I have changed my mind as to the appropriate finding in this case. I said there should be no damages. But now I recall the story about the rich man who was going to heaven and was stopped at the pearly gates by St Peter. St Peter asks God if he should let him in. God says "Ask him what good he has done in his life, that he deserves to be allowed into heaven." St Peter asks the rich man and he says "I gave two pounds to a Big Issue seller once, and three pounds to Cancer Research." Saint Peter tells this to God, who replies "Give him his fiver back and tell him to go to Hell."
I think the same line should be taken in this case. The plaintiffs were hoping to enter the paradise of a risk-free, low-cost tax shelter scheme. Fees were paid, commissions too, and now they want to be allowed to enjoy the benefits denied them. Perhaps his Lordship should order a refund of any commissions and fees, and tell them to go to hell!
Friday, 25 July 2008
Wednesday, 23 July 2008
Prudence and adventurism
Bertram -v- Baker Tilly
July 17th 2008, Court 59, Royal Courts of Justice, London.
Mr Justice Briggs presiding.
Reflections following the examination of Mr Christopher Tidmarsh, QC by Mr Christopher Symons, QC.
It is an accepted tenet of the English common law that business people have a right to order their affairs in such a way as to minimize their contribution to the public purse. As Lord Upjohn famously said “No commercial man in his senses is going to carry out transactions except on the footing of paying the smallest amount of tax [possible]”. It is on this jurisprudential foundation that the grand edifice of the ‘tax planning’ industry is built.
This is not a case, though, where there were a number of ways of carrying out an ‘economic’ business transaction and, after professional advice, one was selected as likely to be the most tax efficient. No, this was a case where individuals who had made many millions of pounds profit in the tax year in question were looking for ways to avoid or delay having to pay tax on those profits.
Certainly they had no intention to ‘evade’ taxation: to conceal those profits or deceive the Revenue. They were looking for legitimate ways to ‘shelter’ their profits from tax. There are overt ways to achieve this. The Exchequer, seeking to encourage investment in small business or special sectors, offers tax concessions to investors in these sectors. It is reported that the plaintiffs had previously sheltered profits by investing in Enterprise Zones, Venture Capital Trusts and Enterprise Investment Schemes. Concessions were offered for investments in British film production in the Finance Acts of 1992 and 1997. Profits invested in such a way would not be subject to taxation.
There is a reason why the Exchequer offers these concessions. Such investments, while politically or economically desirable to the government are, to regular investors, risky or unattractive in other ways. Such concessions are a form of government subsidy: otherwise taxable profits are channelled into government favoured enterprises. This case, however, is not a tax case. It is a negligence case. It is alleged that the plaintiffs were enticed into what they believed was a bona fide tax shelter scheme by the endorsement of a reputable firm of accountants and a tax barrister well known for his textbooks on the subject of UK tax.
Overt tax shelters, government sponsored schemes, are widely known and available to many or all investors. The scheme being proposed to the plaintiffs was not the overt tax shelter of investing in British Film, but the proposed covert exploitation of a perceived flaw in the wording of the Act in which the overt shelter was offered. This was not to be the acceptance of unattractive risks by the investors, in exchange for tax concessions. It was a way of construing the legislation to justify claiming tax allowances on a sum greater than the cash amount actually invested and to open the way to making a risk-free, pseudo-investment.
The scope for creative reading of the legislation arises from the provisions in the act for determining whether the film project in question is a British and small. Its Britishness being determined by the percentage of costs being incurred in the United Kingdom; it’s smallness depending on whether the ‘total production cost’ was to be less than £15 million. Total production cost, for these purposes, was deemed to include amounts already paid and an estimate of future costs payable as the film achieved predicted levels of distribution. The Britishness and smallness tests being administered by the Department of Culture, Media and Sport. Once such estimates were approved, they became an established part of ‘total production costs’ and were not subject to future revision. However when it came to defining the amount of cost that could be claimed for tax relief, the act failed to clearly state whether or not, and on what basis, such future ‘contingent’ costs could be included. The Capital Allowance Act 1990, Revenue practice, and indeed any reasonable conjecture as to the intentionality of the drafters of the provisions, all militate against the scheme’s proposed interpretation. However, in taxation law, the importance of literal interpretation is particularly great. The key word in this case was ‘incurred’. When, as part of their acquisition transaction, the plaintiffs assumed liability for certified future costs (albeit costs contingent on the film succeeding), had they ‘incurred’ allowable costs?
The defendant accountants had gone to some lengths to probe the Revenue on their view of this point: to see if they could get them to inadvertently support their proposed construction of the act. The position regards claims for tax relief by the original film producers would follow the normal model: amounts payable within 4 months are allowable in the relevant tax year; amounts payable after four months would be claimable when paid; amounts payable as and when prior contractual conditions were met would be claimable as and when paid. The position regards claims by those acquiring a film would be clear if they paid cash for the film and all its rights and obligations: subject to various limits and restrictions, such an payments would be allowable. However the scheme was for the ‘investors’ to pay over some cash and, as part of the consideration, to assume liability for the future costs. The future contingent costs. The costs that would never occur if the film was not as successful as once envisaged. The tax question was what amount of allowance could be taken for the future contingent costs in the tax year when the obligation was taken on. Perhaps its nominal value should be allowed. Perhaps such a value is to be discounted back to the present day, to allow for the fact it was payable in the future. Perhaps further adjustment should be made for the fact that the costs were not only future but contingent, and might therefore never become payable.
This left open the possibility that an ‘investor’ could claim relief for the projected total cost of a promising film and if it failed at the box office, keep the relief but not have to pay the costs upon which the relief was based. In effect, to get tax relief on an investment that was never actually made. No wonder the plaintiffs found this scheme unusually attractive – so attractive that they signed up without taking the conventional precaution of taking independent professional [legal] advice, [though high street accountants were consulted].
Was it predictable that when the plaintiffs took relief, the Revenue would enquire into the basis of their claim and a difference of opinion would ensue? It is the Revenue’s job, after all, to collect tax; they are likely to interpret tax statutes in accordance with their view of what Acts should say, even if they don’t actually say it. And they have the peremptory powers to establish their view as the status quo. They did so by issuing an assessment. It seems now that there is little expert dispute: this was entirely foreseeable. The scheme was certainly not so brilliant as to be unassailable. Less clear is the question as to whether it could be defended against assault. The plaintiffs, now, clearly think not, or else they would be seeking judicial review of the Revenue’s action not suing the scheme's advisors. The defendants’ expert witness described the scheme’s position as ‘tenable’, meaning arguable in court, rather than secure against assault. His view as to whether it could succeed in court relied on the vagaries of the judicial system rather than a conviction that the Law would be on the side of the tax payer.
Where does this leave us in trying to decide the rights and wrongs of the case? To be kind, on the one hand we have successful businessmen trying to find a legitimate shelter for their profits, on the other accountants trying to attract investment for British film and a tax lawyer advising on the most tax-effective way to do this. Clearly both sides over-reached. The businessmen in hoping to find a tax El Dorado (a legitimate, risk-free, low-cost tax shelter); the professional advisors in believing that such businessmen accept the risk of a Revenue challenge as par for the course. The missing distinction being that where a scheme attempts to minimize tax on an economic business transaction, an adverse tax ruling is a negative, but not destructive to the entire enterprise. But where a scheme is of itself an attempt to protect profits from taxation, then any failure is total failure in that mission. To be less kind, in this case both sides were greedy and got what was coming to them: the businessmen have contributed some of their profits to the public purse and the professionals have lost some of their reputation. Should the court now compensate one and punish the other? Let us consider on what grounds this would be justified.
At the general level of public policy, what outcome would best serve the interests of society? Should successful businessmen, though greedy and [somewhat] careless, be compensated by over-optimistic professional tax advisors? Clearly not. Whether or not it could have ever have succeeded in a court of law, the scheme was nonetheless a clear attempt to manipulate the meaning of a measure intended to support British film production in such a way as to totally defeat the intention of that measure by making it lucrative to produce films that fail. Neither side comes out of this wreathed in glory. As a matter of public policy such plaintiffs should be estopped from claiming against their confederates in attempted legalised robbery of the public purse.
Putting aside the specific context of this dispute, and looking at it as though the advice given was, for example, on the viability of an alchemic process rather than a tax manoeuvre, was the degree of unlikelihood of success such, that the defendants should be held liable for recklessly enticing the plaintiffs to participate in the scheme? The answer depends not on the quantum of likelihood, but the respective levels of adventurousness and prudence. The businessmen say they assumed the professionals would be more prudent, and the professionals [perhaps] that the businessmen would have more of an appetite for risk. Both sides appear to have misjudged the situation. On these facts, I would say the plaintiffs case should fail. Token damages? Not even that. [See next blog entry.]
The case, of course, will be decided on the Law not opinions from the gallery. If the viability of the scheme the defendants’ endorsed does become the issue, then they can always point out that the scheme, at least, might have worked. It's merits never reached the courts to be rejected and indeed the Revenue seems to have taken attempts at exploitation of the provisions seriously enough to tighten the legislation in 2002. It was a chancy, high-reward scheme but not one so outlandish as to have no conceivable hope of success.
I look forward to the closing arguments, the judgment and… the appeal.
July 17th 2008, Court 59, Royal Courts of Justice, London.
Mr Justice Briggs presiding.
Reflections following the examination of Mr Christopher Tidmarsh, QC by Mr Christopher Symons, QC.
It is an accepted tenet of the English common law that business people have a right to order their affairs in such a way as to minimize their contribution to the public purse. As Lord Upjohn famously said “No commercial man in his senses is going to carry out transactions except on the footing of paying the smallest amount of tax [possible]”. It is on this jurisprudential foundation that the grand edifice of the ‘tax planning’ industry is built.
This is not a case, though, where there were a number of ways of carrying out an ‘economic’ business transaction and, after professional advice, one was selected as likely to be the most tax efficient. No, this was a case where individuals who had made many millions of pounds profit in the tax year in question were looking for ways to avoid or delay having to pay tax on those profits.
Certainly they had no intention to ‘evade’ taxation: to conceal those profits or deceive the Revenue. They were looking for legitimate ways to ‘shelter’ their profits from tax. There are overt ways to achieve this. The Exchequer, seeking to encourage investment in small business or special sectors, offers tax concessions to investors in these sectors. It is reported that the plaintiffs had previously sheltered profits by investing in Enterprise Zones, Venture Capital Trusts and Enterprise Investment Schemes. Concessions were offered for investments in British film production in the Finance Acts of 1992 and 1997. Profits invested in such a way would not be subject to taxation.
There is a reason why the Exchequer offers these concessions. Such investments, while politically or economically desirable to the government are, to regular investors, risky or unattractive in other ways. Such concessions are a form of government subsidy: otherwise taxable profits are channelled into government favoured enterprises. This case, however, is not a tax case. It is a negligence case. It is alleged that the plaintiffs were enticed into what they believed was a bona fide tax shelter scheme by the endorsement of a reputable firm of accountants and a tax barrister well known for his textbooks on the subject of UK tax.
Overt tax shelters, government sponsored schemes, are widely known and available to many or all investors. The scheme being proposed to the plaintiffs was not the overt tax shelter of investing in British Film, but the proposed covert exploitation of a perceived flaw in the wording of the Act in which the overt shelter was offered. This was not to be the acceptance of unattractive risks by the investors, in exchange for tax concessions. It was a way of construing the legislation to justify claiming tax allowances on a sum greater than the cash amount actually invested and to open the way to making a risk-free, pseudo-investment.
The scope for creative reading of the legislation arises from the provisions in the act for determining whether the film project in question is a British and small. Its Britishness being determined by the percentage of costs being incurred in the United Kingdom; it’s smallness depending on whether the ‘total production cost’ was to be less than £15 million. Total production cost, for these purposes, was deemed to include amounts already paid and an estimate of future costs payable as the film achieved predicted levels of distribution. The Britishness and smallness tests being administered by the Department of Culture, Media and Sport. Once such estimates were approved, they became an established part of ‘total production costs’ and were not subject to future revision. However when it came to defining the amount of cost that could be claimed for tax relief, the act failed to clearly state whether or not, and on what basis, such future ‘contingent’ costs could be included. The Capital Allowance Act 1990, Revenue practice, and indeed any reasonable conjecture as to the intentionality of the drafters of the provisions, all militate against the scheme’s proposed interpretation. However, in taxation law, the importance of literal interpretation is particularly great. The key word in this case was ‘incurred’. When, as part of their acquisition transaction, the plaintiffs assumed liability for certified future costs (albeit costs contingent on the film succeeding), had they ‘incurred’ allowable costs?
The defendant accountants had gone to some lengths to probe the Revenue on their view of this point: to see if they could get them to inadvertently support their proposed construction of the act. The position regards claims for tax relief by the original film producers would follow the normal model: amounts payable within 4 months are allowable in the relevant tax year; amounts payable after four months would be claimable when paid; amounts payable as and when prior contractual conditions were met would be claimable as and when paid. The position regards claims by those acquiring a film would be clear if they paid cash for the film and all its rights and obligations: subject to various limits and restrictions, such an payments would be allowable. However the scheme was for the ‘investors’ to pay over some cash and, as part of the consideration, to assume liability for the future costs. The future contingent costs. The costs that would never occur if the film was not as successful as once envisaged. The tax question was what amount of allowance could be taken for the future contingent costs in the tax year when the obligation was taken on. Perhaps its nominal value should be allowed. Perhaps such a value is to be discounted back to the present day, to allow for the fact it was payable in the future. Perhaps further adjustment should be made for the fact that the costs were not only future but contingent, and might therefore never become payable.
This left open the possibility that an ‘investor’ could claim relief for the projected total cost of a promising film and if it failed at the box office, keep the relief but not have to pay the costs upon which the relief was based. In effect, to get tax relief on an investment that was never actually made. No wonder the plaintiffs found this scheme unusually attractive – so attractive that they signed up without taking the conventional precaution of taking independent professional [legal] advice, [though high street accountants were consulted].
Was it predictable that when the plaintiffs took relief, the Revenue would enquire into the basis of their claim and a difference of opinion would ensue? It is the Revenue’s job, after all, to collect tax; they are likely to interpret tax statutes in accordance with their view of what Acts should say, even if they don’t actually say it. And they have the peremptory powers to establish their view as the status quo. They did so by issuing an assessment. It seems now that there is little expert dispute: this was entirely foreseeable. The scheme was certainly not so brilliant as to be unassailable. Less clear is the question as to whether it could be defended against assault. The plaintiffs, now, clearly think not, or else they would be seeking judicial review of the Revenue’s action not suing the scheme's advisors. The defendants’ expert witness described the scheme’s position as ‘tenable’, meaning arguable in court, rather than secure against assault. His view as to whether it could succeed in court relied on the vagaries of the judicial system rather than a conviction that the Law would be on the side of the tax payer.
Where does this leave us in trying to decide the rights and wrongs of the case? To be kind, on the one hand we have successful businessmen trying to find a legitimate shelter for their profits, on the other accountants trying to attract investment for British film and a tax lawyer advising on the most tax-effective way to do this. Clearly both sides over-reached. The businessmen in hoping to find a tax El Dorado (a legitimate, risk-free, low-cost tax shelter); the professional advisors in believing that such businessmen accept the risk of a Revenue challenge as par for the course. The missing distinction being that where a scheme attempts to minimize tax on an economic business transaction, an adverse tax ruling is a negative, but not destructive to the entire enterprise. But where a scheme is of itself an attempt to protect profits from taxation, then any failure is total failure in that mission. To be less kind, in this case both sides were greedy and got what was coming to them: the businessmen have contributed some of their profits to the public purse and the professionals have lost some of their reputation. Should the court now compensate one and punish the other? Let us consider on what grounds this would be justified.
At the general level of public policy, what outcome would best serve the interests of society? Should successful businessmen, though greedy and [somewhat] careless, be compensated by over-optimistic professional tax advisors? Clearly not. Whether or not it could have ever have succeeded in a court of law, the scheme was nonetheless a clear attempt to manipulate the meaning of a measure intended to support British film production in such a way as to totally defeat the intention of that measure by making it lucrative to produce films that fail. Neither side comes out of this wreathed in glory. As a matter of public policy such plaintiffs should be estopped from claiming against their confederates in attempted legalised robbery of the public purse.
Putting aside the specific context of this dispute, and looking at it as though the advice given was, for example, on the viability of an alchemic process rather than a tax manoeuvre, was the degree of unlikelihood of success such, that the defendants should be held liable for recklessly enticing the plaintiffs to participate in the scheme? The answer depends not on the quantum of likelihood, but the respective levels of adventurousness and prudence. The businessmen say they assumed the professionals would be more prudent, and the professionals [perhaps] that the businessmen would have more of an appetite for risk. Both sides appear to have misjudged the situation. On these facts, I would say the plaintiffs case should fail. Token damages? Not even that. [See next blog entry.]
The case, of course, will be decided on the Law not opinions from the gallery. If the viability of the scheme the defendants’ endorsed does become the issue, then they can always point out that the scheme, at least, might have worked. It's merits never reached the courts to be rejected and indeed the Revenue seems to have taken attempts at exploitation of the provisions seriously enough to tighten the legislation in 2002. It was a chancy, high-reward scheme but not one so outlandish as to have no conceivable hope of success.
I look forward to the closing arguments, the judgment and… the appeal.
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