advanced by the petitioner in these proceedings. This is not correct. The description in Mr Collins' tax return, set out at paragraph 4 of the judgment of Stanley Burnton J, is the same as that averred by the petitioners at Article 11.

No weight should therefore be placed on any of these matters. In any event they have all arisen since the material time, i.e. when Dr Branigan was given consent to issue the notices, and are therefore irrelevant to the questions before the court.

[101] In these circumstances, the position of Paulden is therefore on all fours with that of Eastbay. For the same reasons as those set out above, proof before answer is required both of the reasons for the issue of the notice and of the reasonableness of Dr Branigan's opinion and his requirement to furnish particulars.

The Petitioners' submissions on Specification
[102] In all petitions, the petitioners have set out their position fully and frankly and have answered all calls made upon them. They respectfully submit that the attention of the court should focus on the circumstances at the time when Dr Branigan sought and obtained consent to issue notices under section 20(1). Ample specification has been given of why the petitioners contend - and offer to prove where necessary - that he could not reasonably have held the opinions requisite to justify the issue of the notices to the Commissioner. It appears from the respondents' note of argument that they may have permitted their views of Mr Taylor's activities to colour their judgment in relation to application for consent to issue these notices - so argued the petitioners.

Discussion

[103] I have not found this an easy matter to summarise or determine.

[104] However, as outlined above, it would be fair to say that:-

·       There is no real dispute that in relation to the eight bond-issuing companies, each of the companies by its financial accounts bears to have issued one capital redemption policy in 2000, with no other transactions recorded, and each company bears to have generated no income with all expenses having been paid by third parties;

·       Paulden was said to be special because the identity of the individual taxpayer engaged in the transaction with the petitioners (Mr Collins) was known to the officer of HMRC (Dr Branigan) who served the Notice;

·       In relation to the six trustee companies, there is no real dispute that the accounts of Eindhoven record that no transactions took place in any year other than in the capacity as a trustee or nominee. Notwithstanding the occurrence of transactions, that company was stated to have earned no income and all expenses were borne by a third party. In relation to the remaining five, they bore to have carried out no transactions, generated no income, and again their expenses were borne by a third party; and

·       Eindhoven was said to be special because the person for whom that company says that it acts is named in the petition: Monarch Associates.

[105] The petitioners' position was to the effect that all the petitions were relevant - and that in relation to the trustee companies they were entitled to decree de plano.

[106] The respondents' position was to the effect that all the petitions were irrelevant. They contended that, as at 25 August 2005 (the date of the Notices), Dr Branigan was aware:

·       That Mr TPD Taylor was involved with all of the petitioner companies;

·       The accounts of each of the bond issuing companies showed a similar pattern with substantial "premiums" received for similar transactions but no investment yield, contrary to what would normally be expected of such transactions; and

·       There were a number of associated companies bearing to be trustee companies whose accounts disclosed no economic activity.

[107] Turning to the statutory provisions (which I have set out fully above) it is clear from section 20(7) of the Taxes Management Act 1970 that the respondent's officer must, in relation to a notice under section 20(1), satisfy the Commissioner that in all the circumstances he is justified in proceeding under that section.

[108] It is also clear, as Lord Mackay of Clashfern LC observed in R v IRC ex parte Coombs & Co [1991] 2 A.C. 283 at 288G, that:

"The obligation on the commissioner to consider all the circumstances implies a duty on the officer of the Inland Revenue who appears before the commissioner to lay before the commissioner all the information he has about the relevant circumstances including any which might be unfavourable to the giving of the notice."

[109] Further, it is clear that it is the date of the decision that matters. The respondents cannot rely upon material which post-dates the decision concerned - and I have proceeded on that basis.

[110] Ultimately, the test which the petitioners must satisfy in these proceedings is to be found in the dictum of Lord Lowry in R v IRC ex party Coombs & Co, supra at 300C-F, namely:

"The case for the validity of the second notice, or any section 20(3) notice, is supported by the presumption of regularity, which is strong in relation to the function of the commissioner under section 20(7). He is an independent person entrusted by Parliament with the duty of supervising the exercise of the intrusive power conferred by section 20(3) and "in the absence of any proof the contrary" credit ought to be given to public officers, who have acted prima facie within the limits of their authority, for having done so with honesty and discretion: Earl of Derby v Bury Improvement Commissioners (1869) LR 4 Exch 222, 226. The commissioner must be taken to be satisfied that the inspector was justified in proceeding under section 20 and hence that the inspector held, and reasonably held, the opinion required by section 20(3). The presumption that that opinion was reasonable and that the commissioner was right to be satisfied can be displaced only by evidence showing that at the time of giving the second notice the inspector could not reasonably have held that opinion. In order to decide whether the applicants succeed in this task, the court must consider all the evidence on both sides and all the available facts, one of which is that the commissioner, having heard an application, consented to the giving of the notice."

[111] Accordingly, in general terms, there is a presumption of regularity which the respondents are entitled to pray in aid.

[112] However, at this stage, the issue for me involves questions of relevancy. That in turn depends on the pleadings which I have also outlined (above) in part. I also require to take averments pro veritate.

[113] In my opinion, in the whole circumstances and having regard to the pleadings in the various petitions before me, there is no basis for any decree de plano.

[114] On the contrary, in my view, the petitioners' averments, even taking them pro veritate, are not sufficient to meet the test of relevancy.

[115] Even if some or all of the petitioners had averred a relevant case, the respondents' averments would have been sufficient for proof before answer.

[116] In the result, in my opinion, the respondents' submissions prevail.

[117] I would outline my reasons in a little more detail as follows.

[118] In each petition, the petitioners' first plea-in law depends in terms upon:-

"there being no basis upon which the General Commissioner could reasonably have been satisfied that in all the circumstances the Respondents' officer was justified in proceeding under section 20(1)".

[119] In my opinion, the petitioners' averments are not sufficiently relevant and specific to support that critical plea.

[120] I have taken into account all the skilful arguments presented by Mr Tyre, but I have reached the conclusion that the petitioners' averments are irrelevant and essentially lacking in specification.

[121] On averment, as can be seen from the pleadings, the petitioners assert that there was no basis upon which the Commissioner could have been satisfied under section 20(7). They "submit" that the Commissioner could not reasonably have been so satisfied. They "believe and aver" certain things in relation to "the true reason" for the issue of the notice. They aver that they are "unaware of any circumstances" that might lead the respondents to believe certain other things. Reference is also made to the audited accounts and Code of Practice 8.

[122] However, averments as to what the petitioners themselves may (or may not) believe are not by themselves sufficient to entitle the petitioners to a proof before answer. To be relevant, there must be an adequate basis in averment of fact.

[123] The petitioners do aver, inter alia:-

"In particular, there are no circumstances which could reasonably justify the officer's belief that the company has had any income which ought to be subject to tax but has not been assessed".

-        but that formulation does not mirror the statutory test.

[124] Section 20(1) refers to "any tax liability which the person is or may be subject" (emphasis added).

[125] I agree with the respondents submissions (in paragraphs [47] to [49] above) to the effect that:-

1.     Notices may be served at a preliminary stage of investigation and at that stage all the officer requires is to have a reasonable opinion - it need not be shown to have been correct;

2.     There is no onus on the respondent to place before the court evidence of liability to tax; and

3.     It is competent for the respondents to make alternative assessment and open to an officer to entertain alternative possibilities.

[126] The petitioners refer to "income" in their petitions, but there is the possibility of alternatives and election. In Revell v The Edinburgh Life Insurance Company (1906) 5 Tax Cases 221 Lord President Dunedin said, inter alia (at page 227):-

"The Income Tax Acts are complicated enough, but I thought it had been settled beyond all possibility of doubt that inasmuch as the Income Tax Acts do not only deal with profit in the true sense of the word as a commercial profit, but also deal with and impose taxes upon the interest of investments, the Crown has always been allowed when investments are held by a trading company, if it suits them, to say, 'We will charge you a tax upon the produce of your investments, and we won't charge the tax upon your profits.' The Crown cannot charge the tax on both - that is to say, it cannot take a trading account which has money - its assets and investments - and first of all charge income tax upon the produce of investments, and then over and above charge on the profits. It must elect between the two."

[127] It may well be correct to say that "profits and gains can be ascertained only by actuarial calculation" (as suggested by the petitioners - under reference to the Lord President in Scottish Union and National Insurance Co v Inland Revenue (1889) 16 R 461) but in the present petitions there are no averments of actuarial value. Indeed, as the respondents point out, there is no averment or cogent explanation as to where substantial funds have gone.

[128] The fact that the petitioners' accounts were audited does not advance the petitioners' case to the point of relevancy. Nor do the petitioners' references to Code of Practice 8. The existence of audited accounts is not in itself an impediment to proceedings under section 20. In any event, a suspicion of serious fraud is a separate question.

[129] In my view, proceedings under section 20(3) do not exclude, and are not excluded by, proceedings under section 20(1). They are, as the petitioners themselves pointed out, separate subsections. The respondents are entitled to investigate the affairs of Paulden even if they know the name of the bond-holder and are investigating his affairs.

[130] In the result, my opinion, the respondents' submissions fall to be preferred. They are sufficient to result in the dismissal of all the petitions.

[131] I have given anxious consideration to the question of simply allowing a proof before answer in relation to all or some of the petitions - but I am not satisfied that any of the petitioners' averments are sufficient for that purpose.

[132] In my view, the matters highlighted by the respondents and the points of association between the bond-issuing companies and the trustee companies provide sufficient justification for section 20(1) proceedings in relation to all of the petitioners.

[133] It is open to the respondents' officer to draw inferences from facts - provided the inferences are reasonable.

[134] I should perhaps also record that in relation to the bond-issuing companies Mr Tyre's position was (not that the policies can never produce a profit) simply that the policies have not produced a profit yet. There was, however, a possible profit for the company.

[135] I should also record that in relation to Paulden the respondents highlighted certain provisions which may reflect a management fee. They referred to two copies of a capital redemption contract (which they had produced) - one signed and one unsigned - No 7/1 of Process, General Condition (4)(A) and Special Condition (4)(b) and No 7/2 of Process in Special Condition 3(b). The petitioner confirmed in its averments that the signed document is the one which was issued by Paulden to Mr Collins. However, there was no similar concession by the petitioner in relation to the unsigned document.

[136] Finally, I should add that I gave no weight to the respondents' submission to the effect that Mr Taylor is a man well known to the respondents who has attracted adverse comment by Lord Browne-Wilkinson in the House of Lords in McGuckian v CIR (1997) 69 T.C. 1 at 77A-B for "dubious stalling tactics". That may well have been an appropriate line if matters had gone to proof but I do not regard that as relevant for present purposes.

Decision

[137] Accordingly, for the reasons outlined above, I propose:-

(i)                 to sustain the first plea-in-law for the respondents to the relevancy of each of the petitions;

(ii)               to repel the pleas-in-law for each of the petitioners; and

(iii)              to dismiss all fourteen petitions.

[138] However, as requested at the hearing, I shall put the case out By Order so that counsel can address me on the precise terms of the interlocutors to be pronounced.

[139] Meantime, I shall reserve the question of expenses.


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