Burmarsh Ltd v Walters

LORD JUSTICE LLOYD: This appeal is about the price payable to the promoter of a tax saving scheme by taxpayers who wanted to use the scheme in order to reduce their liability to capital gains tax. The scheme applied in the tax year 1997/8 and took advantage of Section 71 of the Taxation of Chargeable Gains Act 1992, as it then stood. I will need to describe the scheme in outline although the tax provisions are relevant only as part of the background against which the contract between Burmarsh Ltd ("Burmarsh"), the claimant and the appellant before us, and the taxpayers is to be construed.

The appeal concerns directly the respondent, Mr Walters, but he has been appointed to represent a long list of other persons who entered into transactions with Burmarsh on similar terms. The case turns on the construction of a Deed of Assignment between Burmarsh and Mr Walters, prepared in standard form for the purposes of the scheme. Under that Deed, Mr Walters, the Assignee, was to pay Burmarsh a Consideration in two instalments. The first was payable, and was paid, on execution of the Deed. It was one-third of the whole. The second instalment was payable in accordance with and subject to other terms of the Deed. Burmarsh contends that in the events which happened the whole of the second instalment was payable. The judge, Mr Paul Morgan QC, sitting as a judge of the Chancery Division, held that only some £7,000 or so was payable in respect of the second instalment, which Mr Walters had already tendered.

Burmarsh appeals and contends that the full amount is payable, which was £305,900 in the case of Mr Walters.

The judge described the scheme in paragraphs 7 to 13 of his judgment. That account has not been criticised, and I gratefully adopt it for the purposes of my own judgment:

The scheme depended on Section 71 (2) of the 1992 Act, as it then stood:

The basis of the scheme was that a person entitled to allowable losses in respect of given property, who could not use those losses, would assign the property in such a way that it became held by a trustee as settled property, and that eventually a person who had chargeable gains, and could therefore use the allowable losses, would become absolutely entitled as against the trustee so that the loss would be treated, under Section 71 (2), as accruing to that person instead of to the trustee.

The judge described at paragraph 14 of his judgment how the scheme was intended to work for the purposes of Section 71:

The scheme was promoted via professional advisers. Mr Walters became aware of it through his accountant Mr M J Levitt of Hazlems Fenton. The promoter of the scheme used Halliwell Landau, Solicitors, to prepare the standard documentation for the scheme and the supporting information and to supply these to solicitors or accountants acting for parties interested in the scheme. The evidence included not only the various formal documents by which the scheme was put into effect but at least some of the supporting documents, including an opinion of Mr Andrew Thornhill QC. It is common ground that, although the scheme appeared to be valid and effective in principle under the legislation as it then stood, it was "aggressive" and the Inland Revenue would examine it with great care and was likely to take issue with claims based on allowable losses acquired under the scheme. Success was by no means assured.

The allowable losses on which the scheme was based had been agreed provisionally by the Inland Revenue in the sum of £98,243,000. This agreement was given by letter from the Inland Revenue (Mr Robinson of Kings Cross), dated 20 August 1996, to Cooper Lancaster Brewers acting for Butte Mining plc. In that letter he noted the capital loss claims and presumed that "the negligible value claims made here are associated with the information provided" in the published accounts. He said he could agree the claims on a provisional basis "but assumed they are tied up with the company's on-going law suits". He asked for information about the current state of the litigation proceeding in the United Kingdom and the United States.

With that by way of preliminary, I turn to the Deed of Assignment dated 12 January 1998 between Burmarsh and Mr Walters. This has five recitals. The first recital records the Deed of Appointment by Clifton; the second, the fact that the appointment was on contingencies which had not yet been satisfied; the third referred to the assignment of the Contingent Interest by the charities to Burmarsh. The fourth recital was as follows:

I can restrict my quotation from the operative provisions to Clause 2 which starts by effecting the Assignment and then deals with the Consideration payable for the Assignment:

I must however refer, without quoting it, to Clause 9 because of the terms of Clause 2.3. By Clause 9.1, the Assignee appointed Messrs Kidsons Impey to complete and submit the tax return claiming the benefit of a Loss. By Clause 9.2 he authorised Kidsons Impey to disclose information to Burmarsh relating to the tax return and to the progress of any communications with the Inland Revenue in relation to the claim for allowance of the Loss. If the Assignee wanted to appoint a different tax adviser he could do so, but under Clause 9.4 he had to tell Burmarsh forthwith and Clause 9.2 would then apply in relation to any new adviser. By Clause 9.3, as a sanction, if he did not comply with Clauses 9.2 or 9.4 then the Acceptance Date would be the earlier of (a) the date of such failure to comply and (b) the Due Date. Thus acceleration of the Acceptance Date under Clause 2.5 or Clause 9.3, as referred to in Clause 2.3 (3), is a sanction for default on the part of the Assignee. No such default occurred in the present case.

Clause 2.3 (2) deals with another circumstance that did not arise, namely the Inland Revenue failing to take in due time the step that they would need to in order to challenge the claim for allowance of the losses. If that had happened, then 12 months after the last date for filing the tax return the claim would have become unchallengeable. The Acceptance Date would then occur on that date. No one expected that situation to arise, and it did not. It follows that the Acceptance Date is the date provided for by Clause 2.3 (1).

Before I consider how that clause applied on the facts and the impact of Clause 2.6, I must take the story onwards. Mr Walters duly submitted his tax return disclosing gains in excess of £4.37 million and allowable losses of £4.37 million which he claimed to set off against the chargeable gains. The Inland Revenue would not accept the validity of this claim, nor that of others who participated in the scheme. We do not know when, but they served a notice under Section 9A of the Taxes Management Act in due time. They selected one case, that of Mr Race, as a test case and prepared for a hearing before the Special Commissioners. They took a variety of points under the scheme, contending that for one reason or another it did not work. If any of those points had prevailed, the assignees would not have been able to set off anything at all against their chargeable gains. These were all or nothing arguments.

They also took issue on the quantification of the Loss, particularly as regards the alleged acquisition cost of the shares. If the technical points had failed this could have led to the allowable loss as a whole being fixed at a smaller amount and so to the abatement, so to speak, of the losses claimable by the various assignees.

I do not consider it necessary to go into the arguments on principle or quantum in any detail.

In the end, the Inland Revenue settled with Mr Race on the basis that they would accept a claim for 35 per cent of the total loss claimed on the basis that the 65 per cent could not be claimed in that or any other year. They then offered the same terms to the other participants in the scheme.

In view of one of the issues argued before us, I should set out this sequence of the history in a little detail. On 26 March 2004 the Inland Revenue wrote to Mr Walters, heading the letter "Without Prejudice". The relevant part of the letter is as follows:

On 28 April 2004 the Inland Revenue wrote again extending the time for response to 30 June and seeking to clarify certain points, still without prejudice. On 3 June the Inland Revenue wrote yet again also marked "Without Prejudice":

In response, on 29 June, Mr Levitt wrote to the Inland Revenue stating that he was authorised on behalf of a list of clients, including Mr Walters, "to accept the Inland Revenue's offer" and enclosing cheques in respect of some of those named, including Mr Walters, the latter's cheque being in excess of £1 million. The cheque was accepted, presented and cleared.

To conclude the sequence, the need for a contractual offer from the Assignee to the Inland Revenue, stipulated in the letter in March, was fulfilled on 21 December 2004 when Mr Levitt sent to the Inland Revenue a settlement agreement duly signed by Mr Walters. This included the following relevant provisions:

In the Schedule the relevant tax is identified as being for the year 1997 to 1998, and as being capital gains tax, and the amount of duty is shown as £926,440.

On 4 January 2005 the Inland Revenue replied, accepting the offer and enclosing a pay slip for the balance remaining payable.

On those facts the issues arising are, first, whether in the terms of Clause 2.6 of the Deed of Assignment, the Loss had been finally determined to be less than £98,243,000 and, if so, secondly, whether that final determination occurred prior to the Acceptance Date. The judge, in a full, clear and thorough reserved judgment, held that the Loss was finally determined to be 35 per cent of £98,243,000, as between the Inland Revenue and Mr Walters, by the Revenue's acceptance of his offer in its letter of 4 January 2005. He also held that this occurred before the Acceptance Date because the Revenue's notification for the purposes of Clause 2.3 (1) was the same letter and because the date of posting governed the date of determination under general principles of contract law, whereas the date of receipt was relevant on the question of notification for the purposes of Clause 2.3 (1). Accordingly he held that Clause 2.6 did apply so as to require a reduction in consideration. On the figures it was such as to leave £7,647.50 payable which had already been tendered on behalf of Mr Walters.

Submissions were addressed to the judge, as also, perhaps more briefly, to us, about the correct approach to the construction of a document such as the Deed of Assignment. Uncontroversially he said at paragraph 68 that it was relevant to examine all of the Deed, including the recitals, to see what light they throw on how the parties expected the agreement to work in practice. He then examined the recitals and compared them with the position adopted by the Inland Revenue in the case concerning Mr Race's claim. In that regard it seems to me, with respect, that he went down a blind alley or at least took a wrong turning. Certainly recital (D) shows that the amount of the Loss was only provisionally agreed so that the Inland Revenue might well take issue on that point, as the judge said in paragraph 74. Otherwise it was common ground that the parties anticipated a challenge to the scheme by the Inland Revenue. What would be the particular grounds for the challenge was not foreseen.

Nor, as it seems to me, do the actual points eventually taken cast any light retrospectively on the aptness or otherwise of the recitals, which can be presumed to have been believed to be accurate so far as the parties to the Deed knew at the time, and in any event were part of the scheme itself which was subject to Inland Revenue scrutiny.

In relation to arguments about a sensible commercial reading of the Deed as against a literal reading, the judge said this at paragraph 77:

Mr Trower, for Burmarsh, showed us that later in the judgment the judge expressed his choice between rival readings on the basis of preferring the "more sensible commercial result" (see paragraph 96). Mr Trower criticised this approach, as it seems to me with some justification, as verging on choosing what the court thinks the more reasonable contract. In the latter part of paragraph 77 it seems to me that the judge was moving towards that approach. That said, various suggested anomalies resulting from one reading or another were urged upon us and they need to be considered in order to assess whether what appears to be the correct reading as a matter of language produces results that cannot have been intended.

There was no real dispute as to the factors relevant to construction in terms of surrounding circumstances between the parties. The Deed is part of a scheme aimed at achieving a tax saving benefit in the context of fiscal legislation, inevitably of a highly technical nature and subject to expected challenge by the Inland Revenue. It would by no means necessarily work. The Deed of Assignment was a standard form document to be used by all participators in the scheme, all of whom would have been introduced by their own professional advisers and would have had their own advice although also seeing at least some of the advice given to the promoter. Mr Trower suggested that it was relevant that the price, of some 10 per cent of the losses acquired, was relatively low compared to that asked in respect of some other schemes that were offered at the time. I am inclined to agree with Mr Fletcher, counsel for the respondent, that nothing turns on this. The judge did not attach weight to it.

Mr Trower also submitted that, although Clause 9 required the Assignee to give information to Burmarsh as to the progress of its claim, in effect Burmarsh had no control over any deal that the Assignee might do with the Inland Revenue, so that, on the judge's reading, the Assignee's independent deal with the Revenue would reduce the Consideration payable to Burmarsh without any control on the part of Burmarsh. Against that, Mr Fletcher pointed out that the Assignee would always have an interest in securing the maximum loss allowance reasonably obtainable so that there would be no tension between the interests of Burmarsh as regards the price and that of the Assignee as regards securing the greatest possible allowance of losses against chargeable gains.

Mr Trower however observed that assignees would have other dealings with the Revenue and might, for their own purposes, take a softer line on the claim for capital gains tax losses in order to secure an advantage on some other aspect of those tax affairs.

These various points are fairly made, but, as it seems to me, somewhat peripheral. Certainly it was foreseeable that the dispute might be resolved by agreement with the Inland Revenue.

Mr Trower also submitted that, on the judge's construction, the Assignee took no risk as regards the price, except that of his own default, and that this is unlikely to have been intended. Mr Fletcher, on the contrary, submitted that the judge's reasoning achieved the sensible result of a direct connection between the price payable and the commercial benefit obtained by the Assignee under the scheme, other than in the case of his own default.

Those are not points about the matrix of facts, it seems to me. They are more like arguments from anomaly. The starting point is the text of the Deed.

It is not in dispute that, at the latest by its letter of 4 January 2005, the Inland Revenue notified Mr Walters that the benefit of part, that is to say his proportion of 35 per cent of the £98,243,000, might be set off against his liability in respect of capital gains tax. Accordingly, if it had not arrived already, the Acceptance Date occurred on receipt of that letter and, subject to Clause 2.6, the second instalment was payable within 14 days thereafter. Clause 2.6 would have the effect found by the judge if, before that date, the Loss had been finally determined to be less than £98,243,000 in the terms of the clause.

The judge held that the final determination in question had to be one as between the Inland Revenue and the particular assignee and that it was not limited, as Burmarsh contended, to the issue of quantum of the loss allowable for capital gains tax purposes in respect of the Appointed Property but rather that it was of the total amount of the loss available to be set off against chargeable gains, if any, made by the Assignee (see paragraph 95 of the judgment). That seems to involve giving the word "Loss" in the second sentence of Clause 2.6 a meaning other than its defined meaning in recital (D). That meaning is the loss which the Appointed Property - that is to say the two blocks of shares - have for the purposes of capital gains tax, a figure provisionally agreed beforehand at the £98,000,000 amount. Plainly, at least part of the object of Clause 2.6 is to cover the risk that the Inland Revenue would not adhere to the provisional agreement but would argue successfully for a lower figure. If they were to succeed in that, then the Consideration would be abated proportionally. By virtue of Clause 2.7, this could even result in part of the initial instalment of the Consideration becoming repayable by Burmarsh to the Assignee.

Mr Fletcher argued for a wider relevance of Clause 2.6 by pointing to other references in Clause 2 to the Loss. In 2.3 (1) there is the phrase "the benefit of all or part of the Loss" in the context of notification by the Revenue of allowing set off against capital gains tax liability. In Clause 2.4 the Assignee is to put in his tax return claiming "the benefit of the Loss". By contrast, in Clauses 2.6 and 2.7 the reference is to "the Loss" rather than to "the benefit of the Loss".

Mr Fletcher submitted that, just as Clause 2.6 follows on from Clause 2.4 - and in that context he submitted it indicated that the final determination would be on the Assignee's tax return, i.e. it would be between the Inland Revenue and the Assignee - so the final determination must be understood as relating to the subject matter of the tax return, that is to say, the claim to have part of the benefit of the Loss by way of set off against chargeable gains incurred by the Assignee.

Mr Trower argued that Clauses 2.6 and 2.7 were rather different in subject matter and were set apart from Clauses 2.1 to 2.5. I would not accept that. I agree with Mr Fletcher that Clause 2 needs to be seen as a whole. Clause 2.6 is expressly referred to in Clause 2.2, and it is a matter of drafting style whether the adjustment provisions in Clauses 2.6 and 2.7 would follow directly after the basic provision as regards the price in Clause 2.2 or rather, as in the instant case, be put later in the clause, following on the provisions about the timing of payment of the second instalment. Nevertheless I cannot accept that Mr Fletcher's argument, that the final determination is the amount allowable in respect of the loss on the Assignee's tax return, gives "Loss" in Clause 2.6 the same meaning as it is defined as having in recital (D).

The judge's reading, for which Mr Fletcher argued, involves giving the defined term - "the Loss" - in Clause 2.6 not the meaning so defined but rather reading it as the loss allowable for capital gains tax purposes against the Assignee's chargeable gains so far as attributable to the loss associated with the Appointed Property. It seems to me that, in the context of this professionally drawn standard form document, dealing in a technical way with a technical subject matter, there would have to be a strong reason for such a departure from the literal and defined reading. The judge considered that it was justified because it led to a "more sensible commercial result". I would not regard that as an adequate basis for such a departure.

The judge observed in paragraph 77, which I have already quoted, that the Deed did not always use its language in a precise and technical way. He had in mind the words "all or any part of the Loss" in Clause 2.3 (1) (see paragraph 78 of the judgment). I agree that the words "all or" are unnecessary in this phrase since no Assignee would ever have the benefit of the whole of the Loss. In Clause 2.4, by contrast, the phrase is more general, and perhaps more apt - "the benefit of the Loss". The judge did not identify any other loose use of language in the Deed, although he could have mentioned an obvious slip in Clause 9.4 where the Assignee is obliged, apparently, to give notice to himself rather than to Burmarsh. It seems to me that the unnecessary inclusion of the words "all or" in Clause 2.3 (1) is too slender a basis for concluding that the defined term - Loss - was not always used with the defined meaning.

I therefore turn to the rival arguments from consequence or anomaly. Mr Trower submitted that the way in which the provisions as to price work is as follows. In principle, the Assignee pays one-third of the price up front and two-thirds once it is known that he can set something off in respect of the Loss against his capital gains tax liability. That occurs either on a notification under Clause 2.3 (1) or a failure by the Inland Revenue to notify under Clause 2.3 (2). The one exception as regards timing is the case of the Assignee's own default under Clause 2.5 or Clause 9.3.

Thus, except in the case of the Assignee's default, Burmarsh takes the risk as regards the second instalment if the scheme fails altogether but the Assignee takes that risk as regards the first instalment, so in proportions 1 to 2. If the scheme does not fail altogether, but the quantum of the original Loss is determined at a lower figure than £98,243,000, the price is abated, even to the extent of a possible repayment of part of the first instalment. Thus, Burmarsh takes the risk of that. In any other case the Assignee takes the risk, in the sense that if he gets less of a benefit from the scheme, but not because of a final determination of the quantification of the Loss, he still has to pay the full price.

Mr Trower pointed out that, on the settlement in question, Mr Walters would remain in pocket under the scheme even if he has to pay the full Consideration to Burmarsh, and he can deduct that full amount for capital gains tax purposes as well as a cost of acquisition. Presumably there might be a level at which compromise with the Inland Revenue would have left the Assignee out of pocket. But the Inland Revenue would have to recognise that in putting forward or negotiating any terms of settlement. Of course, no negotiations took place here with Mr Walters or the other Assignees. But the terms offered were those negotiated and agreed with Mr Race who could have been influenced by this factor.

Mr Fletcher submitted that this reading produced at least two anomalies which would be avoided by a direct link between the price and the commercial benefit under the scheme. The first is that, if Mr Trower is right, Burmarsh would be better off if the scheme failed altogether - because it would keep the first instalment - than if it succeeded but the quantum of the Loss was finally determined at less than one-third of £98,243,000. In the latter event, part of the first instalment would be repaid. Why, he asks, should complete failure lead to a better position for Burmarsh than success but with the quantum reduced to, say, one-quarter?

Mr Trower's answer is that, because quantum is something altogether outside the Assignees' knowledge or their ability to assess risk, it would not be anomalous for Burmarsh to accept the risk on that, whereas Burmarsh and the Assignee should reasonably share, in proportions 1 to 2, the risk of complete failure of the scheme, which each is as able as the other to assess.

Mr Fletcher's other anomaly arises from comparing a settlement with the Inland Revenue on quantum alone which, on Mr Trower's reading, would lead to an abatement under Clause 2.6, with a settlement on several points, including quantum, as in fact happened, under which it could not be said that the quantum of the Loss had been finally determined at a lower figure. The latter would lead, on Mr Trower's submission, to no reduction although it could be a matter of choice, and certainly with no objective significance, whether the settlement was expressed as a final determination of quantum or as, to put it collectively, a horse deal in a given percentage. I see some force in this latter point.

Mr Fletcher's counter to Mr Trower was that, if the scheme failed altogether, the Loss would have been finally determined at nil under Clause 2.6, even though it failed on technical grounds rather than on quantum, and that therefore in that event Clause 2.6 would apply and the whole Initial Consideration would be repayable under Clause 2.7. Thus, according to him, in all cases except that of the Assignee's default the price payable would be directly correlated with the economic benefit obtained by the Assignee from the use of the scheme.

For my part, I cannot accept this contention on Mr Fletcher's part. It would have been easy to achieve such a correlation on the Deed of Assignment, but the drafting would, it seems to me, have been quite different. Nothing in Clause 2 seems to me to suggest that there is to be such a correlation except as regards the single issue of the quantification of the Loss. I can see that this could result in differences of outcome which might, in some ways, seem somewhat arbitrary. But the starting point is the Assignee's obligation to pay the full amount under Clause 2.2. That is qualified only in two ways. Under Clause 2.3 the Acceptance Date may never happen, in which case the liability to pay the second instalment will not arise, and under Clause 2.6 the Consideration may be reduced in the event provided for.

I consider that the quite careful structure of Clause 2.3 (1) deals expressly with the case where the Assignee never gets any benefit from the scheme. It could not be right to read Clause 2.6 as also dealing with that case, and in a quite different way, so that not only would the second instalment not become payable but Burmarsh would have to repay the first instalment as well. Nor does it seem to me that the suggested anomalies are sufficient to justify reading Clause 2.6 as referring to anything other than a final determination of the amount of the Loss in a figure other than that provisionally agreed, namely £98,243,000. There is a rational basis for confining the clause to its expressed subject matter, that of the quantum of the Loss in the fund, namely that identified in Mr Trower's submission to which I have already referred.

The possible oddities identified by Mr Fletcher as resulting from this reading are not, as it seems to me, sufficient to justify reading Loss in this clause as having a meaning other than that given by the definition in recital (D). Assuming, as the judge held, that a final determination under Clause 2.6 has to be one as between the Assignee and the Inland Revenue, nevertheless there never was a final determination of the quantum of the Loss as defined. All that occurred was a conventional bargain by way of compromise of the dispute in which quantum was only one of the several issues, reached no doubt on the basis of each party's assessment of the strengths and weaknesses of their position and the risks and opportunities involved. It is not, in my judgment, something to which the second sentence of Clause 2.6 applies. It follows that, whereas the Acceptance Date occurred at the latest on 5 January 2005, giving rise, as the judge held, to an obligation to pay the balance of the Consideration within 14 days, nothing had happened before that to bring Clause 2.6 into play so as to require the Consideration to be reduced.

We had the benefit of submissions from both counsel as to the parties between whom any final determination had to be made and also as to the true meaning and effect of Clause 2.3 (1), Mr Trower submitting that a relevant notification had occurred in 2004. However neither of these points requires to be decided if I am right in my view that the final determination in Clause 2.6 means a final determination of the quantum of the allowed Loss for capital gains tax purposes attached to or associated with the two blocks of shares.

In the circumstances it is unnecessary to consider either of the other points since nothing turns on them for the purposes of this appeal, nor, so far as I am aware, for any other purpose.

I therefore respectfully differ from the judge in his conclusion as to what it is that is to be the subject of a final determination for the purposes of Clause 2.6. I conclude that the full amount of the second instalment of the Consideration became payable in January 2005. I would allow this appeal.

LORD JUSTICE JACOB: I agree.

THE CHANCELLOR OF THE HIGH COURT: I also agree.