Grimm v Newman and another

COURT OF APPEAL (CIVIL DIVISION)

[2002] EWCA Civ 1621, [2003] 1 All ER 67, [2002] STC 1388

HEARING-DATES: 8, 9, 10 October, 7 November 2002

7 November 2002

CATCHWORDS:

Negligence — Professional person — Duty to exercise reasonable skill and care — Accountant specialising in advising resident non-domiciled individuals on United Kingdom tax avoidance — Accountant advising resident non-domiciled individual that no United Kingdom tax consequence would arise from proposed transaction whereby individual gave overseas assets to his wife in order for her to use them in purchasing a house in the United Kingdom jointly with him — Individual making gifts of his overseas assets to his wife — Joint house purchase taking place — Revenue investigating tax affairs of individual — Counsel advising that gift transaction giving rise to charge to tax on individual on basis of constructive remittance to him — Individual negotiating global settlement with Revenue — Specific amount in global settlement attributable to tax payable on gift transaction — Whether accountant negligent in advising on gift transaction

HEADNOTE:

G was an American citizen domiciled in the United States and resident in the United Kingdom. G received remuneration in respect of overseas employment which included shares in the V Group. From time to time a company in the V Group repurchased such shares. G purchased investments in the United States with proceeds of such repurchases. Had the proceeds of those repurchases or G's investments for the time being representing them been remitted by G to the United Kingdom he would have been liable to pay tax on them under Sch E Case III as his foreign emoluments. Section 132(5) of the Income and Corporation Taxes Act 1988 provided that for the purposes of Sch E Case III, emoluments should be treated as received in the United Kingdom if they were paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom and applied s 65(6)-(9) of the 1988 Act. Section 65 was directly concerned with tax chargeable under Sch D Cases IV and V, namely tax in respect of income arising from securities out of the United Kingdom except income charged under Sch C and tax in respect of income arising from possessions out of the United Kingdom not being income consisting of emoluments of any office or employment. Section 65(5) applied where the person concerned was, inter alia, not domiciled in the United Kingdom, and provided, inter alia, that tax should be computed in the case of tax chargeable under Case V, on the full amount of the actual sums received in the United Kingdom from remittances payable in the United Kingdom or from property imported, or from money or value arising from property not imported, or from money or value brought or to be brought into the United Kingdom. Section 14 of the Capital Gains Tax Act 1979 dealt with chargeable gains accruing to a person resident but not domiciled in the United Kingdom from the disposal of assets situated outside the United Kingdom. Tax was chargeable on the amounts received in the United Kingdom in respect of those chargeable gains, any such amounts being treated as gains accruing when they were received in the United Kingdom. Subsection (2) provided that there should be treated as received in the United Kingdom in respect of any gain all amounts paid, used or enjoyed in or in any manner or form transmitted to or brought to the United Kingdom and applied s 65(6)-(9) of the 1988 Act. In 1991 G engaged CV, a firm of accountants, to provide him with taxation advice. N was a chartered accountant and a partner in CV. In September 1991, G made inquiry of N as to whether he could, without giving rise to United Kingdom tax, make his intended wife, A, a gift from his assets outside the United Kingdom, which would then be transferred by her into the United Kingdom and used to acquire an interest for her in a house in London which they would purchase together. N advised that assets could be transferred to her outside the United Kingdom which she could then remit to the United Kingdom. In November 1991, after their marriage, G gave A various assets outside the United Kingdom with a value of $ US 685,000; he made her a further gift of $ US 100,000 in January 1992. In March 1992 G and A jointly purchased a house in London, T Lodge, each paying half of the purchase price and costs. On completion A's bankers remitted her share of the price to the solicitors acting for G and A. In 1997 counsel's advice was sought on various issues arising between G and the Revenue. Counsel advised, inter alia, that the gift to A and the subsequent remittance by her to the United Kingdom gave rise to a charge to tax on G. After negotiations with the Revenue an agreement was reached. The tax due, as acknowledged by G, included £ 90,953 in respect of Sch E Case III tax arising from remittances via A in connection with the purchase of T Lodge. G brought proceedings alleging that the advice given by N was negligent and in breach of CV's contract of retainer. N and CV contended, inter alia: (i) that the transaction did not give rise to a charge to tax as a taxable remittance of income or gains; (ii) that N's advice had been correct; and (iii) that if further or fuller advice had been given to G he either would not have proceeded at all with the proposal to acquire a new home with his wife or he would have made the purchase in a way that would have given rise to tax. In the High Court Etherton J found N and CV liable, holding that the Revenue had had a strong argument that the transaction fell within the charge to tax as a constructive remittance by G and that N should have recognised that the scheme ran a high risk of being challenged by the Revenue and stood a significant prospect of giving rise to a charge to tax on a constructive remittance by G and that had full and proper advice been given G would have structured the transaction, by which he funded and acquired the new home, in an alternative way that would have not given rise to United Kingdom tax and that would have been beyond challenge by the Revenue. N and CV appealed contending: (i) that the judge had been wrong in considering that he did not need to express a concluded view on whether the transaction gave rise to a charge to tax since the issue between the parties was whether the advice given had been correct in law; (ii) that as a matter of law the completed gift abroad by G to A of the investments with which she later funded the acquisition of T Lodge precluded any constructive remittance for the purposes of Sch E Case III, Sch D Case V or s 17 of the 1979 Act; (iii) that the judge should not have permitted G to advance the alternative scheme ultimately relied on by him; and (iv) that the alternative scheme would have been no more efficacious than N's scheme. G submitted, inter alia, that counsel for N and CV should have objected to the consideration of any alternative scheme when the topic was broached by counsel for G and should, consistently with CPR 16.5(2) (CPR 16.5(2) provides, '[w]here the defendant denies an allegation-(a) he must state his reasons for doing so; and (b) if he intends to put forward a different version of events from that given by the claimant, he must state his own version'.), have pleaded that no alternative scheme would work.

Held — (1) Per Sir Andrew Morritt V-C and Potter LJ. The advice given by N to G had been correct as a matter of law for the following reasons. First, it was not suggested that the gift by G in favour of his wife was not perfected in the United States at the time the transfers to her were made. Nor was it suggested that G retained any beneficial interest or contractual right of control over the property he gave to his wife. Thus in February 1992 the investments were the absolute property of A for her to do with them what she willed. At that stage the investments lost the characteristics which made them potentially liable to United Kingdom tax in the hands of G. Second, to fall within the charge to tax it was necessary that there be monetary or financial equivalence between the foreign income or emolument and that which was received, used or enjoyed in the United Kingdom. G had not received, used or enjoyed the monetary or financial equivalent of what he had given. Nor had he transmitted the proceeds of sale of the investments to the United Kingdom. Third, the analogy with a case where a taxpayer had received from a company controlled by his business associates the monetary equivalent of what he had disposed of to a company controlled by himself was false. There the original disposer and ultimate recipient had been the same and the 'conduit pipe' through which the money had been poured had been readily identifiable. Fourth, the legislation dealing with constructive remittances did not entitle the court to treat husband and wife as the same person. In the context of constructive remittances there was no specific provision to that effect and none could be implied. Nor was there anything in the Ramsay principle to justify any such treatment. The terms of s 132(5) of the 1988 Act and s 14 of the 1979 Act on the one hand, and s 65(5) (b) of the 1988 Act on the other, applied to the acts, use and enjoyment of A, but not to those of her husband. Fifth, the remittance by A to the solicitors jointly instructed on the purchase of T Lodge had been made in the course of satisfying her joint and several obligations to the vendors. It had not been a receipt by or on behalf of G in a several capacity, nor had there been any use or enjoyment of the money by him in such a capacity. It followed that N and CV's appeal should be allowed. Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229, Thomson (Inspector of Taxes) v Moyse [1961] AC 967 applied. MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2001] STC 237 considered. Harmel v Wright (Inspector of Taxes) [1974] STC 88 distinguished.

(2) The issue of whether the judge should have allowed G to rely on the alternative scheme was to be approached on the assumption that the advice given by N to G had not been correct. It had been for G to plead and prove loss arising from reliance on negligent advice. When specifically asked for details of the advice he considered N should have given, G had made no reference to any alternative scheme. In those circumstances the obligation imposed on a defendant by CPR 16.5(2) to state his own version of events could not possibly have arisen. The acquiescence of counsel for N and CV in counsel for G pursuing unpleaded allegations of which he had received adequate notice could not be treated as acquiescence in the pursuit of allegations which he had not. Moreover, the essential factual elements on which the point of law might have arisen, namely what the reasonable tax adviser would have advised and whether the claimant would have implemented that advice had never been explored let alone established. The judge should not have allowed G to rely on the alternative scheme unless and until an application by him for permission to amend had been made and allowed. Accordingly, on that ground also, N and CV's appeal would be allowed.

(3) Per Sir Andrew Morritt V-C and Potter LJ. On the assumption that tax was properly payable under a scheme such as N had originally advised, there was no basis on which tax could have been avoided by implementation of the alternative scheme. Accordingly, on the ground that G had sustained no loss by reason of N's negligence, N and CV's appeal would be allowed.

NOTES:

For negligence by a professional adviser in the context of tax avoidance, see Simon's Direct Tax Service A1.118.

For the remittance basis under Sch D, see ibid, E1.323.

For what constitutes receipt in the United Kingdom, see ibid, E1.324.

For remittance by persons resident in the United Kingdom chargeable under Sch E, see ibid E4.116.

For the charge to capital gains tax on amounts received in the United Kingdom by individuals resident but not domiciled in the United Kingdom in respect of chargeable gains accruing to them from the disposal of assets situated outside the United Kingdom, see ibid, C1.603.

CASES-REF-TO:

Carter (Inspector of Taxes) v Sharon [1936] 1 All ER 720, 20 TC 229.

Craven (Inspector of Taxes) v White [1988] STC 476, [1989] AC 398, [1988] 3 All ER 495, HL.

Furniss (Inspector of Taxes) v Dawson [1984] STC 153, [1984] AC 474, [1984] 1 All ER 530, 55 TC 324, HL.

Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325, [1974] 1 All ER 945, 49 TC 149.

IRC v McGuckian [1997] STC 908, [1997] 1 WLR 991, [1997] 3 All ER 817, 69 TC 1, HL.

MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2001] STC 237, [2001] 2 WLR 377, [2001] 1 All ER 865, 73 TC 1.

Ramsay (WT) Ltd v IRC [1981] STC 174, [1982] AC 300, [1981] 1 All ER 865, 54 TC 101, HL.

Thomson (Inspector of Taxes) v Moyse [1961] AC 967, [1960] 3 All ER 684, 39 TC 291, HL.

Timpson's Executors v Yerbury (Inspector of Taxes) [1936] 1 KB 645, [1936] 1 All ER 186, 20 TC 155, CA.

INTRODUCTION:

Action

John A Newman (N), a chartered accountant and Chantrey Vellacott DFK (CV), the firm in which N was a partner, appealed from the decision of Etherton J on 1 November 2001 ([2002] STC 84) finding N and CV liable in breach of contract and negligence to Charles Richard Grimm (G) in their advising that G could, without giving rise to a charge to United Kingdom tax, make his intended wife a gift from his assets outside the United Kingdom, which she would transfer into the United Kingdom and use to acquire an interest in a house in London which she would purchase jointly with G. After an inquiry into G's tax affairs by the Revenue, G negotiated a global offer of settlement which included a sum referable to the transaction on which G had sought advice. The facts and grounds of appeal are set out in the judgment of Sir Andrew Morritt V-C.

COUNSEL:

John Ross QC and John Tallon QC for N and CV; Edward Nugee QC and Michael Jefferis for G.

JUDGMENT-READ:

Cur adv vult 7 November 2002. The following judgments were delivered.

PANEL: SIR ANDREW MORRIT V-C, POTTER, CARNWATH LJJ

JUDGMENTBY-1: SIR ANDREW MORRITT V-C

JUDGMENT-1:

SIR ANDREW MORRITT V-C: Introduction

[1] At all material times the claimant (Mr Grimm) was domiciled in the United States but resident in England. He was the beneficial owner of substantial investments situated in the United States representing foreign emoluments taxable in the United Kingdom under Sch E Case III if, but only if, they were remitted to the United Kingdom. In the autumn 1991 he sought the advice of the first defendant (Mr Newman), a chartered accountant and partner in the second defendant (Chantrey Vellacott) whether he might, without adverse United Kingdom tax consequences, give to his then intended wife some of those investments to enable her to pay for a half interest in a house in the United Kingdom to be acquired by the two of them. Mr Newman advised that he could.

[2] Mr Grimm married Ms Aurora Lombardi on 29 September 1991 and gave her $ US 785,000 worth of those investments. On 30 March 1992 Mr and Mrs Grimm completed the purchase of Templewood Lodge, Hampstead as beneficial joint tenants at the price of £ 750,000. Mrs Grimm paid half the purchase price and costs amounting to £ 386,983 from the proceeds of sale of the investments given to her by Mr Grimm. Mr Grimm paid the other half with a loan to him, secured on Templewood Lodge, of £ 300,000 and the balance from his own resources. In due course the Inland Revenue claimed tax on the basis that the gift by Mr Grimm to Mrs Grimm and the purchase by her of an interest in Templewood Lodge constituted a remittance of Mr Grimm's foreign emoluments to the United Kingdom. On 18 May 1999 Mr Grimm paid £ 90,953, part of a larger amount, in respect of the tax so claimed.

[3] On 9 August 2000 Mr Grimm commenced these proceedings against Mr Newman and Chantrey Vellacott claiming damages for negligent advice. Such damages, quantified at £ 111,145, comprised the tax paid (£ 90,953), the appropriate proportion of the interest paid (£ 4,892), the fees paid for the advice of Mr Newman (£ 1,416) and a proportion of the fees paid in respect of the dealings with the Revenue (£ 13,884). The action was tried by Etherton J between 8 and 12 October 2001 (see [2002] EWCA Civ 1621, [2002] STC 84). The issues before him were (a) whether the advice given by Mr Newman was right, but if wrong, (b) whether Mr Grimm's purposes might have been achievable by other means, and if so, (c) what was the measure of Mr Grimm's loss.

[4] In his clear and careful judgment given on 1 November 2001 Etherton J expressed no view whether the advice given by Mr Newman was right or wrong. Instead he considered that a reasonably skilful and careful accountant tax adviser would have realised and informed Mr Grimm that it was advice which, if implemented, ran a high risk of being challenged by the Revenue with a significant prospect of success as the constructive remittance of foreign emoluments. He considered that an alternative scheme, the complete elements of which were not explained until the end of the closing submissions of counsel for Mr Grimm, would have achieved the desired result. He awarded damages to Mr Grimm in respect of the tax paid and interest but not in respect of the fees. He awarded Mr Grimm all the costs of the action, notwithstanding the very late appearance of the details of the alternative scheme.

[5] On this appeal the defendants claim that the judge was wrong in each of those respects. They submit that: (1) the judge should have determined that the advice of Mr Newman was right in law, (2) the judge should not have permitted Mr Grimm to advance the alternative scheme ultimately relied on by him, (3) such alternative scheme could have been no more efficacious than that on which Mr Newman relied, and (4) costs should have been awarded against Mr Grimm down to the time the alternative scheme emerged. By his cross-appeal Mr Grimm contends that (5) the judge was wrong not to award him damages by reference to the costs incurred in dealing with the Revenue. I will deal with these issues in due course, but first it is necessary to set out the facts and the course of the proceedings in more detail and to explain the tax treatment of foreign income and capital gains.

The facts

[6] Mr Grimm was a citizen of and domiciled in the United States. He became resident in the United Kingdom in 1983 and shortly thereafter joined the group of Dutch oil companies known as the Vitol Group. Within the group Mr Grimm enjoyed dual employment, that is to say he had one contract of employment with a non-resident employer covering duties to be performed wholly outside the United Kingdom and another prescribing his duties to be performed within the United Kingdom. His remuneration in respect of his overseas employment was, in part, shares in Vitol. From time to time a company in the Vitol Group repurchased such shares. It was from the proceeds of such repurchases that Mr Grimm accumulated the investments in the United States with which this case is concerned. It is not disputed that if the proceeds of the repurchase, or the investments for the time being representing them, had been remitted by Mr Grimm to the United Kingdom he would have been liable to pay tax on them under Sch E Case III as his foreign emoluments. Mr Grimm was advised in relation to his United States tax affairs by Mr Ott, then a partner in Kilpatrick & Cody, and in relation to his English tax affairs by Mr Newman.

[7] In 1991 Mr Grimm became engaged to marry Ms Aurora Lombardi. At that time he was living in rented accommodation. They decided that they should buy a house in London. On 24 September 1991 Mr Ott wrote to Mr Newman informing him that the marriage was to take place on 29 September 1991. He continued —

'1 he [Mr Grimm] has asked whether any actions can be taken by him either before or after his marriage to make tax free remittances by gift to his new wife. (His wife to be is English domiciled, to the extent this is relevant.) [Mr Grimm] is especially anxious to remit funds so that he may purchase a house in London.'

[8] Mr Newman replied the following day in these terms:

'It is possible for [Mr Grimm] to gift funds on the occasion of his marriage to his wife from his funds outside the UK, which would not be taxable in the UK. He may gift (say) enough funds for his wife to buy her half share of the house in London and provided that this is a gift on marriage this would be okay.

Although it is not absolutely necessary to make the gift on the day of the wedding, it should take place near to this date, so that the Inspector cannot challenge the question of reciprocity.'

[9] The next day, 26 September, Mr Grimm spoke to Mr Newman's assistant, Ms Alicia Shaw, concerning the advice Mr Newman had given. Her note records that:

'He wanted to know about remitting capital to UK to buy a house. I advised him that he could transfer money to his wife outside the UK — she could then remit this to UK to purchase a house as there is no reciprocity in the payment. I also advised him that he could remit any of his own capital to UK himself and this would not be taxable in UK. He said he would talk this over with you on your return on 10.10.91.'

[10] The marriage duly took place on 29 September 1991. On 18 October 1991 Mr Grimm signed a letter addressed to his wife stating:

'On the occasion of our marriage and with love and affection I hereby make a gift to you today of all my right, title and interest in the following assets: [details omitted]

I have arranged for Prudential Bache, Louisville, Kentucky to set up an account in your name and these assets will be transferred to your account as soon as they receive all the necessary paper-work required.'

Such transfers actually took place on 15 November 1991 to the value of $ US 685,000 and on 31 January 1992 to a value of $ US 100,000. It is common ground that such transfers, coupled with the declaration of intention contained in the letter of 18 October 1991, were valid and effectual to transfer the absolute beneficial ownership in the investments subject thereto from Mr Grimm to Mrs Grimm.

[11] On 23 October 1991 Mr Ott wrote again to Mr Newman. He recorded that:

'I met with Rick Grimm here in Atlanta last Friday and, among other things, we discussed the gift Rick will make to his new wife, Aurora, this week. As you will recall, Rick desires to make this gift to allow Aurora to acquire a one-half interest in a property they will jointly acquire in London later this year. For US tax purposes the amount of the gift will be limited to $695,000. The gift will be effected by transferring a mutual fund account, denominated in dollars, into Aurora's name, and that account is presently located (that is, managed by a company incorporated and resident) outside the United Kingdom.

At Rick's request I would like your blessing of this gift transaction for UK tax purposes. For your information I will soon prepare a letter for Rick to leave with Aurora evidencing the gift. Second, I would appreciate your confirmation that there are no UK gift tax consequences to the gift. Finally, I would appreciate your advice as to whether Rick may make additional gifts next year in the same fashion, with the amount of such gifts not being treated as remitted income or profits of Rick when remitted to the United Kingdom by Aurora.'

[12] Mr Newman replied to Mr Ott on 30 October 1991 in the following terms:

'I have reviewed our previous correspondence concerning Rick's gift to Aurora and I note that in a conversation which Rick had with Alicia Shaw he mentioned that Aurora is a UK domiciled lady. Whilst this does not affect the position, I would like confirmation of her domicile and residence position for my records.

The gift of $695,000 is okay provided it is made outside the UK and there is no reciprocity. The gift to purchase a half share in their marital home may go ahead without any UK tax consequences.

With regard to future gifts, I am a little wary of large gifts on a regular basis, as the Inspector may argue that the funds were being used to meet Rick's expenses. This is a situation which should be kept in check, but provided the authorities can be satisfied that there is no reciprocity then further gifts may be made, but once again I stress that the gift must be made outside the UK.'

As the judge recorded the size of the gift was relevant to United States, not United Kingdom, tax law.

[13] On 2 January 1992 there was a telephone conversation between Mr Grimm and Mr Newman. The contemporaneous note of the latter records that:

'Rick advised that he was contemplating purchasing a house for a price of around the half million mark. He is contemplating taking a mortgage outside the United Kingdom of £ 200,000 and I confirmed that if the interest on this mortgage was paid outside the United Kingdom out of non UK earnings, then this would not constitute a remittance to the United Kingdom of such non UK earnings.

With regard to the other terms of the mortgage, Rick advised that it would be an interest only mortgage and would be paid back either out of funds generated in the United Kingdom or on the sale of the property.

With regard to the source of the finance, Rick mentioned that his preceding mortgage had been with First National Bank of Boston and he would seek further mortgage from them. I mentioned that Barclays Bank, Isle of Man had been approached in connection with Keith Ott's mortgage-this was a possibility for him too.

Lastly, he had close working relationships with Nat West Bank in the United Kingdom and perhaps their overseas branches, Coutts & Co. Overseas would be appropriate.'

[14] On 1 February 1992 Mrs Grimm wrote to Prudential Bache Securities requesting them to transfer to her account with First National Bank of Boston (FNBB) in Guernsey $ US 786,000 from the proceeds of sale of the investments given to her by Mr Grimm. She also asked for any funds remaining to be transferred to Mr Grimm's account with Prudential Bache.

[15] The contract for Mr and Mrs Grimm to purchase Templewood Lodge was made on 24 February 1992. On 19 March 1992 FNBB Guernsey, on Mrs Grimm's instructions, converted the balance of $ US 786,000 with accrued interest into £ 454,763.23 and remitted £ 386,983 to the solicitors acting for Mr and Mrs Grimm in connection with the purchase of Templewood Lodge. The purchase was completed by a transfer dated 20 March 1992 to Mr and Mrs Grimm as 'joint tenants beneficially entitled'.

[16] Mr Grimm's tax return of the year ended 5 April 1992 contained no details of the gifts to Mrs Grimm and their subsequent application by her because, as Mr Newman said in his letter to Mr Grimm dated 29 October 1992, 'as this was a gift purely out of capital there is no need to report this to the Revenue'. In an earlier letter to Mr Grimm dated 14 October 1992 he had expressed the opinion that, as none of Mr Grimm's overseas income had been remitted to the United Kingdom, there was no need to report the details.

[17] On 13 October 1993 the Inspector of Taxes wrote to Chantrey Vellacott concerning Mr Grimm's holding and disposal of certain shares in Vitol. He referred to a potential Sch E liability and the fact that capital gains in respect of Mr Grimm's foreign assets were assessable on a remittance basis. He noted that Mr Grimm had bought his present residence on 20 March 1992 before the remittance of the proceeds of sale of those shares and asked for details of the purchase price of the house, how it was financed including details of the source of the cash required and the relevant dates. These and other details were provided by Mr Newman in subsequent correspondence with the Revenue.

[18] On 24 November 1997 Mr Newman, on behalf of Mr Grimm, sought the advice of counsel on the issues arising between Mr Grimm and the Revenue. The principal issues arose out of the dual employment of Mr Grimm by Vitol. With regard to the acquisition of Templewood Lodge Mr Newman's note records:

'[Mr Newman] asked counsel for his opinion on the gift made by Mr Grimm to his wife which she then used to assist in the joint purchase of their house. Counsel asked whether firstly she had financial resources of her own and whether she mixed the gifts with other assets or investments. [Mr Newman] advised that he was not certain on both those points but felt it was safe to assume that Mrs Grimm did not have substantial assets. Further such assets were not commingled with the proceeds of realisation of the US assets. Hence the money was passed straight through without being further invested in order to purchase the house. The gift was made in the expectation of the future joint purchase of the matrimonial property. Counsel's opinion was that it was not a pure gift: there were strings attached to it. If this was the case, Carter v Sharon would not be applicable as an analogy.'

[19] On 10 February 1998 there was a meeting between Mr Newman and officers of the Revenue for the purpose of ascertaining if a settlement of all outstanding issues could be achieved. After subsequent negotiations, an agreement was reached in March 1999 whereby the Revenue accepted from Mr Grimm £ 648,720 in respect of tax due and £ 27,000 in respect of interest and penalties. The tax due, as acknowledged by Mr Grimm, included £ 160,953 for tax under Sch E for 1991-92 of which £ 90,953 was in respect of Sch E Case III tax arising from remittances via Mrs Grimm, ie in connection with the purchase of Templewood Lodge.

The proceedings

[20] These proceedings were commenced on 9 August 2000. In para 9 of the particulars of claim Mr Grimm alleged that he made the gifts to his wife in reliance on the advice of Mr Newman and Ms Shaw to which I have referred at [8] and [9] above. In para 15 he alleged that Mr and Mrs Grimm proceeded with the purchase of Templewood Lodge in reliance on the advice of Mr Newman to which I have referred at [12] above. In paras 24 and 25 Mr Grimm alleged in conventional terms the duties of skill and care owed by Mr Newman and Chantrey Vellacott. Paragraph 26 contains the particulars of the alleged breach of duty in 13 sub-paragraphs. In one form or another they assert that the advice given by Mr Newman was wrong in law. In sub-para (3) it is asserted that:

'Alternatively they [sc Mr Newman and Ms Shaw] ought to have appreciated that there was a probability that the Revenue would claim tax on the basis mentioned [sc that the money used by Mrs Grimm to buy her interest in Templewood Lodge could be traced back to Mr Grimm's emoluments] and would be likely to succeed in its claim if the Claimant resisted.'

It was not alleged that Mr Newman should have advised Mr Grimm that, even if his advice was right in law, to follow it would be likely to attract a claim from the Revenue which would be costly to resist. In para 36(2) Mr Grimm alleged that:

'If the claimant had been advised that the arrangements connected with the gift would result, or that it was seriously possible that they would result, in liability for the tax which he has paid, he would not have made the gift to Mrs Grimm at all and would either have bought a house for a figure in the region of the £ 363,000 which he contributed to Templewood Lodge or he would have funded the balance of the price of a slightly more expensive house by using assets of his on which UK tax had already been paid.'

[21] In their defence the defendants maintained in para 15 that the advice given was correct and/or was advice which a reasonably competent accountant could and/or would have given. On 24 October 2000 the defendants sought further information in connection with, amongst other paragraphs of the particulars of claim, para 26. They asked:

'Please have regard to para 26 of your points of claim:

i. Is it your case that the gift to your wife could not have been structured so as to avoid UK tax?

ii. If it is your case that the gift could have been structured to avoid UK tax, give particulars of how you allege this result should have been achieved.

iii. What advice do you allege the defendants should have given you, but failed to give you.'

[22] The answers provided on 15 November 2000 were as follows:

'6.(i) The gift alone did not give rise to a UK tax liability. It is the claimant's case that it was the gift and the application of the remitted gift to purchase a matrimonial home, from which the claimant benefited, which gave rise to the UK tax liability.

6.(ii) The gift did not give rise to a UK tax liability. It was the gift and the application of the remitted gift to purchase a matrimonial home, from which the claimant benefited, which gave rise to a UK tax liability.

6.(iii) They should have advised that to make a gift in the US and remit the money to the UK for the purchase of a house from which the claimant would benefit would inevitably have created a UK tax liability.'

[23] Thus the case for Mr Grimm was that the advice given was wrong in law, that he should have been so advised and that had he been so advised he would not have made the gift at all, he would have bought another house for half the price, or he would have paid for a more expensive house from resources on which United Kingdom tax had already been paid. It was not then suggested that Mr Newman should have advised Mr Grimm to adopt some other scheme which would not have attracted a liability to United Kingdom tax. During the course of the hearing it was suggested that there were alternative schemes under which a house might be bought with the foreign emoluments through a non-resident trust or company. In addition reference was made to the possibility of Mr Grimm obtaining an offshore loan. But it was not until the end of the reply of counsel for Mr Grimm that any suggestion was made that Mrs Grimm should obtain an offshore back-to-back loan using the assets given to her by Mr Grimm for that purpose.

[24] I shall refer to the judgment of Etherton J in greater detail later but for present purposes it is sufficient to note some of his conclusions. First, he considered that it was unnecessary and, in the absence of the Revenue, undesirable to reach any conclusion whether or not the scheme advised by Mr Newman gave rise to a charge to tax. Second, he decided that the Revenue had a strong case for contending that the transaction did give rise to a charge to tax under Sch E Case III. Third, in failing to advise Mr Grimm to that effect and in failing to consider alternative schemes which would not give rise to a liability to United Kingdom tax the defendants were in breach of their contractual and tortious duties of care. Fourth, if full and proper advice had been given, Mr Grimm could and would have restructured the transaction in a way which would not have given rise to United Kingdom tax. Fifth, had he been so advised by Mr Newman, Mr Grimm would have proceeded with the purchase of a suitable house in London without giving rise to United Kingdom tax by means of a gift to Mrs Grimm of his overseas assets and the use by her of those assets as security for an offshore loan to her for use in the purchase of the property. Sixth, the loss caused by that negligence was the full amount of the tax incurred together with interest thereon.

Taxation of foreign income or gains

[25] The relevant provisions are those in force in 1991-1992. It is to those that I refer, though I do not understand that the provisions now in force are substantially different. Tax is chargeable under Sch E in respect of any office or employment on emoluments therefrom under three cases. Cases I and II do not apply to emoluments of a person not domiciled in the United Kingdom from an office or employment under which his duties are to be performed wholly outside the United Kingdom. Tax is charged under Case III on —

'1 any emoluments for any year of assessment in which the person holding the office or employment is resident in the United Kingdom (whether or not ordinarily resident there) so far as the emoluments are received in the United Kingdom 1'

[26] What constitutes such a receipt is provided for in s 132(5) of the Income and Corporation Taxes Act 1988 (the 1988 Act) in the following terms:

'For the purposes of Case III of Schedule E, emoluments shall be treated as received in the United Kingdom if they are paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom, and subsections (6) to (9) of section 65 shall apply for the purposes of this subsection as they apply for the purposes of subsection (5) of that section.'

[27] Section 65 is directly concerned with tax chargeable under Cases IV and V of Sch D, namely 'tax in respect of income arising from securities out of the United Kingdom except such income as is charged under Schedule C' and 'tax in respect of income arising from possessions out of the United Kingdom not being income consisting of emoluments of any office or employment'. Section 59(1) provides for the tax on such income to be paid by 'the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged'. Section 65(1)-(3) provides for the computation of tax payable under those cases except where, as provided for by s 65(4), the person concerned 'is not domiciled in the United Kingdom' or 'being a Commonwealth citizen or a citizen of the Republic of Ireland, is not ordinarily resident in the United Kingdom'.

[28] In cases to which s 65(4) applies it is provided by s 65(5) that tax shall be computed:

'(a) in the case of tax chargeable under Case IV, on the full amount, so far as the same can be computed, of the sums received in the United Kingdom in the year preceding the year of assessment, without any deduction or abatement; and

(b) in the case of tax chargeable under Case V, on the full amount of the actual sums received in the United Kingdom in the year preceding the year of assessment from remittances payable in the United Kingdom, or from property imported, or from money or value arising from property not imported, or from money or value 1 brought or to be brought into the United Kingdom, without any deduction or abatement 1'

[29] Section 65(6)-(9), which by virtue of s 132(5) apply to foreign emoluments as they apply foreign income, deal with cases in which foreign income is used to back loans to the person entitled to the income. They provide, so far as relevant, as follows:

'(6) For the purposes of subsection (5) above, any income arising from securities or possessions out of the United Kingdom which is applied outside the United Kingdom by a person ordinarily resident in the United Kingdom in or towards satisfaction of —

(a) any debt for money lent to him in the United Kingdom or for interest on money so lent, or

(b) any debt for money lent to him outside the United Kingdom and received in or brought to the United Kingdom, or

(c) any debt incurred for satisfying in whole or in part a debt falling within paragraph (a) or (b) above,

shall be treated as received by him in the United Kingdom (and, for the purposes of subsection (5)(b) above, as so received from remittances payable in the United Kingdom).

(7) Where a person ordinarily resident in the United Kingdom receives in or brings to the United Kingdom money lent to him outside the United Kingdom, but the debt for that money is wholly or partly satisfied before he does so, subsection (6) above shall apply as if the money had been received in or brought to the United Kingdom before the debt was so satisfied, except that any sums treated by virtue of that subsection as received in the United Kingdom shall be treated as so received at the time when the money so lent is actually received in or brought to the United Kingdom.

(8) Where —

(a) a person ("the borrower") is indebted for money lent to him, and

(b) income is applied by him in such a way that the money or property representing it is held by the lender on behalf of or to the account of the borrower in such circumstances as to be available to the lender for the purpose of satisfying or reducing the debt by set-off or otherwise,

that income shall be treated as applied by the borrower in or towards satisfaction of the debt if, under any arrangement between the borrower and the lender, the amount for the time being of the borrower's indebtedness to the lender, or the time at which the debt is to be repaid in whole or in part, depends in any respect directly or indirectly on the amount or value so held by the lender.

(9) For the purposes of subsections (6) to (8) above —

(a) a debt for money lent shall, to the extent to which that money is applied in or towards satisfying another debt, be deemed to be a debt incurred for satisfying that other debt, and a debt incurred for satisfying in whole or in part a debt falling within paragraph (c) of subsection (6) above shall itself be treated as falling within that paragraph; and

(b) "lender" includes, in relation to any money lent, any person for the time being entitled to repayment.'

[30] By virtue of s 14 of the Capital Gains Tax Act 1979 (the 1979 Act) a similar regime existed in relation to chargeable gains accruing to a person resident or ordinarily resident but not domiciled in the United Kingdom from the disposal of assets situated outside the United Kingdom. In such a case tax is chargeable —

'1 on the amounts (if any) received in the United Kingdom in respect of those chargeable gains, any such amounts being treated as gains accruing when they are received in the United Kingdom.'

Section 14(2) provides that:

'1 there shall be treated as received in the United Kingdom in respect of any gain all amounts paid, used or enjoyed in or in any manner or form transmitted to or brought to the United Kingdom, and subsections (6) to (9) of section 65 of the Taxes Act 1988 1 shall apply as they would apply for the purposes of subsection (5) of the section if the gain were income arising from possessions out of the United Kingdom.'

[31] Thus in the case of foreign emoluments or capital gains the test of receipt is whether the emolument or amount in respect of the gain is 'paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom' (see s 132(5) of the 1988 Act, and s 14(2) of the 1979 Act). In the case of income from foreign possessions taxable under Case V of Sch D the test is whether actual sums have been received in the United Kingdom from —

'1 remittances payable in the United Kingdom, or from property imported, or from money or value arising from property not imported, or from money or value 1 brought or to be brought into the United Kingdom 1'

(see s 65(5)(b) of the 1988 Act). In all three cases s 65(6)-(9) of the 1988 Act apply where the person entitled to the foreign emoluments, income or chargeable gains applies them in connection with a loan to himself.

[32] By 1991 there had been four reported cases relevant to the advice Mr Newman gave to Mr Grimm. In chronological order they are Timpson's Executors v Yerbury (Inspector of Taxes) [1936] 1 KB 645; Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229; Thomson (Inspector of Taxes) v Moyse [1961] AC 967 and Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325. The first three concerned income from foreign possessions taxable under Case V Sch D. Only the fourth is a decision directly on the application of the statutory predecessor of s 132(5) of the 1988 Act.

[33] In Timpson's Executors v Yerbury (Inspector of Taxes) [1936] 1 KB 645 a resident in the United Kingdom was the life tenant under a trust administered in accordance with the law of the State of New York. She directed the trustees to pay out of the income to which she was entitled allowances to her children resident in England. The payments were made by way of bills of exchange drawn on London, payable to the child in question and posted to such child or his or her banker. She was assessed to tax in the United Kingdom on the amount of those allowances on the ground that they were her income and had been remitted to the United Kingdom. The assessment was upheld by the Court of Appeal on the ground that the income represented by the bills of exchange was income to which the life tenant was entitled, though not received by her, when it came to the United Kingdom because the gift to the children was not complete prior to collection of the proceeds of the bills of exchange in the United Kingdom. Accordingly she was liable for tax under the predecessor of s 59 of the 1988 Act on the basis of entitlement not receipt. The Court of Appeal left open the question of liability if the gift had been completed outside the United Kingdom. That was the issue determined in Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229.

[34] In that case a person domiciled in the United States but resident in England paid allowances to her daughter resident in England out of the income of her investments in the United States. The method of payment was by means of a banker's draft drawn on a London bank payable to the daughter and posted to her in California. The banker's draft was bought by the mother's bank in California and debited to her account. The mother was assessed to tax under Case V of Sch D on the amount of the allowances. The assessment was discharged by the Special Commissioners and, on appeal, by Lawrence J.

[35] The Special Commissioners held that the gift to the daughter was completed in California, at the latest, when the banker's draft was posted to her on her mother's instructions. The judge concluded that the predecessors of ss 59 and 65(5) of the 1988 Act only applied to income from foreign possessions which is either received by the taxpayer in the United Kingdom or to which he is entitled at the time it comes to the United Kingdom. He specifically rejected the argument for the Crown that if the subject matter of the gift comes to the United Kingdom by direction of the taxpayer it is received by the taxpayer. Thus, for the purposes of Case V of Sch D, if there is a gift of foreign income completed outside the United Kingdom the donee may remit the subject matter or any other property representing it to the United Kingdom without a liability to United Kingdom tax being imposed on either the donor or the donee.

[36] Thomson (Inspector of Taxes) v Moyse [1961] AC 967 concerned a British subject resident in England but domiciled in the United States. He was the life tenant of trusts under the wills of both his father and his mother administered in accordance with the law of the State of New York. The income of the trusts was paid in United States dollars into the beneficiary's bank account with a bank in New York. The beneficiary drew cheques on that account in favour of banks in England and instructed them to convert them into sterling and credit the sterling equivalent to the beneficiary's account with that bank. The English bank sold the United States dollars to the Bank of England, as required by the Exchange Control legislation then in force, and credited the proceeds of sale in sterling to the beneficiary's account in England. The beneficiary was assessed to tax under Case V of Sch D. The Special Commissioners discharged the assessments on the grounds that the American income had not been brought into the United Kingdom. Their decision was upheld by Wynn-Parry J and a majority of the Court of Appeal.

[37] The House of Lords disagreed and reinstated the assessments. Lords Reid and Denning considered that the beneficiary had received sums 'from money or value arising from property not imported' within the third category of receipt for which the predecessor of s 65(4) provided (see [1961] AC 990-991, 1005). Lord Radcliffe, with whom Viscount Simmonds and Lord Cohen agreed, held that the beneficiary was liable for the tax claimed but on somewhat wider grounds. He said ([1961] AC 967 at 994-995):

'It is plain, therefore, that the "bringing in" of a person's income in this context means nothing more than the effecting of its transmission from one country to the other by whatever means the agencies of commerce or finance may make available for that purpose. If that transmission takes place, it is neither here nor there to ask whether anything, items of property or instrument of transfer, has actually been brought into the country or not.

No more is it relevant to know what has happened to the taxpayer's money in the country where the income arises. Ex hypothesi he has transferred it, in this case the dollar credit, to the purchaser who is to provide him with sterling. What use the purchaser may make of the dollars has no bearing on the question whether the taxpayer has received sums of sterling through remittance of his American income.'

[38] With reference to the predecessor of s 65(5) Lord Radcliffe added ([1961] AC 967 at 996):

'It is true that the rule then goes on to list a number of sources from which the sums to be computed may have been received; and this additional wording has, I think, been the origin of some of the mystification which has crept into this branch of the law. There has been a tendency to treat these several instances of the way in which income may be remitted as if they were limiting the generality of the phrase "actual sums received in the United Kingdom" and it may be said in defence of such a reading that the strict grammar of the sentence does so suggest. In my view, however, it would be wrong to give any weight to this; for I cannot think that it was ever the intention of the legislature to say in effect that whereas under Case IV all sums of foreign income were to be computable, if received in the United Kingdom, under Case V only those sums of income received were to be computable which were attributable to the specified operations or sources. There could be no reason for such a distinction. I think, therefore, that these four sub-heads, as they have been called, should be treated as illustrations, no doubt intended to form a comprehensive list of illustrations, of the way in which, when foreign income is transmitted to this country, the transmission can be effected and the sterling sums obtained. These sub-heads, which are not all very clearly phrased, should accordingly be construed according to their general sense and without too much nicety of language. For instance, "remittances payable in the United Kingdom" is a phrase capable of applying to the instrument employed to effect the transfer, to the credit arising from the transfer and, I think, to the whole operation of remitting money to be paid here.'

[39] In Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325 the taxpayer was domiciled in South Africa but resident in England. Before he came to England he arranged for the incorporation of two companies, Artemis Ltd and Lodestar Ltd. Artemis was controlled by the taxpayer but Lodestar, in which he had no interest, was controlled by his business associates. The taxpayer arranged for his foreign emoluments to be applied in the subscription of shares in Artemis, the subscription moneys were lent by Artemis to Lodestar which lent them to the taxpayer in England. The taxpayer was assessed on the amounts of the loans from Lodestar under Case III of Sch E. The assessment was upheld by the Special Commissioners. They found that all the transactions were parts of a pre-ordained plan and that the taxpayer had received foreign emoluments in the United Kingdom to the extent of the loans from Lodestar.

[40] The decision of the Special Commissioners was upheld by Templeman J on two grounds, first, that as the sums lent by Lodestar to the taxpayer were traceable to the taxpayer's foreign emoluments the latter were received by him in the United Kingdom and, second, the emoluments were used, enjoyed in and transmitted to the United Kingdom within the meaning of the predecessor of s 132(5) so as to constitute receipt.

[41] With regard to the first ground Templeman J said ([1974] STC 88 at 93-94, [1974] 1 WLR 325 at 328):

'Has the taxpayer received in the United Kingdom emoluments from the South African company? Although at various stages different cheques are written on different accounts, one can, with fascination, with certainty and no difficulty at all, follow, for example, a salary of £ 25,000 paid by cheque from the South African company to the taxpayer; then by cheque by the taxpayer to Artemis; then by cheque by Artemis to Lodestar, and finally by cheque by Lodestar to the taxpayer in England. Ignoring for the moment exchange control and the possibility that some cheques will be in rands and others in sterling, and ignoring the costs that will drip away, that sum begins in South Africa from the employers of the taxpayer and ends up in this country with the taxpayer. In my judgment, on the peculiar circumstances of this case-and I say nothing about other cases where it may be possible that the money does, en route, disappear and it is not possible to follow with the same certainty as in the present case-the sums which the taxpayer eventually receives, represent and are the emoluments which start off from his South African employers in the first place 1

This case depends on keeping one's eye on the emoluments, on the original sum of £ 25,000, and seeing what happens to it. It is true that it is paid over at one stage as purchase price for shares, and it is true that one cannot normally identify money, but in the present case you can; you do not need to get behind the corporate veil to perceive and know that the £ 25,000 which goes in as purchase price for shares comes out on the instant in the form of the loan to Lodestar. In my judgment, on the wording of s 156 [the predecessor of s 14(1)], one does not need to strip aside the corporate veil if you find that emoluments, which mean money, come in at one end of a conduit pipe and pass through certain traceable pipes until they come out at the other end to the taxpayer.'

[42] With regard to the second ground, after referring to the speech of Lord Radcliffe in Thomson (Inspector of Taxes) v Moyse [1961] AC 967, Templeman J said ([1974] STC 88 at 96-97, [1974] 1 WLR 325 at 331):

'Counsel for the Crown submitted in the alternative that the word "received" should now be given a slightly wider extension because of para 8 of Sch 2 to the Finance Act 1956, which requires that "emoluments shall be treated as received 1 if they are paid, used or enjoyed". He does not submit that "paid, used or enjoyed" substantially alter the authorities on receipt or the test adumbrated by Lord Radcliffe, but he does say in a proper case they can shed light on and possibly give some small extension to the word "receipt".

If one asks whether, in fact, the original sums paid in South Africa have been used or enjoyed in any manner or in any manner or form transmitted, it is difficult to avoid the conclusion that they have been used, enjoyed and transmitted. All I need to say is that para 8 is not inconsistent with the result which I reach by construing s 156 in the light of the authorities.'

Was the advice of Mr Newman correct in law?

[43] In his judgment Etherton J said ([2002] STC 84 at [60] and [61]):

'[60] The way in which these submissions on each side were made at the trial appeared to be an invitation or request to me to determine whether, as a matter of law, the transaction by which assets given by Mr Grimm to his wife, and then remitted by her to the United Kingdom, and applied in part in the purchase of Templewood Lodge, gave rise to a charge to tax. I am, naturally, concerned to be asked to give an absolute ruling on this issue, in the absence of the Revenue. My decision on the point would not, of course, be binding on the Revenue in any subsequent proceedings involving a taxpayer, since the Revenue is not a party to these proceedings. On the other hand, my decision could affect the way in which future transactions are arranged, and would be of some persuasive authority in any future proceedings involving the Revenue, even though I would not have had the benefit of submissions on its behalf in these proceedings.

[61] I do not consider that, in order to determine the proceedings before me, it is necessary for me to express a concluded view on whether the relevant transaction by Mr Grimm and Mrs Grimm gave rise to a charge to tax under all or any of the statutory provisions which I have set out earlier in this judgment. It is sufficient to say, for the reasons that I will elaborate, that the Revenue had a strong case for contending that the transaction did give rise to a charge to tax under Case III of Sch E.'

[44] Counsel for Mr Newman and Chantrey Vellacott submitted that the judge was wrong in this respect. They pointed out, as the judge had correctly observed, that the issue between the parties was whether or not the advice given was correct in law. The case for Mr Grimm was conducted throughout on the footing that it was not; not that, if right, Mr Grimm should have been warned of problems he might face in satisfying the Revenue to that effect. Further they drew attention to the fact that the judge had no such reservation in relation to the alternative scheme which he considered would not have given rise to a liability to tax in the United Kingdom. They did not question the validity of the considerations which led the judge to avoid deciding this issue but contended that they were inadequate. Counsel for Mr Grimm conceded that it would have been more satisfying if the judge had decided on the validity of Mr Newman's advice and urged us to do so.

[45] Like the judge I too am reluctant to decide a point of such potential importance in the absence of the Revenue and in the knowledge of its possible impact on the tax planning of others. Nevertheless it is not possible to avoid a decision on whether or not the advice of Mr Newman was correct in law for that was and is precisely the issue between the parties. Further if the efficacy of the alternative scheme is relevant, which it is, then a decision on the soundness, as a matter of law, of the original advice is necessary too. Those who may read this judgment must bear in mind that we have not heard any argument from the Revenue and the conclusion we reach relates to the efficacy of advice given in 1991. They must consider for themselves the extent to which they may safely rely on our decision in arranging their affairs now.

[46] Though Etherton J did not decide in terms whether the advice of Mr Newman was correct as a matter of law it is plain from the terms of his judgment what his conclusion would have been. Accordingly I should refer to his reasoning and conclusion.

[47] He considered that Mr and Mrs Grimm acquired Templewood Lodge as beneficial joint tenants (see [2002] STC 84 at [62]) and that as between Mr and Mrs Grimm the liability to repay the mortgage loan of £ 300,000 was that of Mr Grimm alone (see [2002] STC 84 at [63]). He continued ([2002] STC 84 at [64]):

'I do not, however, accept [counsel for the defendants'] submission that it is not strongly arguable that the acquisition by Mr Grimm of an interest in Templewood Lodge as a beneficial joint tenant, as a result of the use by Mrs Grimm of assets given to her by Mr Grimm and applied in the purchase of the property, brought Mr Grimm within the charging provisions concerning taxable remittances by ordinarily resident, but non-domiciled, individuals. It seems to me, in the light of the very wide scope of the charging provisions relating to Case V of Sch D, Case III of Sch E, and s 12 of the 1992 Act, as elucidated in the case law to which I have already referred, that the Revenue had a strong argument that the transaction fell within those charging provisions. Not only did the acquisition of his interest in the beneficial joint tenancy give Mr Grimm a proprietary right which carried with it a right of physical occupation, but it conferred on Mr Grimm a prospective right to ownership of the entire property. I do not accept [counsel for the defendants'] submission that, in the absence of any evidence that there was a market for the sale of a right of survivorship or as to the value of such a right, there could be no realistic argument by the Revenue that the transaction gave rise to a charge to tax. The prospective, albeit contingent, right of Mr Grimm to the entire property was manifestly an important benefit to him. It gave him the contingent right to ownership of a much larger property than he could have afforded from his own resources, apart from the gift to his wife. That was plainly a financial benefit to him, even if it turned upon an uncertain and possibly remote contingency, namely his wife predeceasing him before sale of Templewood Lodge or severance of the joint tenancy so as to create Mr Grimm and Mrs Grimm equitable tenants in common.'

[48] The judge then considered the effect of various publications from the Revenue and others and concluded ([2002] STC 84 at [68]):

'In my judgment, a reasonably skilful and careful accountant tax adviser, with the same specialism as the first defendant, would have recognised in 1991 that a scheme, by which assets representing income were paid to Mr Grimm's wife and applied by her in the purchase of property jointly acquired with Mr Grimm and intended to be occupied by them, ran a high risk of being challenged by the Revenue and stood a significant prospect of giving rise to a charge to tax on a constructive remittance by Mr Grimm.'

He added ([2002] STC 84 at [69]):

'Nor did [Mr Newman] advise or seek to ascertain whether some other scheme for the joint purchase of a house in London might be feasible, with less risks of a charge to tax. In my judgment, any reasonably skilful and careful accountant tax adviser, in the position of the first defendant, would have done all these things.'

[49] The judge then dealt with a number of matters no longer in issue. They were that neither the knowledge and experience of Mr Grimm nor the co-ordinating role of Mr Ott qualified the unambiguous nature of the advice Mr Newman gave. The judge found as a fact that both Mr Grimm and Mr Ott reasonably believed that if Mr Grimm acted as advised in the letters of 22 and 30 October 1991 no taxable remittance would be involved. He acquitted Mr Newman of any breach of duty in failing to advise Mr Grimm not to fund the acquisition of his interest by means of the mortgage loan for £ 300,000 (see [2002] STC 84 at [76]) and found as a fact that Mrs Grimm's contribution was of half the purchase price and related expenses and not more (see [2002] STC 84 at [77]). In relation to the warnings against 'reciprocity' contained in the letters of 25 September and 30 October 1991 and the telephone conversation on 26 September 1991 he said ([2002] STC 84 at [78]):

'It appears to me, and I understood [counsel for the defendants] ultimately to concede, that this issue has no practical bearing on the question of whether [Mr Newman] failed to exercise due skill and care in his advice. It is perfectly clear from the letter of 30 October 1991 that [Mr Newman] was advising that an outright gift of assets outside the jurisdiction, by Mr Grimm to his wife, which assets were then applied in the joint purchase of a property, for their joint occupation, would not give rise to a charge to tax on a remittance. Indeed, the defendants' case, as I have said, is and has always been that the actual transaction carried out by Mr Grimm and Mrs Grimm did not give rise to a charge to tax. I have held, contrary to their submission, that the Revenue had a strongly arguable case that the transaction did give rise to a charge to tax on a remittance, not because of any "reciprocity" in relation to the original gift by Mr Grimm to Mrs Grimm, but in consequence of the width of the relevant statutory charging provisions and the gloss placed upon them, particularly by the judgment of Templeman J in Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325.'

[50] Etherton J concluded ([2002] STC 84 at [79]):

'For the reasons I have set out in this part of my judgment, I find that the defendants, in breach of their duty of care and in breach of their contract of retainer, failed to exercise reasonable skill and care in the advice given to Mr Grimm in September and October 1991.'

[51] The submission of the defendants is that the completed gift abroad by Mr Grimm to Mrs Grimm of the investments with which she later funded the acquisition of her interest in Templewood Lodge precludes any constructive remittance for the purposes of Sch E Case III, Sch D Case V or s 14 of the 1979 Act. They rely on the decisions in Timpsons Executors v Yerbury (Inspector of Taxes) [1936] 1 KB 645 and Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229, particularly the latter. They contend that such investments in the beneficial ownership of Mrs Grimm lost their characteristics of income or chargeable gains of Mr Grimm.

[52] The defendants point out that Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229 was not cited in Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325. They distinguish the latter on the grounds that there was no gift to another and, in this case, the recipient in the United Kingdom was Mrs Grimm not Mr Grimm. They submit that in this case it is not possible to stigmatise the intermediate transactions as a 'conduit pipe' as it ran between different persons and, as far as Mr Grimm is concerned, what was put in by him was different in kind to any conceivable use or enjoyment by him which came out. They rely on the speech of Lord Radcliffe in Thomson (Inspector of Taxes) v Moyse [1961] AC 9677 as demonstrating that what must be received in the United Kingdom is the financial equivalent to the foreign income or chargeable gain.

[53] The case for Mr Grimm in this court is not the same as that advanced before Etherton J. It is clear from the passage from the judgment of Etherton J (see [2002] STC 84 at [64]), which I have quoted at [47] above, that the case before him which, in effect, he accepted was that the constructive remittance by Mr Grimm arose out of his proprietary interest in Templewood Lodge which carried with it a right of physical occupation and the potential accrual of Mrs Grimm's interest by survivorship. In this court in both the written and oral argument of counsel Mr Grimm relied on the remittance made on 19 March 1992 by FNBB Guernsey, on the instructions of Mrs Grimm, of £ 386,983 to the solicitors acting for Mr and Mrs Grimm to be applied by them on completion of the purchase.

[54] Counsel for Mr Grimm contend that the money so received by the solicitors may be clearly traced from and identified with the foreign emoluments or income of Mr Grimm. They claim that in consequence the foreign emoluments of Mr Grimm were 'paid [to], used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom' by Mr Grimm. In this connection they rely on Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325. In addition they point out that the gift was part of a pre-arranged tax avoidance scheme in which Mr Grimm evidently expected, with justification, that his new wife would use the gift to buy her interest in Templewood Lodge. In this connection they point to the dictum of Lord Nicholls of Birkenhead in MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6 at [2], [2001] STC 237 at [2], [2001] 2 WLR 377, that WT Ramsay Ltd v IRC [1981] STC 174, [1982] AC 300 —

'1 brought out three points in particular. First, when it is sought to attach a tax consequence to a transaction, the task of the courts is to ascertain the legal nature of the transaction. If that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. Courts are entitled to look at a prearranged tax avoidance scheme as a whole. It matters not whether the parties' intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.'

[55] It is also necessary to mention the second and third points to which Lord Nicholls referred. The second is to the effect that the first point does not entitle the court to treat the transaction or any step in it as a sham or to go behind it in search of some supposed underlying substance. Rather it enables 'the court to look at a document or transaction in the context in which it properly belongs' (see [2001] STC 237 at [4], [2001] 2 WLR 377). The third point is that having identified the legal nature of the transaction the courts 'must then relate this to the language of the statute' (see [2001] STC 237 at [5], [2001] 2 WLR 377).

[56] Counsel for Mr Grimm accepted that if there had been no pre-arrangement for the application of the gift then the principle of Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229, which they did not dispute, would have applied so that any subsequent application by Mrs Grimm such as occurred in this case would not have constituted a constructive remittance.

[57] I prefer the arguments for the defendants. First, it is not suggested that the gift by Mr Grimm in favour of Mrs Grimm was not perfected in the United States at the time the transfers to her were made. Nor is it suggested that Mr Grimm retained any beneficial interest therein or contractual right of control over the property he gave to Mrs Grimm. Thus in February 1992 the investments were the absolute property of Mrs Grimm for her to do with them what she willed. On the basis of Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229, at that stage the investments lost the characteristics which made them potentially liable to United Kingdom tax in the hands of Mr Grimm.

[58] Second, the passages in the speech of Lord Radcliffe in Thomson (Inspector of Taxes) v Moyse [1961] AC 9677 to which I have drawn attention do point to the need for monetary or financial equivalence between the foreign income or emolument and that which is received, used or enjoyed in the United Kingdom. Mr Grimm did not receive, use or enjoy the monetary or financial equivalent of what he gave. Nor did he transmit the proceeds of sale of the investments to the United Kingdom.

[59] Third, the analogy with Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325 is false. In that case the taxpayer received from Lodestar the monetary equivalent of what he had disposed of to Artemis. The original disposer and ultimate recipient was the same and the 'conduit pipe' through which the money was poured readily identifiable.

[60] Fourth, the real issue, as it seems to me, is whether the legislation dealing with constructive remittances entitles the court to treat husband and wife as the same person. In my view it does not. In many contexts specific provision is made to that effect. But in the context of constructive remittances there is no such provision in the legislation and, in my view, none can be implied. Likewise, there is nothing in the Ramsay principles as explained by Lord Nicholls in MacNiven to justify any such treatment. If one considers the terms of s 132(5) of the 1988 Act or s 14 of the 1979 Act on the one hand or s 65(5)(b) on the other they apply to the acts, use and enjoyment of Mrs Grimm but not to those of her husband.

[61] Fifth, the particular feature now relied on, namely the remittance by Mrs Grimm to the solicitors jointly instructed on the purchase of Templewood Lodge was made in the course of satisfying her joint and several obligation to the vendors. It was not a receipt by or on behalf of Mr Grimm in a several capacity; nor was there any use or enjoyment of the money by him in such a capacity. No doubt this is why it was not a point the Revenue ever relied on.

[62] I appreciate that I am reaching a conclusion different from that of counsel consulted by Mr Newman on behalf of Mr Grimm on 24 November 1997. He considered that it was not a pure gift because 'strings were attached to it' with the consequence that Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229 had no application. If by strings he meant that Mr Grimm retained some beneficial interest in or contractual control over the investments then his instructions were incorrect. If, on the other hand, he meant an expectation as to the use Mrs Grimm might put the gift, such as Lord Nicholls referred to in MacNiven (see [54] above), that could not, in my view, justify ignoring the gift to Mrs Grimm and its effect (see [55] above). Similarly I am reaching a conclusion at variance with that of the Revenue. The basis of the Revenue's claim, as set out in their letter of 21 August 1997, was that the remittance to Mrs Grimm was analogous to the use of company loans as in Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325. For the reasons I have given I do not agree. In a letter of 19 January 1999 Mr Newman reported to Mr Grimm the outcome of his meeting with Mr Barker of the Revenue Special Compliance Office held to discuss a 'without prejudice' offer to settle all the issues between the Revenue and Mr Grimm. He said:

'With regard to the remittance via Mrs Grimm, again they were quite firm on this and at the end of the day I feel that this amount [which included £ 90,953] should be accepted and the double tax credit is indeed a generous offer.'

[63] In my judgment the advice given by Mr Newman to Mr Grimm was correct as a matter of law. Thus I would reject the basis on which the case for Mr Grimm was advanced. As the judge recorded, no complaint was made of Mr Newman's conduct of the negotiations with the Revenue by which the many and various claims of the Revenue were compromised. It follows that I would allow the appeal and dismiss the claim. However in the absence of any argument from the Revenue I ought to examine the other grounds on which the defendants rely.

Should the judge have allowed Mr Grimm to rely on the alternative scheme?

[64] It is necessary to approach this issue on the assumption that my conclusion on the correctness of Mr Newman's advice is wrong. Etherton J said ([2002] STC 84 at [82]):

'For the reasons which I state more fully below, I find that, if full and proper advice had been given by the first defendant, Mr Grimm could and would have structured the transaction, by which he funded and acquired the new home, in a way that would have not have given rise to United Kingdom tax and that would have been beyond challenge by the Revenue.'

Later, Etherton J found that Mr Grimm —

'would have purchased Templewood Lodge, or something slightly smaller and less expensive, but costing more than the amount of his contribution to the joint purchase of Templewood Lodge'

(see [2002] STC 84 at [87]). As he observed at [88]: 'The issue which then arises is whether Mr Grimm could and would have purchased a property in a way that would not have given rise to tax.'

[65] The judge then referred to the paucity of information as to what assets Mr Grimm held outside the United Kingdom and their derivation. He concluded ([2002] STC 84 at [90]):

'I am unable, on the evidence, to conclude that Mr Grimm had sufficient funds, which had already borne United Kingdom tax, to fund directly the purchase of Templewood Lodge or a similar property in 1992.'

[66] Etherton J rejected the suggestions, for a variety of reasons, that Mr Newman could or should have advised the purchase through offshore trustees or companies and continued ([2002] STC 84 at [91]):

'This aspect of the case, therefore, rests on whether I am able and willing to find, as a fact, that, if so advised, Mr Grimm would have entered into a scheme, in which sufficient money would be raised by way of a loan made abroad, to purchase a suitable property in the United Kingdom, such loan being backed by a deposit of foreign assets.'

[67] In [92] the judge recorded that, at the very end of his submissions in reply, counsel for Mr Grimm suggested a scheme whereby Mr Grimm would have given the investments to Mrs Grimm for her to deposit with a foreign bank as security for a back-to-back loan to be applied by her in the purchase of the house in London. In [93] he recorded that such a submission did not sit comfortably with the answers to the requests for further information to which I have referred in [22] above and he recorded the protests of counsel for the defendants that there was no evidence as to the cost of such an arrangement nor as to any loan to value ratio.

[68] Etherton J concluded ([2002] STC 84 at [94]):

'Nevertheless, it seems to me right that Mr Grimm should be able to advance the case that he would have proceeded with the proposal to acquire a new home in London by making an overseas gift of overseas assets to his wife, which she then would use to raise an overseas loan, if he had been advised that such an arrangement would clearly and certainly not give rise to United Kingdom tax. Mr Grimm's position that he would have gone ahead with the purchase of property, if he had known that the first defendant's advice was not correct, and would and could have done so in a way that would not give rise to United Kingdom tax, is not inconsistent with Mr Grimm's pleaded case. Further, the first defendant himself confirmed, as I have said, in his oral evidence that the offshore back-to-back loan scheme would be effective for tax purposes and had been the subject of advice by him to clients. Further still, the first defendant's attendance note of 2 January 1992 makes clear that he was aware that Mr Grimm was intending to enter into a foreign loan arrangement, and the first defendant advised that, provided the interest on the mortgage was paid outside the United Kingdom out of non-United Kingdom earnings, it would not constitute a taxable remittance to the United Kingdom.'

[69] He concluded that such a scheme would have been implemented and would have been effective. He said ([2002] STC 84 at [95]):

'The following factors underlie, in my judgment, the likelihood that such a transaction would have been implemented. First, I have already referred to my conclusion that Mr Grimm would have wished, if possible, to purchase a house for himself and his new wife. Second, it is clear that Mr Grimm would have been willing to make a substantial gift or gifts to his wife in order to effect that objective. Third, Mr Grimm was in fact willing to raise some of the funds for the purchase of Templewood Lodge by means of a foreign loan. Fourth, arrangements, under which Mrs Grimm raised money for the purchase by way of a foreign, or increased foreign loan, posed no particular disadvantages from Mr Grimm's perspective. Fifth, it is clear from the oral evidence of the first defendant himself that the cost of such a back-to-back loan transaction was low. Sixth, there is no reason to suppose that a bank lender would not be willing to lend the same amount as cash deposited by way of security; and, in any event, it is clear that Templewood Lodge, or any property purchased, would have sufficient equity to enable a loan to be raised considerably larger than the £ 300,000 mortgage loan in fact secured on Templewood Lodge. Seventh, Mr Grimm had sufficient assets which he could have employed, if necessary, to make interest payments on any such loan. For all these reasons I find that Mr Grimm, if so advised, would have proceeded with the purchase of a suitable property in London, without giving rise to United Kingdom tax, by means of a gift to his wife of overseas assets and the use of those assets to raise a foreign loan to his wife, for use in the purchase of the property.'

[70] Counsel for Mr Grimm contended before us that it was his case throughout the hearing before Etherton J that some alternative scheme would have worked. He suggested that there was no obligation to plead any specific alternative scheme for what was involved was an issue of law, but, if there was, all that was missing was a detail of the alternative scheme relied on which should be treated with more benevolence than a wholly new case. He suggested that the fault was that of the defendants. He submitted that counsel for the defendants should have objected to the consideration of any alternative scheme when the topic was broached by counsel for Mr Grimm in his opening submissions and should, consistently with CPR 16.5, have pleaded that no alternative scheme would work.

[71] These are bold submissions. It was for Mr Grimm to plead and prove loss arising from reliance on negligent advice. When specifically asked for details of the advice he considered Mr Newman should have given, Mr Grimm made no reference to any alternative scheme. In those circumstances I do not see how the obligation imposed on a defendant by CPR 16.5(2) to state his own version of events could possibly arise. There was no relevant allegation to deny. The acquiescence of counsel for the defendants in counsel for Mr Grimm pursuing unpleaded allegations of which he had received adequate notice cannot be treated as acquiescence in the pursuit of allegations of which he had not. Furthermore, reference to the transcript demonstrates that, when the defendants' counsel first became aware of the detail of the alternative scheme at the end of the final submissions of Mr Grimm's counsel, he did indeed object at having to consider it.

[72] Moreover this is not a 'mere pleading point'. There was no reference to this scheme in the evidence of the expert called by Mr Grimm. No reference to a back-to-back loan to Mrs Grimm on the security of the foreign investments was ever put to Mr Grimm or Mr Newman. Nor was there any evidence to indicate the likely terms of such a loan or whether Mrs Grimm was either willing or able to comply with them. Thus the essential factual elements on which the point of law might have arisen, namely what the reasonable tax adviser would have advised and whether Mr Grimm would have implemented that advice, were never explored let alone established.

[73] The judge was properly concerned not to put the parties to the delay and expense involved in any adjournment necessitated by an application for permission to amend if it could be avoided. Nevertheless, in my view, the course the judge took was impermissible. The allegation of the alternative scheme was inconsistent with the answer to the request for further information. The back-to-back loan scheme about which Mr Newman had been examined was a putative loan to Mr Grimm or other the taxpayer whose foreign assets or emoluments were to be used in the context of s 65(6)-(9). He was not examined about a back-to-back loan to Mrs Grimm and the use by her of the proceeds in the purchase of a house in the United Kingdom. In my view the judge should not have allowed Mr Grimm to rely on this alternative scheme unless and until an application by him for permission to amend had been made and allowed.

[74] Accordingly, on this ground too I would allow the appeal and discharge the judge's order. But it would be unsatisfactory to leave the matter there for, if the alternative scheme did work and I am wrong on the correctness of Mr Newman's advice, the proper course might be for us to consider such an application at this stage and, if allowed, to direct a new trial. In those circumstances it is necessary to consider whether the alternative scheme would have worked.

Would the alternative scheme have avoided United Kingdom tax?

[75] Again this question must be approached on the footing that Mr Newman's original advice was wrong in law. This would be on the basis that the principle of Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229 did not apply because the funds used in the purchase of the house could be traced back to or identified with Mr Grimm's foreign assets or emoluments in accordance with Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325, with or without assistance from the Ramsay principles.

[76] Counsel for Mr Grimm submitted that on the gift of the foreign assets to Mrs Grimm they lost their characteristics of foreign income or emoluments. Further he contended that such assets when charged by Mrs Grimm to the foreign lender would be seen to remain offshore, only the proceeds of the loan being remitted by Mrs Grimm to the United Kingdom. He accepted that the provisions of s 65(8) would apply only to a loan to Mr Grimm, not Mrs Grimm. In that connection he contended that, as those provisions are narrowly drawn to apply only to the person in whose hands the foreign assets or emoluments are taxable in the event of remittance to the United Kingdom, it is impermissible to apply the principles of Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325 or Ramsay to extend them to others.

[77] I am unable to see any basis on which tax could be avoided by implementation of the alternative scheme on the assumption that it was properly payable under a scheme such as Mr Newman originally advised. First, the fact that s 65(8) applies to the person entitled to the foreign income or emoluments, not his or her spouse, does not by necessary implication exclude the identification of such foreign income or emoluments with the proceeds of the loan when remitted to the United Kingdom. A provision of limited application is not inconsistent with the application of other principles outside the sphere of its application. Second, the alternative scheme would be as much a pre-arranged tax avoidance scheme as that proposed by Mr Newman. If it is right to withhold the application of the principle of Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229 in the one case then it is just as right to do so in the other. Indeed the interposition of the offshore loan to Mrs Grimm might be regarded as a prime example of the insertion of an unnecessary step simply for tax reasons.

[78] It follows that if we had been invited to entertain an application by Mr Grimm for permission to amend I would have refused it. In those circumstances there could have been no reason to order a new trial. But the consequence is also that Mr Grimm has failed to prove that the breach of duty by Mr Newman caused him any loss. Accordingly I would allow this appeal on the alternative ground that Mr Grimm sustained no loss by reason of Mr Newman's negligence.

Costs

[79] If the appeal is allowed then the order for costs of which complaint is made falls with the rest of the order. There is no need for me to deal with this issue.

Quantum of damages

[80] Similarly the cross-appeal in respect of the judge's refusal to award damages in respect of the fees charged by Chantrey Vellacott for Mr Newman's initial advice or conduct of the negotiations with the Revenue do not arise either. Nor is there any need for me to deal with those issues.

Conclusion

[81] In these circumstances I would allow the appeal and discharge the order of Etherton J because either the advice of Mr Newman was correct in law or, if it was not, Mr Grimm failed to establish that he had sustained any loss by relying on it.

JUDGMENTBY-2: POTTER LJ

JUDGMENT-2:

POTTER LJ: [82] I agree. I have however had the advantage of reading in draft the judgment of Carnwath LJ who differs upon the issue of negligence and, in these circumstances, I merely add a few words of explanation for preferring the reasoning of the Vice-Chancellor.

[83] So far as Mr Newman's original advice was concerned, it seems to me plain from a study of the pleadings and the transcripts that the proceedings were conducted upon the basis that Mr Grimm roundly asserted that Mr Newman's advice that the scheme was effective for the purposes of avoiding United Kingdom tax was wrong, whereas the defendants' case was that it was correct. The flags of the parties were thus pinned to their respective masts, and the judge was invited to deal with the matter on that basis, until the allegation of negligence was expanded in the course of Mr Jefferis's final submissions, for Mr Grimm, on 12 October 2001. In these circumstances it seems to me that, not only should the judge have dealt with the issue of negligence on the basis pleaded, but he should have confined himself to it. It was always open to Mr Grimm to conduct the case on the basis which found favour with the judge, but they did not do so. The nearest the pleadings came to it was the averment pleaded as set out at [20] in the judgment of the Vice-Chancellor. That did not relate specifically to the advice which it is alleged should have been given. In relation to that very question, at para 6 (iii) of the defendants' request for further information dated 20 October 2000, they specifically asked: 'What advice do you allege the Defendants should have given you but failed to give you?' only to receive the reply:

'They should have advised that to make a gift in the U.S. and remit the money to the U.K. for the purchase of a house from which Mr Grimm would benefit would inevitably have created a U.K. tax liability.'

The case was thereafter conducted on that basis.

[84] It does not seem to me that this is a mere pleading point, contrary to the merits of the case. It is a point of substance because the issue of what effect such advice would have had was never explored in evidence and it may well have been that, given the defendants' view that the scheme propounded was effective, the risk of challenge by the Revenue would have been taken by Mr Grimm in any event. Certainly the judge held specifically that, on the basis of Mr Grimm's evidence (and contrary to his pleaded case), had he been appropriately advised he would in any event have proceeded with the purchase of the house whether or not on the basis of the alternative scheme, because he wished to buy the house and had the (foreign) assets with which to do so.

[85] For these reasons I agree with the judgment of the Vice-Chancellor on the question of whether or not the case in negligence as put against the defendants was established. On that basis the issues raised in the cross-appeal do not need to be decided.

JUDGMENTBY-3: CARNWATH LJ

JUDGMENT-3:

CARNWATH LJ: [86] I gratefully adopt the Vice-Chancellor's exposition of the facts and the course of the proceedings. For the reasons given, I agree that the appeal should succeed on the grounds relating to the alternative scheme. The judge should not have allowed the alternative scheme to be introduced; and, in any event, adoption of that scheme would not have improved Mr Grimm's chances of avoiding liability to tax on the gift. Where I differ, with respect, is in relation to the conclusion that negligence was not established. This does not affect the conclusion on the appeal, which is the most substantial aspect of the case. However, there is also a cross-appeal, which on this basis would have become a live issue.

[87] The critical allegation, in my view, is that contained in para 26(3) of the particulars, which has already been quoted. The Mr Grimm's case did not depend simply on the contention that Mr Newman's advice was wrong in law. The alternative contention was that, whatever the courts might ultimately have been held to be the correct position in law, there was a significant likelihood that the Inland Revenue would claim tax, and would succeed. Implicit in that, as I read it, is the allegation that Mr Newman should have been aware of that risk, and taken it into account in his advice to his client. That alternative formulation expresses the practical reality that, whatever the position in strict law, most people prefer to avoid a battle through the courts with the Revenue; and they expect their tax advisers to take reasonable steps to protect them from such an outcome.

[88] The likelihood became fact. As soon as the Revenue became aware of the circumstances surrounding the gift and the house-purchase, they did claim tax, and they were successful in their claim. The legal position was not tested before the commissioners or the courts. But that was because (as alleged in para 28-29 of the particulars of claim), Mr Grimm was given advice by counsel (Mr Peacock), which, with the concurrence of Mr Newman, led to him conceding the claim.

[89] In those circumstances, it is small comfort to Mr Grimm to be told by this court, some years later, that if he had fought it out, he would have succeeded. More importantly, in my view, it is irrelevant to the substance of the case on this formulation. The issue is not whether the advice would ultimately have been upheld, because that is not what happened. The issue is whether a reasonably skilful adviser, in Mr Newman's position, should have recognised the risk of what in fact occurred, and have advised his client accordingly.

[90] I am conscious that the other members of the court take a different view of the way the case was developed. The Vice-Chancellor, referring to para 26(3) of the particulars of claim, says:

'It was not alleged that Mr Newman should have advised Mr Grimm that, even if his advice was right in law, to follow it would be likely to attract a claim from the Revenue which would be costly to resist.'

I accept that this way of putting the matter was far from the forefront of Mr Grimm's case, as developed before the judge. However, it was in my view sufficiently raised (at least implicitly) by the pleadings, and, having reviewed the transcript of the hearing, I do not think it can be said to have been abandoned.

[91] For this reason, I think that the judge was entitled to treat this as a live issue, and to base his decision upon it. Having taken that course, and having regard to his subsequent findings, he was also entitled, in my view, to decline to express a concluded view on the tax point. This is not because of any qualms about deciding such an issue in the absence of the Revenue, or because of its possible effects on other taxpayers. If such an issue arises on the case as pleaded, then it must be decided. However, the mere fact that the parties want it to be decided is not enough. On the pleadings, the judge was entitled, in my view, to approach the case on the alternative basis that there was a significant likelihood of the Revenue making the claim, and being successful.

[92] This way of looking at the case cannot, in my view, be avoided by casting doubt on Mr Peacock's advice, or on the adequacy of his instructions. That was not the way the case was put by the defendants at the hearing. This was not surprising, since it was Mr Newman who gave the instructions, and carried out the advice. In evidence, Mr Newman himself expressed his respect for the advice of counsel, and expanded on this in re-examination. Counsel seems to have taken the common sense view that, whatever the theory, a tribunal would need convincing evidence (including some 'grilling' of Mr Grimm in cross-examination), before being persuaded that there were no 'strings attached' to the gift. After discussion, Mr Newman was evidently content to accept that view of the matter, and to act on it.

[93] Nor did Mr Newman deny in cross-examination, that, if he had thought there were significant risks attached to the scheme, he would have been under a duty to advise of those risks. As I understand it, on this issue, the defendants had two main points: first, that the risks, if any, were reasonably perceived as not significant-'within the risks of normal life'-particularly having regard to the financial experience of both Mr Grimm and his American adviser; and, secondly, that the concession of the Revenue's claim was part of a 'global settlement' and therefore not specifically attributable to the advice in relation to the gift.

[94] The judge rejected both arguments, and in my view was entitled to do so on the evidence. On the first point, he held that the scheme 'stood a significant prospect of giving rise to a charge to tax' (see [2002] STC 84 at [68]); that the advice was unqualified, and Mr Grimm, notwithstanding his financial experience, was entitled to treat it as such (at [73]); and that none of the textbooks or other matters relied on by the defendants justified a reasonably skilful adviser giving such unqualified advice (at [74]). On the second point, he found 'no cogent evidence' that the concession on the gift was accepted by the Revenue as a reason for reducing other claims (at [100]).

[95] I accept that the above is a somewhat selective view of the proceedings. This simple way of expressing the case may not have emerged with great clarity from the pleadings, or from Mr Grimm's submissions and evidence. On some aspects, his case had a chameleon-like quality, notably on the questions of what would have happened if he had been advised of the risk, what other points might have taken by the Revenue to defeat the scheme, and what alternative schemes might have been more successful. However, as I have sought to explain, it was a view of the matter which was open to the judge on the pleadings. It is not excluded by a finding of law against Mr Grimm on the tax point.

[96] There remains the question whether a reasonably skilful adviser should have recognised the risk that the scheme would be subject to successful challenge. This does involve a consideration of the relevant statutory provisions and authorities, not as a matter of legal decision, but as they would have been perceived by a competent adviser at the time. Here again, I gratefully acknowledge the analysis of the statutory provisions and the four most relevant cases in the judgment of the Vice-Chancellor, including their relation to the most recent developments in the WT Ramsay Ltd v IRC [1981] STC 174, [1982] AC 300 line of authorities. I am also grateful for the clarity of the arguments as presented to us, by Mr Tallon QC and Mr Nugee QC (for the defendants and Mr Grimm respectively). In fairness to the judge, it is right to acknowledge that the emphasis of those legal arguments was rather different to that adopted below.

[97] In the light of that analysis, I see the force of the view that, on the completion gift to the wife in America, the emoluments lost their character as such; and that accordingly there were no emoluments to remit, actually or constructively, to this country. I have two main concerns. The first relates to the width of the expression 'paid, used or enjoyed', as it appears in s 132(5) of the Income and Corporation Taxes Act 1988 (the 1988 Act); the second, to the application of the Ramsay principle.

[98] The precise meaning of the words 'used or enjoyed' in s 132(5) does not appear to have been considered in any reported case. That provision (as it appeared in the Finance Act 1956) did not form the basis of the decision in Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325, although Templeman J referred to it as 'not inconsistent' with the result he had reached (see [1974] STC 88 at 97, [1974] 1 WLR 325 at 331). It is of interest that counsel for the Revenue (Mr Vinelott QC, as he then was) did not submit that those words 'substantially alter' the effect of the earlier cases; but merely that they 'can shed light on and possibly give some small extension to the word "receipt".' (see [1974] STC 88 at 97, [1974] 1 WLR 325 at 331).

[99] That limited view would have been consistent with the evidence of Mr Churchill, Mr Grimm's expert witness in this case, based on his previous experience as a tax inspector, and his interpretation of the Revenue's current instructions to its inspectors. He said that the word 'enjoyment' in s 132(5) 'would have been interpreted as economic enjoyment rather than personal enjoyment'. The approach taken by the Revenue in this case, which treated Mr Grimm's occupation of Templewood Lodge as 'enjoyment', was at odds with 'the official stated view that there must be financial consideration for a remittance to take place'.

[100] Mr Tallon's submissions were to similar effect. He said that s 132(5) was 'concerned with turning the income which has arisen in one country into the expendable resources of its owner in the UK'. He illustrated this by two contrasting cases: in the first, a husband in the United States of America uses his emoluments to make a gift of a necklace to his wife, who then brings it to, and wears it in, the United Kingdom; in the second, the husband in the United States of America uses the emoluments to buy a pair of expensive cuff-links for himself, and then brings them to, and wears them in, the United Kingdom. The section would bite on the second but not the first. In the first, the necklace, by the time it reaches the United Kingdom, has ceased to represent 'an expendable resource' of the husband, even though he may enjoy seeing his wife wear it. In the second, on the other hand, the cuff-links arrive in the United Kingdom as 'an expendable resource' of his own (even if, I infer, he only bought them because his wife enjoyed seeing him wear expensive cuff-links).

[101] I find the example helpful, because it does focus attention on a crucial point. 'Enjoyment' by the husband is not enough to bring the section into play. The enjoyment must be of his 'emoluments', in some form. If the emoluments have been converted, by a valid gift, into a necklace belonging to his wife, they are no longer his emoluments, and are therefore not within the section. On the other hand, the illustration also underlines the difficulty, and potential artificiality, of applying such narrow distinctions in the context of dealings between husband and wife.

[102] The second concern relates to the application in the present context of the Ramsay line of authorities, and requires a more detailed explanation. On the basis of the arguments presented to us, I would not, respectfully, dissent from the analysis, in the judgment of the Vice-Chancellor, of the facts of this case by reference to the most recent of those authorities, MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2001] STC 237, [2001] 2 WLR 377. In saying that, I have regard particularly to the speech of Lord Hoffmann, with which all their Lordships (including Lord Nicholls) agreed.

[103] Like the Vice-Chancellor, I would underline the point that we have not heard argument from the Revenue. Furthermore, some (not least the judge in Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325-see Lord Templeman 'Tax and the Taxpayer' [2001] LQR 575) might regard the speeches in MacNiven, as representing a retreat from previous statements in their Lordship's House, including the classic statement by Lord Brightman in Furniss (Inspector of Taxes) v Dawson [1984] STC 153 at 166-167, [1984] AC 474 at 527. Lord Nicholls himself arrived at his conclusion via a 'road to Damascus' (see [2001] STC 237 at [13], [2001] 2 WLR 377). A careful tax adviser today would need to keep in mind the statements of Lord Steyn and Lord Cooke of Thordon in IRC v McGuckian [1997] STC 908 at 916, 920-921, [1997] 1 WLR 991 at 1000, 1005), about the open-ended nature of the journey. It might be a mistake to regard MacNiven as representing the last word.

[104] More significantly, as the Vice-Chancellor observes, we are concerned with the efficacy of advice given in 1991. The Ramsay principle was at a much earlier stage of its development. Interestingly, at that time the most recent case at in the House of Lords was Craven (Inspector of Taxes) v White [1988] STC 476, [1989] AC 398, which might itself be regarded as marking an earlier phase of retrenchment. However, I do not think that the question in this case can be answered by an over-sophisticated analysis of the ebb and flow of judicial views as to the limits of the doctrine, over the years since Ramsay itself in 1982. What matters is how a reasonably careful tax adviser would have seen the position in 1991.

[105] The way the case is put in the particulars of claim (para 26(4)) is as follows:

'The first defendant and Miss Shaw would or ought to have appreciated also that in the alternative the Revenue would claim tax and would, on Mr Grimm giving honest evidence about his motive for the gift, succeed in claiming tax or be likely to succeed in claiming tax on the footing that the arrangements whereby the assets formerly held in Mr Grimm's PBS nominee account were ultimately used by Mrs Grimm to assist in buying whatever house they selected represented a pre-ordained series of steps within the doctrine of Furniss v Dawson notwithstanding that the gift was received by Mrs Grimm free of any legally enforceable obligation to use it in a particular way.'

[106] The judge did not comment specifically on this formulation, nor on the Ramsay line of cases, although Mr Newman was cross-examined about it. The judge relied simply on the 'gloss' placed on the statute by Harmel v Wright (Inspector of Taxes) [1974] STC 88, [1974] 1 WLR 325 (see [2002] STC 84 at [78]). Nor was there any evidence that, in making their claim, the Revenue had been relying on the Ramsay approach. Their case apparently was that the transfer of funds was analogous to the use of company loans in Harmel v Wright, and that the 'funds were remitted to the UK and enjoyed by Mr Grimm by way of purchase and occupancy of the UK home'.

[107] Ramsay was not mentioned by Mr Peacock in his advice. As I have said, he took the simple view that the gift had 'strings attached', and was not therefore within Carter (Inspector of Taxes) v Sharon (1936) 20 TC 229. There is no record of any more detailed discussion of the law. I agree with Mr Tallon that the 'strings', which Mr Peacock would have had in mind, were some form of obligation on the wife to put the funds towards the purchase of the house in the United Kingdom, sufficient to detract from the quality of the transfer as an absolute gift in America. In legal terms, the consequence would have been to move the facts across the narrow border between Carter and Timpson's Executors v Yerbury (Inspector of Taxes) [1936] 1 KB 645 (as already explained by the Vice-Chancellor). As in Timpson, the gift would not have been complete until its English purpose had been achieved.

[108] Mr Tallon's simple answer to this is that there was no evidence before the judge, and no finding by him, that there were any such 'strings'. The judge directed his attention to the use made of the funds in England, but overlooked the fact that, by that time, they had ceased to be emoluments of Mr Grimm, and therefore were on the Carter side of the border. That is fair comment on the evidence as it has emerged in this case, between two parties neither of whom, at the time of the Revenue's inquiries, had any reason to suggest otherwise.

[109] However, it is not the way it was seen by Mr Peacock at that time, and one can understand why. There was no contractual obligation on Mrs Grimm to use the funds towards the purchase of the house. But there was a clear expectation that she would do so, as part of what was a predetermined scheme. That is at least a sufficient starting point for a Ramsay analysis. As Lord Nicholls said (MacNiven [2001] STC 237 at [2], [2001] 2 WLR 377):

'It matters not whether the parties' intention to proceed with a scheme through all its stages takes the form of a contractual obligation or is expressed only as an expectation without contractual force.'

He is there summarising the essential (and controversial) rationale of the Ramsay doctrine, as explained for example by Lord Brightman in Furniss (Inspector of Taxes) v Dawson [1984] STC 153 at 166, [1984] AC 474 at 526) —

'1 no distinction is to be drawn for fiscal purposes, because none exists in reality, between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatim.'

[110] Of course, wearing MacNiven spectacles, one recognises that this is not the end of the analysis, for the reasons explained by the Vice-Chancellor. However, it may help to explain why Mr Peacock (advising some four years before MacNiven) might have been sceptical about Mr Newman's protestations that there were 'no strings', merely because there was no contractual obligation; or as to the prospects of maintaining this position in the face of strong cross-examination before the commissioners.

[111] I am conscious that I must not read thoughts into the minds of those involved, beyond what is supported by the evidence. Whether or not such a Ramsay analysis underlay Mr Peacock's thinking is not in the end material. I come back to what seems to me the simple and correct view of the case. In the event, the scheme did not work, because counsel advised that it could not be defended. The reasons which led Mr Peacock to give that advice have not been criticised by Mr Newman. Nor did he give any reason why they should not have equally been in his mind, as a specialist adviser, in 1991. The proof of the pudding was in the eating.

[112] Accordingly, in respectful disagreement with the other members of the court, and for somewhat different reasons, I would uphold the judge's finding of negligence.

[113] Notwithstanding this difference, I am unable, for the reasons given by the Vice-Chancellor, to agree with the judge's view of the consequences of that negligence. There was no alternative scheme, and therefore fuller advice would not have led to the charge to tax being avoided. In theory, there remains the question whether any part of the claim subject to the cross-appeal should have been allowed. The answer to this is not straightforward, since the case before the judge proceeded on the footing that there was an alternative scheme; there were no clear findings as to how, if this had not been the case, Mr Grimm would have reacted to fuller advice. On the majority view, this issue does not arise, and anything I say would be academic. I prefer therefore to express no view.

DISPOSITION:

Appeal allowed.

SOLICITORS:

Squire & Co; Paul, Histings, Janofsky & Walker LLP.