Inland Revenue Commissioners v Botnar, [1998] STC 38
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Inland Revenue Commissioners v Botnar
CHANCERY DIVISION
[1998] STC 38
HEARING-DATES: 23, 24 October, 19 November 1997
INTRODUCTION:
Case stated
1. At hearings before two commissioners for the special purposes of
the Income Tax Acts on 14, 16, 17, 18, 21, 22, 23, 24 and 25 November
1994 and 4, 5, 6 and 7 March 1996, Otto Octave Botnar (the taxpayer)
appealed against assessments to income tax laid on him under s 478 of
the Income and Corporation Taxes Act 1970 (the 1970 Act) for the
fourteen years from 1974-75 to 1987-88 inclusive in the following
amounts:
(£) tax (£)
1974-75 193,432 91,716.56
1975-76 195,076 93,637.08
1976-77 398,931 191,487.73
1977-78 680,429 333,411.07
1978-79 1,165,678 582,840.74
1979-80 360,832 108,250.20
1980-81 13,256,939 5,437,794.40
1981-82 8,821,656 2,646,496.60
1982-83 13,350,228 4,005,060.80
1983-84 18,114,285 5,434,286.00
1984-85 13,585,714 8,151,428.40
1985-86 18,114,285 5,434,286.00
1986-87 26,788,732 7,988,350.20
1987-88 29,391,780 9,699,287.00
2. The question in issue was whether the taxpayer being ordinarily
resident in the United Kingdom had by means of transfers of assets
within the preamble to s 478 power to enjoy income of a person
resident out of the United Kingdom in the respective years of
assessment.
3. Mr Andrew Park QC and Mr Thomas Ivory, instructed by Jeffery Green
Russell, represented Mr Botnar. Mr James Munby QC and Mr Christopher
Tidmarsh, instructed by the Solicitor of Inland Revenue, represented
the Commissioners of Inland Revenue.
4. Statements by Mr Botnar, Dr Peter Lenz and Mr Manfred Weder were
submitted under s 8(2)(b) of the Civil Evidence Act 1968.
5. A statement by Mr D C Potter as an expert was not challenged.
6. Oral evidence was given by Frank Nicholas Frazer Haddock, Andrew
Frazer Smith FCA, Frank Shannon and John Reginald Rook.
[Paragraph 7 listed the documents put in evidence.]
8. At the conclusion of the hearings the commissioners reserved their
decision which they gave on 22 May 1996. A copy of that decision was
annexed hereto and formed part of the case. The commissioners amended
the decision to take account of the fact that the case concerned the
years of assessment prior to the Income and Corporation Taxes Act
1988.
9. The facts and contentions of the parties were set out in the
decision. It would be seen therefrom that the commissioners decided
that because the use of the power in cl 3(c) of the settlement dated
11 October 1974 in the manner envisaged by the memorandum of Dr Lenz
would have involved a fraud on the power, the taxpayer did not have
power to enjoy the income giving rise to the assessments. In the event
that the commissioners were wrong on their primary finding, they also
made a series of other findings.
[List of cases cited in argument deleted]
11. Following the determination of the appeal, by letter on 18 June
1996 the Commissioners of Inland Revenue required the commissioners to
state a case for the opinion of the High Court pursuant to the Taxes
Management Act 1970, s 56.
12. The questions of law for the opinion of the High Court were
whether: (a) the commissioners had erred in law in holding that the
use of the power in cl 3(c) of the settlement dated 11 October 1974 in
the manner envisaged by the memorandum of Dr Lenz (set out in para 69
of the decision) would involve a fraud on the power; (b) the
commissioners had erred in law in finding and concluding that Mr
Botnar was 'such an individual' within s 478(1) of the 1970 Act in
respect of the transfers to Otto Botnar Ltd (OBL) in March 1974 of his
180,350 shares in Datsun United Kingdom Ltd (DUK) and the 79,000
shares in DUK transferred by Nustad AG; (c) the commissioners had
erred in law in finding (subject to their conclusion as to the fraud
on the power) that the dividends received by OBL, EMV and EMVC were
'so dealt with' as to be 'calculated' to enure for the benefit of Mr
Botnar or his wife within s 475(5)(a) of the 1970 Act; (d) the
commissioners erred in law in holding (regardless of their conclusion
as to the fraud on the power) that s 478(5)(d) did not apply to the
income received by OBL, European Motor Vehicles BV (EMV) and European
Motor Vehicles Corporation (EMVC) after the formation of the
settlement in October 1974; (e) the commissioners had erred in law in
holding (regardless of their conclusion as to the fraud on the power)
that Mr Botnar was not able to control the application of income of
OBL, EMV and EMVC within s 478(5)(e) of the 1970 Act; and (f) there
had been evidence to justify their conclusion that (subject to their
conclusion as to the fraud on the power) the tax assessed in respect
of the years 1974-75 to 1982-83 represented tax lost attributable to
fraud or wilful default and the tax assessed in respect of 1983-84 and
1984-85 represented tax lost attributable to fraudulent or negligent
conduct.
DECISION: 1. This appeal concerns assessments to income tax under s
478 of the Income and Corporation Taxes Act 1970 (the 1970 Act) and s
739 of the Income and Corporation Taxes Act 1988 (the 1988 Act) for
the 16 years from 1974-75 to 1989-90. For convenience we refer
primarily to the 1970 Act.
2. The assessments were made on 31 January 1992. Those for 1985-86 and
subsequent years were thus inside the usual time limit. In respect of
the earlier years the Crown must establish fraud or wilful default for
years up to 1982-83 and fraudulent or negligent conduct for 1983-84
and 1984-85 in accordance with s 36 of the Taxes Management Act 1970.
3. The parties agreed at the outset that the evidence and arguments as
to the basic liability under s 478 of the 1970 Act should be heard
first with the appellant opening and that the extended time limit
issue should follow but at the same hearing. On that basis a single
decision would have been given.
4. In the event the basic liability issue occupied the ten days listed
and it was agreed that we would issue a preliminary decision on the
liability issue and hear the time limit aspect thereafter.
5. The present decision is a composite decision taking account of the
additional material on the extended time limit issue and also of the
submissions as to the fraud on the power issue.
6. This was one of the last cases to which s 52 of the Taxes
Management Act 1970 applied limiting the evidence to 'lawful
evidence'.
7. The evidence consisted of the following: oral evidence under oath
from Frank Nicholas Frazer Haddock, who was Mr Botnar's solicitor and
also acted for Datsun United Kingdom Ltd (DUK) (later Nissan United
Kingdom Ltd (NUK)), Andrew Frazer Smith FCA and Frank Shannon,
formerly finance director of the company; signed statements by Mr
Botnar, Dr Peter Lenz and Dr Manfred Weder, all three of whom are
beyond the seas within s 8(2)(b) of the Civil Evidence Act 1968; a
report dated 3 August 1994 by Andrew Mainz, FCA, a partner in Coopers
and Lybrand, with appendices and four ring binders of exhibits marked
'AAJM 1-213', and a response dated 15 November 1994 to a schedule of
comments on the report; a number of additional letters produced during
the hearing; a bundle of documents of some 400 pages in a ring binder
produced by the Revenue and a letter by Mr Haddock dated 1 May 1996
introduced after the second hearing with the agreement of the Revenue.
8. At the further hearing we heard oral evidence from John Reginald
Rook, formerly a higher executive officer of the technical division of
the Revenue; Mr Park QC put in evidence a statement by D C Potter QC
as an expert. Mr Rook produced certain memoranda and notes between
1978 and 1982.
9. There was no agreed statement of facts. Mr Park put forward the
Mainz report with its exhibits as establishing facts. Most of the
facts in the Mainz report were not in dispute; the accuracy of the
report was confirmed by Dr Lenz in para 14 of his statement and we
accept the conclusions; the rest of the documentary evidence was only
agreed in the sense that the authenticity of the letters and documents
was not challenged. In so far as it was contemporaneous, documentary
evidence is potentially part of the res gestae.
10. Although they were not strictly proved we have treated the copies
of various company reports, share certificates, share registers etc as
evidence of the facts contained therein, since both parties conducted
the appeal on this basis.
11. The restraints of the hearsay rule were of particular importance
in this case where three of the appellant's witnesses including Mr
Botnar himself could not be cross-examined and where the evidence-in-
chief of Mr Haddock and his cross-examination was constrained by the
fact that legal professional privilege was not expressly waived
although at times it is arguable that his evidence may have
constituted such waiver.
12. Mr Munby QC, however, did not at any stage make a formal
submission that legal professional privilege had been waived.
13. Mr Munby did during Mr Shannon's re-examination seek to put in a
previous consistent statement. However, this was only relevant to the
issue of Mr Shannon's credit and in our judgment its probative value
was outweighed by the potential prejudice on other matters.
14. The facts covered a span of over 20 years and were of great
complexity.
15. We start by setting out in chronological order those facts which
were in substance not disputed, leaving controversial evidence for
later review.
Events up to March 1974 and the transfer to OBL
16. Mr Botnar was born in 1913 in Germany. From 1966 until 1970 he was
an employee of NSU (GB) Ltd (NSU) which held the United Kingdom
concession for NSU, and from 1967 that for DUK, which subsequently
became Nissan. Michael John Hunt and Frank Shannon were also employees
of NSU.
17. In 1970 Mr Max Bunford, who was Mr Botnar's brother and the
controlling shareholder of NSU, sold the NSU concession to the Thomas
Tilling Group. Mr Bunford is now dead.
18. Mr Botnar with Mr Hunt and Mr Shannon decided to acquire the
Datsun concession through a new company. This new company was
Moorcrest Motor Co Ltd (Moorcrest), which was incorporated in on 13
October 1970.
19. On 23 October 1970 the initial issued share capital of Moorcrest
namely two £1 shares was increased to £25,000 by the allotment of
23,997 shares to Andrew Frazer Smith, a Brighton accountant, 999 to
Mrs Dorothy Quodling and one share each to two other persons, Capt
Kerby MP and Takao Ishii. The initial directors were Capt Kerby, Mr
Ishii, Mrs Quodling and Mr Smith, Mr Smith being chairman. John Henry
Pinkerton was appointed a director on 20 November. Mrs Quodling
resigned on 3 December 1970. Capt Kerby died on 2 January 1971. On 25
January 1971 Moorcrest changed its name to Datsun United Kingdom Ltd .
20. On 17 March 1971 25,000 further DUK shares were issued to Mr Smith
giving DUK an issued share capital of £50,000. Mr Smith and Mrs
Quodling did not provide the cash subscribed for their shares and held
as nominees, having been asked to act by Mr Smith's brother-in-law, Mr
Hanson, who was acting for the beneficial owners. On 5 April 1971 Mr
Smith resigned as a director and Mr Hunt was appointed.
21. On 17 June 1971 Nustad AG was formed. On 16 August 1971 50,000 DUK
shares, being all the then issued shares, were transferred to or
registered in the name of Nustad AG (Nustad), of Basel, Switzerland.
Mr Smith had executed a blank transfer for his holding of 48,997
shares and left it with Mr Hanson. At the time Mr Smith did not know
that the blank transfer had been utilised; he did not know the
identity of the transferee. On 27 August 1971 a further 1,000 DUK
shares were returned as allotted and issued, 996 to Mr Hunt, 3 to
Nustad, and 1 to the Earl of Lauderdale who had been appointed a
director two days before. The share register shows a further three
shares registered in the name of Nustad on 16 August 1971. In any
event, until the issue in November of that year, Nustad was from 27
August 1971 the registered holder of 50,000 shares.
22. On 8 October 1971 Mr Botnar was appointed a director.
23. On 16 November 1971, 3,003 DUK shares were issued to Mr Hunt,
3,000 to Mr Shannon and 999 to Mr Pinkerton. On 23 November Mr Shannon
replaced Mr Ishii as a director. On 24 November 10,000 shares were
issued to Nustad, 25,350 to Mr Botnar, 3,800 to Mr Hunt and 2,849 to
Mr Shannon.
24. After that issue the DUK share holdings were as follows:
Mr Hunt 7,800
Mr Pinkerton 1,000
Nustad AG 60,000
Earl of Lauderdale 1
Mr Shannon 5,849
Mr Botnar 25,350
100,000
25. On 21 December 1971, 8,000 DUK shares were issued to Mr Hunt,
6,000 to Mr Shannon and 26,000 to Mr Botnar. With this issue Nustad AG
ceased to be controlling shareholder.
26. DUK's report for the initial period to 31 December 1971 shows a
profit of £58,884 on sales of £4.84m. DUK had new purpose-built
premises at Lancing with a spare parts warehouse, a bonded compound of
50,000 square feet also at Lancing and a five-acre compound at
Shoreham Harbour. There were 65 employees. Mr Botnar was chairman. A
dividend of 15p per share in the gross amount of £76,500 was declared
by the directors as an interim dividend and paid on 22 March 1972. No
charitable contributions were made.
27. On 15 November 1972 the issued capital was doubled, 61,538 £1
shares being allotted to Nustad for cash at par making its holding
121,538 shares.
28. In December 1972 Mr Botnar's only child, Camelia, was killed in a
car accident. She was 20 years of age.
29. 1972 was a year of dramatic expansion with profits (after
corporation tax) of £539,285 on sales of £24.48m. DUK had contracted
to buy land for £600,000. Mr Botnar's remuneration was £77,975. At the
year-end the issued share capital was £400,000 of which Mr Botnar held
180,350 shares, Nustad 121,538, Mr Hunt 55,492 and Mr Shannon 41,619.
Reserves on profit and loss account were £484,648. A dividend of 15p
(21.43p with tax credit under the Finance Act 1972) was declared in
1973, costing £85,714 with advance corporation tax. DUK's report for
the year ended 31 December 1972 was dated 31 July 1973.
Sales doubled again in 1973 to £49.5m with a profit after tax of
£600,335. The profit would have exceeded £1m but for a fire in
November 1973 which destroyed the warehouse. By then there were 165
employees, capital commitments were recorded as £2.54m but there was
no shortage of liquidity; net assets shown in the accounts were
£1.85m. Mr Botnar's remuneration in 1973 was £69,000. There was no
change in the director's share-holdings. A dividend of 50p was paid on
8 November 1924. The report was dated 30 September 1974.
31. In the Autumn of 1971 Mr Frank Haddock, a partner in Coole and
Haddock, a firm of solicitors in Worthing, met Mr Shannon at a tax
seminar in London given by Mr Peter Whiteman, a practising barrister.
At the beginning of October Mr Haddock met Mr Botnar and was
instructed to act in a libel action against The Times newspaper. He
was also instructed on a tax matter and saw Mr Whiteman in conference
on 15 October 1971.
32. In June 1972 Mr Haddock instructed Mr Milton Grundy, counsel, on a
tax matter concerning DUK. There was a conference attended by Mr
Botnar, Mr Hunt, Mr Shannon and Mr Haddock. During a wide-ranging
discussion on Mr Botnar's personal affairs Mr Grundy pointed out the
heavy estate duty payable if Mr Botnar died owning DUK shares. Mr
Grundy suggested that a company in Jersey or the Isle of Man should
acquire the shares. Later that year Mr Grundy suggested an offshore
settlement. After a further conference in June 1973 attended by Mr
Shannon, Mr Haddock, and possibly Mr Botnar, Mr Grundy wrote an
opinion and prepared a draft settlement. As recorded at para 28, Mr
Botnar's only child had died meanwhile.
33. NM Rothschild and Sons (CI) Ltd (Rothschilds), of Guernsey, were
instructed regarding the acquisition of Mr Botnar's DUK shares by an
investment company to be formed in Guernsey. On 9 July 1973 the Bank
of England wrote to Rothschilds in response to a letter of 15 June,
regarding a proposed company to be called 'O Botnar Ltd'. The Bank of
England indicated that consent would be given for the issue of shares
in the company whose activities would 'be confined to investment
holding on behalf of Mr O Botnar, a resident of Germany, through the
Liechtenstein anstalt, O Botnar Anstalt'.
34. On 12 November 1973 Allgemeines Treuunternehmen, of Vaduz, as
founder and legal representative, applied to the court in
Liechtenstein for registration of the Botnar establishment with a
fully paid capital of SwF 20,000. The administrative council was one
or more of Mr Botnar, Dr Peter Lotz, of Basel, and Dr Bruno Guggi, of
Vaduz. The registration was stamped on the following day. Article 5
provided:
'Beneficiaries. Income and all profits of the establishment are due to
the beneficiaries. These will be defined by the founder or his legal
successor . . .'
Establishment is the English for 'anstalt'.
35. Also on 12 November 1973 Allgemeines Treuunternehmen established a
Liechtenstein trust company with individual legal rights in the name
of 'OOB Trust Reg'. The appointed members of the council were the
taxpayer and his wife, Dr Lotz, Robert A Jeker and Dr Guggi.
36. On 13 November 1973 Rothschilds wrote to the Bank of England
stating that the initial shares in O Botnar Ltd (OBL) would be issued
to Mr Botnar, the managing director of DUK.
The letter stated:
'When the initial shares have been issued it is the intention that the
company will act to acquire control of Datsun UK Ltd. This will be
done by O Botnar Ltd making an offer to Mr Botnar and Nustad AG of
Basle, Switzerland, to purchase their shares offering in exchange
shares in itself. The terms of the offer will be one share of O Botnar
Ltd for every 50 shares at present held in Datsun UK Ltd. We are given
to believe that Mr Botnar will accept the offer in respect of the
whole of his shareholding but that Nustad AG may only accept for a
proportion of its holding. The end result therefore will be that the
Datsun UK Ltd shares will still be effectively held by Mr Botnar and
Nustad AG Ltd but through the intermediary of O Botnar Ltd.'
37. The Bank of England replied asking for the name and residential
status of the controlling shareholders of Nustad and withdrawing the
earlier consent. Rothschilds wrote on 8 January 1974:
'We have been advised that Dr R Baumann is in fact the beneficial
owner of the share capital of Nustad AG.'
38. The notepaper used by Dr Lenz for three letters in 1976 shows Dr
Roger Baumann as one of the three lawyers in the firm.
39. On 7 February the Bank of England wrote to Rothschilds asking them
to request Dr Baumann to provide the name(s) and country of residence
of the true owners behind Nustad. Rothschilds did not reply until 30
July.
40. Meanwhile the general election on 28 February 1974 had resulted in
a change of government and on 6 March it was announced that Mr Denis
Healey's budget speech would be on 25 March. There were fears that
persons such as Mr Botnar who although resident in the United Kingdom
was domiciled abroad would be adversely affected. An increase in taxes
was expected with heavier taxes both on income and capital.
41. OBL was registered by the Royal Court of Guernsey on 7 March 1974,
the original subscribers being seven employees of Rothschilds. On 15
March 1974 Mr Botnar wrote a letter accepting an offer of OBL in a
letter dated 13 March to acquire his holding of 180,350 shares in DUK
in return for 3,607 OBL shares. His transfer bore that date and gave
Coole and Haddock as the transferor's agent.
42. According to a translation of the minutes dated 19 March 1974 the
directors of Nustad (which had by then changed its name to Nustad
Holding AG) resolved to accept the offer for 79,000 shares. These
directors' minutes include the following:
'2. In consideration of the 79,000 shares in Datsun UK AG (sic) Nustad
Holding AG receives 1,580 shares in Botnar Limited. Mr Botnar
undertook to purchase those 1,580 shares in Botnar Limited in Guernsey
at a price of 1,264,000 francs.
For tax reasons on the part of the company, this purchase price will
be deferred until the beginning of 1975 in consideration of interest
for delay in the sum of 5% per annum.
3. Old Court Limited in Guernsey is to be informed that it holds the
shares in Botnar Limited for Botnar Establishment, Vaduz.'
43. The minutes of the meeting of the directors of DUK on 20 March
1974 record the acceptance of the share transfers.
44. The shares in OBL issued to Mr Botnar were registered in the name
of Rothschilds' nominee company, Old Court Ltd. On 20 March Mr Botnar
instructed Old Court Ltd to hold his shares to the order of Botnar
Establishment, c/o Allgemeines Treuunternehmen (sic). Nustad gave a
similar instruction.
45. The directors of OBL approved the offer on 22 March and noted Mr
Botnar's acceptance. His holding was recorded as including the seven
shares issued to the original subscribers
46. The budget was on 26 March.
April to October 1974, the settlement and the memorandum
47. Up to this stage Mr Whiteman had not apparently been directly
involved with the proposals leading to the 1974 settlement (the
settlement), although he had seen Mr Botnar in conference in October
1971. Between April 1974 and 11 October there were six occasions on
which Mr Haddock sent instructions to him. Mr Haddock recorded a total
of eight conferences, two being on the telephone and one a
consultation between Mr Leo Price QC and Mr Whiteman lasting one hour
and 35 minutes. One of Mr Whiteman's telephone conferences was with Mr
Shannon; Mr Whiteman also met Dr Lenz during this period on one or two
occasions when Dr Lenz was in England. On 29 July 1974 Mr Whiteman
prepared a 'Note on settlement' (see para 9 of the Lenz memorandum set
out below).
48. One relevant factor was that Mr Botnar had been resident in the
United Kingdom from April 1968 and was thus into his seventh year of
residence.
49. Following an application to the Liechtenstein court on 12 July
1974 the name of the Botnar establishment was changed to the Anafi
establishment and Mr Botnar ceased to be a member of the
administrative council. This was on Mr Whiteman's advice.
50. On 30 July Rothschilds wrote to the Bank of England referring to
the letter of 7 February and stating:
'We are now able to advise you that the beneficial owner of the shares
in Nustad AG is Sr Livio Verona who is resident in Argentina.'
51. There was no evidence that exchange control consent had been given
for the share exchange in March 1974.
52. On 1 August Old Court Ltd received an instruction from Nustad
backdated to 20 March instructing them to hold Nustad's OBL shares to
the order of Anafi establishment.
53. On 20 August 1974 Mr Haddock went to Basel and met Dr Lenz in his
office. This was after the consultation between Mr Price and Mr
Whiteman. He passed on counsel's advice and explained the proposed
settlement and that there would be named beneficiaries who would not
in fact benefit. Dr Lenz also came to England and saw Mr Whiteman. Mr
Haddock recorded that Dr Lenz had obtained waivers of benefits from
the proposed beneficiaries.
54. Mr Haddock told us that the settlement was tailored by Mr Whiteman
specifically to meet Mr Botnar's circumstances. In particular the cl
3(c) power was included.
55. A memorandum was prepared in order to explain the settlement to Dr
Lenz as protector. The initial draft was prepared by Mr Haddock
borrowing from the opinion of Mr Grundy.
56. The memorandum was settled by Mr Whiteman in September 1974 with
some amendments. It was resettled with the amendments in the spring of
1975. It is the 1975 version which was exhibited. The note by counsel
and supplemental documents annexed to the memorandum were not in
evidence.
57. The settlement which was dated 11 October 1974 was expressed to be
made between Allgemienes Treuunternehmen as settlor and Dr Peter Lotz,
Herr Gerd Rothardt and Dr Guggi as trustees. Dr Lotz was a partner in
Dr Lenz's firm in Basel.
58. The trust fund was defined as 'The funds now subject to the trusts
of the Establishment known as Anafi Establishment (Vaduz)' with any
additions. Six Swiss residents were named as beneficiaries, Dr Peter
Gloor, Dr Alex Fischer, Dr Armin Mayer, Frau Edith Heinzer, Fraulein
Kathrin Staudder and Herr Fritz Ahann. The 'Appointed Class' included
the beneficiaries and certain close relatives and partners, employees,
or close relatives of the settlor.
59. 'Excluded Person' was defined to mean residents of the United
Kingdom or their spouses, certain named persons including 'Herr Octav
Botnar of Dusseldorf (Germany)' and Allgemeines Treuunternehmen
together with spouses, widows, widowers, and issue including adopted
or legitimated children of the above persons.
60. By cl 2 the trustees were directed to accumulate the entire income
as an accretion to capital, and to hold the capital and accumulations
at the expiry of the trust period (80 years unless earlier
determined), on trust for such of the appointed class as the trustees
should appoint with a trust in default for the beneficiaries then
living in equal shares and an ultimate trust in default, 'for such
charitable purposes as the trustees shall determine'.
61. Clause 3 conferred powers 'in relation to the capital but not the
income'. Clause 3(a) gave power to appoint capital for the benefit of
members of the appointed class.
62. Clause 3(b) and (c) gave the trustees the following powers:
'(b) Raise any sum or sums out of the capital of the trust fund and
pay or apply the same to or for the benefit of all or any one or more
exclusive of the other or others of the members of the Appointed Class
and in such respective amounts if more than one and generally in such
manner as the Trustees shall in their discretion think fit.
(c) Pay or transfer the whole or any part or parts of the capital of
the trust fund to the trustees for the time being of any other trust
wheresoever established or existing and whether governed by the proper
law governing this Settlement at the time of the exercise of the power
contained herein or by the law of any other state or territory under
which any one or more of the members of the Appointed Class are
interested notwithstanding that such other trust may also contain
trusts powers and provisions (discretionary or otherwise) in favour of
some other person or persons or objects and so that after such
transfer the money investments and property so transferred shall (i)
cease to be regarded as held upon the terms of this Settlement for all
the purposes of this Settlement and (ii) cease to be regarded as the
Trust Fund or part of the Trust Fund of this Settlement as the case
may be for all the purposes of this Settlement.'
Clause 4(a) provided as follows:
'For the purposes of Clause 3 hereof . . . a person shall be deemed to
be interested under a trust if any capital or income comprised in the
trust is or may become liable to be transferred paid applied or
appointed to him or her or for his or her benefit either pursuant to
the terms of the Trust or in consequence of an exercise of any power
or discretion thereby conferred on any person.'
63. Clause 5 provided that the cl 3 power should only be exercisable
on condition that it was provided that any income resulting from the
exercise of the power should be accumulated during the trust period.
64. Clause 8(a) gave the trustees or the protector power to add to the
appointed class any persons or classes of persons other than excluded
persons. Clause 11 gave the trustees power to determine the trust
period. Clause 13 gave to the trustees wide powers exercisable by deed
or by declaration in writing to delegate any trusts, powers or
discretion to any persons.
65. Clause 20(a) provided that Dr Peter Lenz should be the first
protector and cl 20(d) and the fifth schedule gave Dr Roger Baumann
power to appoint a new protector who could be himself.
66. Clause 21 provided that various powers including those in cll 3, 8
and 13 were only exercisable with the written consent of the
protector.
67. Clause 23 provided as follows:
'No Excluded Person shall be capable of taking any benefit in
accordance with the terms of this settlement and in particular but
without prejudice to the generality of the foregoing provisions of
this Clause:
(a) The trust fund shall henceforth be possessed and enjoyed to the
entire exclusion of any such Excluded Person and of any benefit to him
by contract or otherwise
(b) No part of the capital or income of the trust fund shall be paid
or lent or applied for the benefit of any such Excluded Person.
68. Clause 26 provided that the proper law of the settlement was the
law of Liechtenstein.
69. Because of its importance we set out the memorandum in full:
'PRIVATE MEMORANDUM OF DR P LENZ AS PROTECTOR OF SETTLEMENT DATED 11TH
OCTOBER 1974 BY ALLGEMEINES TREUUNTERNEHMEN (VADUZ)
Annexed:
(1) Copy settlement.
(2) Note by Counsel.
(3) Supplemental documents.
1. This Settlement, drafted by UK Tax Counsel (Mr Peter Whiteman), has
been executed in conjunction with arrangements for the avoidance of UK
Estate Duty, Capital Gains Tax and Income Tax in relation to shares in
Datsun UK Ltd formerly owned by Mr O Botnar.
2. The estate duty objective, apart from being the most important, was
the easiest to achieve since all that this required was that the
Datsun shares should be situated outside the UK, and that Mr Botnar
should be domiciled outside the UK either, if he did not settle the
shares, at the date of his death or, if he did settle the shares (as
actually happened), at the date of the settlement.
3. Mr Botnar is, and intends to remain, domiciled in Germany.
4. The mechanism for changing the situs of the Datsun shares was an
exchange of shares. Mr Botnar received shares in a Guernsey
incorporated company, O Botnar Ltd, in exchange for his shares in
Datsun UK Ltd.
5. Although it is sufficient for estate duty purposes that O Botnar
Ltd is incorporated in Guernsey, in order to be effective for capital
gains tax on a disposal of the Datsun shares, it must be possible to
show that O Botnar Ltd is non-resident at the date of such disposal.
This is unlikely to be possible so long as Mr Botnar is resident in
the UK, and it was mainly this consideration which led to the creation
of the structure of a Liechtenstein Settlement owning the funds of a
Liechtenstein Establishment, which in turn owns the shares of O Botnar
Ltd. Now, provided (as should be the case) that O Botnar Ltd is
regarded as non-resident for the purpose of section 41 of the Finance
Act 1965, gains arising on future disposals of Datsun shares by O
Botnar Ltd will not be apportioned back to Mr Botnar so as to render
him liable to capital gains tax if he is still resident or ordinarily
resident in the UK. No disposal of Datsun shares should, however, be
contemplated without the prior advice of UK lawyers.
6. The Establishment was introduced into the structure partly because
Mr Botnar preferred his centre of operations to be Liechtenstein/
Switzerland rather than the Channel Islands, and was preferred to a
Liechtenstein AG on the basis of local advice and on the ground of
cost. Having decided upon the use of an Establishment which, because
it does not have a divided share capital could not, it was thought,
make the offer to the shareholders of Datsun UK Ltd so as to satisfy
the provision of Finance Act 1963 Schedule 7 paragraph 6 and avoid
liability to capital gains tax on the initial disposal by Mr Botnar of
his Datsun shares to a non-resident, it was necessary for O Botnar Ltd
to be incorporated in order to make the offer to the Datsun
shareholders. O Botnar Ltd was accordingly incorporated in Guernsey as
a corporated tax company, ie it will pay local tax only at the fixed
rate of (currently) £300 instead of Guernsey Income Tax on its profits
at the rate of 20%; and control will be exercised by nominee directors
resident in Sark under the management of NM Rothschild & Sons (CI)
Ltd, St Julian's Court. St Julian's Avenue, Peter Port, Guernsey
(Tele: Guernsey 26741 - Mr D Creed). O Botnar Ltd is resident outside
for exchange control purposes.
7. An offer was duly made on 13th March 1974 by O Botnar Ltd to Mr
Botnar for his entire holding of 180,350 Datsun shares and to Nustad
AG of Basel (Switzerland) for its entire holding of 121,538 Datsun
shares, ie sufficient to give O Botnar Ltd control of Datsun UK Ltd.
The offer was on a 1:50 basis and, so far as Mr Botnar's holding was
concerned, Certificates for 3,607 shares were prepared, one for 3,600
in favour of Old Court Ltd and the other seven in the names of the
seven statutory members of O Botnar Ltd each holding one fully-paid
share of £1 supported by a Declaration of Trust in favour of Old Court
Ltd. The complete holding of 3,607 shares was held by Old Court Ltd to
Mr Botnar's order until 20th March 1974 when he directed in writing
that they be held to the order of Botnar Establishment (now Anafi
Establishment), c/o Allgemeines Treuunternehmen, PO Box 34722, 9490
Vaduz, Liechtenstein. Nustad accepted the offer in respect of 79,000
Shares only, which was sufficient to give O Botnar Ltd control of
Datsun, and a certificate for 1,580 shares was prepared in favour of
Old Court Ltd as nominee for Nustad AG. On 20th March 1974 Nustad also
instructed Old Court Ltd to hold its shares in O Botnar Ltd to the
order of Botnar Establishment (now Anafi Establishment). The present
position is that the Datsun shares formerly owned by Mr Botnar will be
registered in Datsun's books in the name O Botnar Ltd; and the Datsun
shares formerly owned by Nustad AG will also be registered in the name
of O Botnar Ltd, as soon as the relative share transfers have been
stamped following adjudication. Counsel has strongly advised that the
shares of O Botnar Ltd should continue to be registered in the name of
Old Court Ltd and its nominees as at present (and held by them to the
order of Anafi Establishment) and not transferred into the name of the
Establishment or the Trustees.
8. It is hoped that this structure ie Settlement -- Establishment --
Guernsey Company -- Datsun shares, will also be effective to avoid
United Kingdom income tax in excess of the basic rate on distributions
or deemed distributions (including dividends) out of Datsun UK Ltd.
The result is more likely to be achieved if dividends are not
distributed by O Botnar Ltd or the Anafi Establishment to the
Trustees, and with this in view a provision is being inserted in the
Statutes of the Anafi Establishment and in the Articles of O Botnar
Ltd prohibiting such a distribution. Dividends will, therefore, be
reinvested and the resulting capital and income retained and
accumulated in O Botnar Ltd until it is liquidated or some other
satisfactory means is devised of applying the funds elsewhere. At one
time it was envisaged that O Botnar Ltd would be liquidated by the
Establishment at some time after 5th April 1975: however UK Tax
Counsel has advised it would be preferable to retain the Guernsey
Company for the time being if only for the important reason that it
can then appear in the Datsun books as the registered holder of the
Datsun Shares, and further advice should be sought if it is desired to
alter the structure for any reason.
9. The Settlement executed on 9th October 1974 by Allgemeines
Treuunternehmen was settled by UK Tax Counsel with a view to avoiding,
so far as possible, UK capital gains tax on a disposal of the Datsun
shares, and UK income tax in excess of the basic rate on distributions
out of Datsun UK Ltd. See Note on Settlement dated 29th July 1974
annexed signed by Mr Peter Whiteman of Counsel. For this reason
neither Mr or Mrs Botnar are named as "Beneficiaries" in the Second
Schedule: furthermore their names appear in the list of "excluded
persons" in the Third Schedule. The only way in which Mr and Mrs
Botnar can therefore benefit under the Settlement is by the Trustees
exercising their powers in relation to the capital (but not the
income) of the trust fund (ie the Funds of the Anafi Establishment
owning shares of O Botnar Ltd owning the Datsun Share) under Clause
3(c) of the settlement by paying or transferring "the whole or any
part or parts of the capital of the Trust Fund" to the trustees for
the time being of any other trust wheresoever established or existing,
and whether governed by the proper law governing the present
Settlement at the time of the exercise of the power contained therein
or by the law of another state of territory, under which any one or
more of the members of the appointed class are interested,
notwithstanding that such other trust may also contain trusts powers
and provision (discretionary or otherwise) in favour of some other
person or persons (ie) Mr and/or Mrs Botnar) or objects, and so that
after such transfer the money investments and property so transferred
shall (i) cease to be regarded as held upon the terms of the present
settlement for all the purposes of the present settlement and (ii)
cease to be regarded as the trust fund or part of the trust fund of
the present Settlement as the case may be for all the purpose of the
present Settlement [emphasis added].
10. The Trustees, namely Herr Robert Jeker, Herr Walter Schmucke, Herr
Gerd Rothard, Dr Bruno Guggi and Dr Peter Lotz are fully aware of the
reason why the Settlement was drafted in this way, and have indicated
their acceptance of the advice of UK Chancery Counsel (Mr Leolin Price
QC) set out on page 11 of Mr Whiteman's Note, that the wording of
Clause 3(c) and the listing of Mr and Mrs Botnar's "Excluded Persons"
in the Settlement would not justify the Trustees in refusing to
transfer the trust fund or part thereof to the Trustees of another
Settlement under which Mr and/or Mrs Botnar would benefit. This was of
course absolutely vital to the course of action.
11. The advice of UK lawyers must be sought before any benefit if
(sic) afforded to Mr or Mrs Botnar, or any other beneficiary, under
the Settlement or in relation to the Datsun shares, particularly in a
UK fiscal year during which they are resident or ordinarily resident
in the UK as the terms of the relevant statutory provision (section
478 of the Taxes Act 1970) are extremely complicated and very
extensive in their application. In particular any income accumulated
in O Botnar Ltd or by the Establishment must not be lent to Mr or Mrs
Botnar, nor should they be or become directors or employees of O
Botnar Ltd, the Establishment or the Trustees. Furthermore, neither Mr
or Mrs Botnar must be granted proxy votes in respect of the Datsun
shares at general meetings of the company. Counsel has advised that
this Settlement and the Anafi Establishment should not be used for any
purposes other than in relation to the holding of the Datsun shares.
12. In practice, the question of benefit to Mr and Mrs Botnar is only
likely to arise on a disposal of some or all of the Datsun shares. In
accordance with the provision of Clause 3 (c), the Trust Fund, or an
appropriate part, would be transferred to another Settlement executed
for the purpose of naming at least one of the beneficiaries of the
present Settlement as a beneficiary, and with Mr and/or Mrs Botnar
being added subsequently. The exact method of benefit would depend on
the question of Mr and/or Mrs Botnar's residence for tax purposes at
the time. Ideally the disposal would take place in a UK fiscal year
during which they were not resident in the UK, but if this was
impractical the best result under the present UK law is likely to be
achieved if the trust fund is transferred to another Settlement under
which Mr and/or Mrs Botnar are capable of benefiting only in the
following fiscal year, and if their interest is sold to a non-resident
merchant bank before such interest falls into possession. This is the
basic course of action: however, to give Mr Botnar the best possible
chance of obtaining a tax-free benefit an enormous number of
requirements would be built into the scheme. This would be necessary
from the point of view of section 478, and may be necessary for
capital transfer tax purposes. That tax is a real difficulty in
connection with the proposed course of action. The consequences of it
will not be fully understood for some time and this is another good
reason for leaving the shares in O Botnar Ltd for the time being.
13. In practical terms if O Botnar Ltd (assuming the company had not
then been liquidated) sold the Datsun shares to a non-resident it
would receive payment therefore without exchange control problems.
However if the shares were sold to a UK resident, Bank of England
permission would be required but there is no reason why this
permission would not be forthcoming. Because O Botnar Ltd is resident
outside the UK for exchange control purposes, no Bank of England
consent would be required for the payment of funds to Liechtenstein.
The only problem to be overcome would be the restrictions in the
Memorandum of O Botnar Ltd and in the Statutes of the Establishment
against payment of dividends which would need to be considered and
dealt with in the most advantageous manner in the light of the
circumstances prevailing at the time. Alternatively it might be
possible to effect the transfer of funds under a loan arrangement or
by other means depending, as stated, on circumstances prevailing at
the time.
14. In so far as the Anafi Establishment is still in possession of
assets, including shares in O Botnar Ltd holding shares in Datsun, at
the date of Mr Botnar's death, such assets would not pass under Mr
Botnar's Will for the reason that he has already entirely and
effectively disposed of all his interest in the Datsun shares. The
Trustees would, in practice, act on the instructions of the Protector
and it is therefore essential that the Protector should at all times
be kept fully aware of Mr Botnar's wishes in this respect. This is
also important for the Protector's own protection. Mrs Botnar could
only benefit under the procedure afforded in Clause 3 (c) of the
Settlement: however other beneficiaries could benefit either under
that procedure, or their names could be added to the appointed class
under the provisions of Clause 8 of the Settlement.
15. In case of doubt reference should be made to Mr Frank N F Haddock
of Messrs Coole & Haddock, Solicitors, 5 The Steyne, Worthing, Sussex,
England (Tele: Worthing 205666). Counsel who settled the Settlement is
Mr Peter Whiteman, Barrister at law, 4 Pump Court, Temple, London EC4
(Tele: 01-353- 5186).'
70. It is to be noted that para 9 of the memorandum gives the wrong
date for the settlement and that para 10 names Herr Jeker and Schmucke
as trustees, whereas they were in fact beneficiaries.
November 1974 to August 1980 and the transfer from OBL to EMV
71. Between 1974 and 1979 dividends totalling £3,147,333 were paid by
DUK of which £2,305,616 was paid to OBL. The first of these dividends
at a cost of £347,761 (including advance corporation tax and 50%
surcharge totalling £147,761), described as an interim dividend, was
proposed in the director's report dated 30 September 1974 attached to
the 1973 audited accounts, and was paid on 8 November 1974. Apart from
administration expenses virtually all of this was placed on deposit;
at the end of 1978 £2,067,075 was on deposit. In 1979 £1m was donated
to the Camelia Botnar Foundation (CBF) a registered United Kingdom
charity, constituted on 19 January 1979 to benefit under-privileged
children.
72. OBL was placed into voluntary liquidation on 1 December 1983.
Further donations totalling £850,244 were made to the CBF fund prior
to liquidation together with the final balance on liquidation. Mr
Mainz's investigations show that all of OBL's income excluding
administration costs was paid to the CBF.
73. On 4 April 1975 Mr Ozawa of Nissan Motor Co Ltd wrote from Tokyo
to Mr Botnar regarding a discussion when Mr Botnar had informed Nissan
that he had transferred his DUK holding by gift to a Channel Islands
trust fund. Mr Ozawa wrote that in giving to DUK the United Kingdom
distribution rights Nissan had always expected that control and
management of DUK would remain with Mr Botnar. The letter continued:
'You have confirmed that in order to satisfy the requirements of
Nissan Motor Company you have concluded an agreement between yourself
and Datsun United Kingdom Ltd which recognises that management control
and direction of Datsun United Kingdom Ltd is still carried out by you
and will remain with you.'
74. On 18 April 1975 DUK paid an interim dividend of 50p per share at
a cost of £307,693 (including advance corporation tax of £107,693).
75. On 4 June 1975 Mr Haddock wrote to Mr Brian Laventure, of Thornton
Baker & Co, stating that Mr Whiteman was currently settling a
provision to be inserted into the statutes of Anafi Establishment
precluding the making of distributions to the trustees of the
settlement. He stated that Mr Whiteman had agreed 'under some pressure
from Mr Botnar' that this should be in the Anafi statutes rather than
the articles of OBL. In the event the statutes were not changed until
26 May 1976. A certified copy of the statutes incorporating these
amendments was dated 15 June 1976.
76. On 10 November 1975 the technical division of the Revenue sent a
lengthy questionnaire to Thornton Baker, Mr Botnar's accountants, in
relation to s 478.
77. Thornton Baker sent the following answers on 1 April 1976:
'(a) Neither Mr Botnar nor Mrs Botnar has at any time since 5th April
1969 made any capital settlement whether in the United Kingdom or
elsewhere, nor has Mrs Botnar directly or indirectly added assets to
any settlement by whomsoever made. On 20 March 1974 Mr Botnar directed
that his shares in O Botnar Ltd should be held to the order of Anafi
Establishment of Vaduz.
(b) Mrs Botnar has not made any such transfer [ie a transfer of assets
directly or indirectly to a company, trust or partnership outside the
United Kingdom]. On 15 March 1974 Mr Botnar transferred his entire
shareholding of 180,350 shares of Datsun UK Ltd to O Botnar Ltd in
exchange for the issue to him of 3,607 shares of O Botnar Ltd.'
At (c) Thornton Baker replied 'No' to the question whether any
company, trust or partnership in which Mr Botnar or his wife had a
direct or indirect interest had transferred assets directly or
indirectly to a company, trust or partnership outside the United
Kingdom. In answer to question (d) whether Mr Botnar or his wife had
at any time since 1969 had a direct or indirect interest in an
unquoted company outside the United Kingdom, Thornton Baker referred
to answer (b); we return to this answer later in relation to the
extended time limit aspect.
78. The technical division replied on 13 April 1976 seeking
information about OBL and the Anafi establishment. On 7 June Thornton
Baker provided a copy of the settlement. On 16 September the technical
division requested a copy of the articles of Anafi.
79. The accounts of DUK for 1974 were dated 25 November 1975. They
showed a profit after tax of £894,337 on sales of £57.4m. Interest on
short-term deposits was £1.15m. Mr Botnar's remuneration was shown as
£53,000. These show the interim dividend of 50p per share paid on 18
April 1975.
80. OBL's accounts for 1975 show a dividend received of £129,675 and
£281,921 on deposit at the year-end.
81. DUK's accounts for 1975 dated 15 December 1976 show a profit after
tax and minority interests of £2,108,687 on sales of £77m. Mr Botnar's
emoluments were shown as £30,000. Interest on short-term deposits was
£1.3m. A dividend of 50p per share costing £204,500 was paid on 5
April 1976.
82. In March or July 1976 there was a conference at Mr Whiteman's
chambers attended by Mr Botnar, Mr Hunt, Mr Shannon, Mr Laventure, Mr
Haddock and DUK's auditors. The conference was concerned both with DUK
and Mr Botnar's personal tax. Mr Haddock told us that Botnar stated
that he had no intention that either he nor his wife should ever
profit from the settlement and that the purposes lying behind the
settlement were charitable. Mr Haddock said in evidence that Mr Botnar
had not instructed his advisers to set up a charitable settlement in
1974.
83. On 9 June 1976 a further dividend of 50p a share costing £204,500
was paid by DUK. During 1976 a charitable donation of £2,075 was made,
the first by DUK. Turnover in 1976 rose to £108m but attributable
profits were unchanged at £2.1m. Mr Botnar's emoluments were £30,000.
84. In a letter dated 2 September 1976 the Revenue accepted, on the
basis of information supplied by Thornton Baker, that Mr Botnar was
domiciled in the state of North Rhine/Westphalia in West Germany.
85. In 1976 and 1977 the lawyers advising Mr Botnar contemplated using
the cl 3(c) route to establish an exclusively charitable settlement.
The route would have been in two stages. In the first stage a
Liechtenstein stiftung would have been established with one or more of
the named beneficiaries being included as a beneficiary. The trustees
of the settlement with the consent of Dr Lenz as protector would then
have exercised their power under cl 3(c) to transfer the capital of
the settlement to the new stiftung. The second stage would be to
repeat the process to a wholly charitable settlement. No effect was
given to these proposals.
86. On 11 October 1977, after six reminders, the Revenue were given a
copy of the statutes of the Anafi establishment. This prompted further
questions.
87. The profits of DUK showed no increase in 1976 but doubled in 1977
to £4.299m on sales of £170m. A dividend of 50p a share was paid in
April 1977 (cost £204,500) and £1.50 in December 1977 costing £503,833
after part had been waived. Charitable donations amounting to £22,754
were made in 1977 by DUK and its subsidiaries.
88. On 3 January 1978 DUK made a bonus issue from reserves. OBL's
holding increased to 1,268,216 shares.
89. During 1978 the Revenue continued to press for information.
90. On 17 July 1978 Mr Haddock wrote to Mr Lavanture regarding a
conference with Mr Whiteman on 1 August 1978. The letter mentions a
proposal to apply up to £500,000 to benefit handicapped children,
saying that Mr Botnar wished a particular charity to be benefited,
possibly linked to his daughter's name. The letter included the
following paragraph:
'In the past Mr Botnar has expressed the wish that the Datsun shares
should be registered in the names of the Trustees of the Settlement
which appears to involve the liquidation of O Botnar Ltd -- I think he
wishes that his name should disappear from any reference to ownership
of Datsun shares and prefers that the funds are held abroad in
Switzerland rather than externally in Guernsey. However, if Guernsey
is an essential tax saving feature of any future arrangements I doubt
if Mr Botnar will pursue these objectives particularly if the Revenue
can now be satisfied that section 478 is not applicable.'
91. On 23 October 1978 Thornton Baker wrote to the Revenue stressing
Mr Botnar's charitable motives. The letter included the following
sentence:
'The trustees of the Settlement were at all times aware of the
overriding charitable intentions underlying the Settlement although no
specific objectives were defined at that time beyond a general
charitable intention.'
92. The letter stated that the CBF had been constituted and said that
'the trustees are currently considering other charitable objectives
both in this country and abroad.'
93. We return to this letter in relation to the extended time limit
assessments.
94. In fact the CBF was established on 19 January 1979 with Mr Haddock
and one of his partners as trustees.
95. On 3 May 1979 Rothschilds sent £350,000 from OBL to the CBF
stating that this was on the instructions of the 1974 settlement
trustees.
96. On 27 June 1979 Thornton Baker sent to the technical division
OBL's accounts for the four years ended December 1977. They stated
that OBL had recently made a charitable donation of £350,000 to the
CBF.
97. On 19 September 1979 Mr Rook of the technical division wrote
stating 'I do not propose to ask further questions about these
arrangements at this time.'
98. Meanwhile DUK continued to grow rapidly. Sales rose from £170m in
1977, to £252m in 1978 and £315m in 1979. Profits were £3.6m in 1977,
£10.1m in 1978 and £1371m in 1979. Dividends totalling £2 a share were
declared for 1977 and £1 for 1978. No dividend was declared for 1979.
In 1978 charitable contributions of £2,426 were made and in 1979 these
were increased to £125,000. £70,429 of this latter figure was the
first payment under a seven-year covenant in aid of the Datsun centre
for handicapped children in Worthing. In 1980 the year-end was brought
forward to 31 July. Profits for the seven-month period were
£5,402,743. No dividends were declared for this short period and
charitable contributions of £43,432 were paid in the period.
99. In about 1978 Mr Botnar purchased a Swiss company (Datsun Suisse
AG) which had the importation and distribution rights for Nissan cars
in Switzerland. A Swiss lawyer Dr Marco Lorez was involved in the
purchase and became a director of Datsun Suisse.
He advised that the tax on the DUK dividends paid to OBL could be
reduced under the double taxation agreement between the United Kingdom
and the Netherlands if OBL's shares were transferred to a Dutch
company.
100. On 11 March 1980 Mr Lavanture sent to Mr Haddock notes of United
Kingdom tax considerations relating to proposals by Wisselink BV,
including the liquidation of OBL. At this stage the first step was to
be the sale by the trustees of their OBL shares to the Bahamian bank.
The notes included the following:
'1. The trustees will receive cash direct into their hands. Although
funds have been made available from time to time out of Guernsey
direct to the Foundation, Guernsey has never paid any dividends as
this was considered by Counsel to be advisable to ensure that there
was clear evidence no individual resident in the United Kingdom ever
had 'power to enjoy' the income Guernsey has received from DUK, within
the meaning of section 478 Taxes Act 1970. Consequently if it is
necessary to sell the shares of Guernsey rather than DUK I suggest a
new holding company is interposed between the trust and the cash to
preserve the structure that was designed to prevent any claim under
section 478. If the proceeds are mainly to be invested in bank
deposits etc, a tax haven such as the Bahamas or Liechtenstein will
probably be appropriate as the place where the new company should be
incorporated.'
101. On the same day OBL sent a further donation of £24,000 to the
CBF.
102. On 17 March 1980 Mr Botnar was assessed to capital gains tax on
the 1974 transactions.
103. On 16 April 1980 Mr Lavanture sent to Mr Shannon a six-page
memorandum on the proposals.
104. On 18 August OBL agreed to sell its DUK shares to a Dutch
company, European Motor Vehicles BV (EMV) which had been formed
shortly before; the consideration was SwF 100m. The sum was borrowed
by EMV from its parent, International Transport Holdings NV (ITH), a
Netherlands Antilles company which was wholly-owned by Handelsbank NV
(Overseas) Ltd (Handelsbank), of Nassau, Bahamas, itself a wholly-
owned subsidiary of Handelsbank of Zurich.
105. Otingo Development Corp (Otingo) of Nassau, Bahamas, which was
wholly-owned indirectly by the settlement, lent SwF 93m to ITH which
ITH lent in turn to EMV. Azeng Corp, a shelf company controlled by the
settlement, borrowed SwF 100m from OBL and advanced it to Otingo.
106. Dissul AG, another company controlled by the 1974 settlement,
agreed with Handelsbank to deposit SwF 8m with Handelsbank as security
for the purchase by Handelsbank of the shares in ITH for SwF 7m.
Handelsbank agreed to manage 'in conformity with the instructions
given to it directly by Dissul' and entered into a put and call option
with Dissul for the ITH shares.
107. These loans and transactions were part of a single circular
transaction involving entities which were (apart from Handelsbank)
directly or indirectly owned by the settlement. Mr Mainz of Coopers
and Lybrand saw no evidence of any movement of cash. The transactions
were finalised at a series of meetings in Basel on 26 August 1980.
108. The result was that EMV in Holland owned some 65% of the DUK
shares which it had acquired from OBL; EMV was owned or controlled
indirectly by the settlement as OBL had been. OBL's main asset was the
loan of SwF 100m to Azeng Corp; OBL also had £1,042,591 on deposit at
the year end. The loan from Azeng was at such rate of interest as
should be agreed from time to time and otherwise would be interest-
free.
109. DUK itself assisted the operation by capitalising £2m of reserves
in a one-for-one issue enabling stamp duty to be reduced since OBL
renounced its entitlement in favour of EMV.
110. In August 1980 the DUK group entered into a seven-year covenant
of £100,000 p a in favour of CBF. In 1980 the trustees of that
foundation also purchased approximately 475% of the share capital of
DUK from various directors other than Mr Botnar. The dividend income
from these shares between 1980 and 1992 amounted to approximately
£12.5m.
September 1980 to June 1984 and the transfer to European Motor
Vehicles Corp
111. On 2 December and 12 December 1980 and 19 February 1981 DUK paid
dividends totalling £7.50 a share, at a cost of £14.6m.
112. A bill rendered by Dr Weder, manager and legal counsel at
Handelsbank, to EMV on 3 December 1982 for SwF 9,971 was signed
'Einverstanden' by Mr Botnar. Another bill from Loyens and Volkmaars
of the Hague to Dr Lorez for obtaining a tax ruling re EMV was
similarly signed by Mr Botnar; the date of this is unclear. A further
bill from Dr Lorez's firm to EMV dated 9 March 1983 was signed by Mr
Botnar.
113. In 1981 the tax advantage of having a Dutch company holding the
DUK shares was removed and in 1983 the liquidation of EMV was
discussed.
114. Meanwhile on 1 December 1983 OBL was put into liquidation. On 20
December 1983 the liquidator of OBL waived the obligations of Azeng
Corp in relation to its loan of SwF 100m to OBL.
115. On 20 January 1984 the board of EMV resolved to distribute all
EMV's shares in DUK to ITH as a dividend. On the same day DUK made a
one-for-one bonus issue and EMV renounced its shares in favour of ITH.
On 29 May 1984 EMV was put into liquidation. All of the income of EMV
was paid to its parent ITH.
116. On 29 June 1984 Dissul exercised its option to acquire the ITH
shares from Handelsbank in the Bahamas. On 2 July Dissul sold its ITH
shares to European Motor Vehicles Corp (EMVC), Panama, in
consideration of SwF 4.5m which Dissul lent to EMVC.
117. The only bearer share certificate in EMVC is held by another
Panamanian company, Nabotar Finance & Holdings Corp Ltd (Nabotar); the
only share certificate in Nabotar is held by Dr Lenz to the order of
the trustees of the 1974 settlement.
118. Also on 29 June 1984 EMVC directed ITH to distribute to it all of
ITH's shares in DUK which had by then become NUK. Shortly after this
ITH was liquidated.
119. We now return to DUK itself.
120. In the year to July 1981 profits after taxation were £48m on
sales of £303m; £14.6m was distributed in dividends, an amount which
exceeded the distribution for all years together up to then; and
charitable contributions amounted to £256,744.
121. Profits fell back somewhat in the following years to £27.3m to
July 1982 and £26m to July 1983. The dividend distribution for the
periods increased to £14.7m and £19.7m and charitable contributions
amounted to £291,246 and £350,792 respectively.
122. On 1 January 1984 DUK changed its name to NUK in line with a
decision of Nissan Motor Co of Japan to drop the name Datsun and
replace it with Nissan.
123. At around this time Nissan Motor Co announced the construction of
a manufacturing plant in Sunderland. The original feasibility studies
had started in 1980. The plans by 1985 were for annual production of
25,000 cars to be made from assembly kits rising to 100,000 cars by
1992.
124. The sales of NUK to July 1983 were 107,000 units.
July 1984 to April 1990
125. The profits of NUK to July 1984 were £33.9m on sales of £448m and
profits to July 1985 were £29.8m on sales of £496m.
126. In November 1984 Mr Botnar sold his shares in Nissan Suisse AG
for around SwF 100m.
127. In 1985 a further trust (the 1985 settlement) was formed in
Switzerland or Liechtenstein under which Mr and Mrs Botnar were the
only named beneficiaries. The trustees were Merco Trust AG (Merco), Dr
Keicher and Dr Lotz. Mr Haddock sent a draft for this settlement to Dr
Lenz on 7 March 1985.
128. On 14 January 1988 a payment of SwF 767,898 was made by EMVC to
Dr Lenz's firm. On 28 January Dr Lenz's firm paid SwF 2,107,344 to the
Fondation Camelia Botnar of Villars, Switzerland, the activities of
which are of a charitable nature. A sum roughly equal to the balance
was paid to ABC Corp.
129. Between 1984 and April 1988 dividends totalling £69,824,180 were
received by EMVC. Apart from the payments mentioned, some £12.4m was
paid to Nabotor, EMVC's parent. The balance after expenses was
retained.
130. On 7 October 1988 EMVC made a payment of £820,000 to an account
in the name of 'Beneficiary Trust settlement 1985'. On 13 October 1988
£680,000 was paid by EMVC to the client account of 'Drs Lotz, Baumann,
Lenz and Iselin'; on the next day an identical sum was paid from this
account to an account of Merco. It is accepted that these sums were
actually used to finance the purchase of a property in Eaton Square
and to refurbish it. Mr Haddock carried out the conveyancing, the
property being purchased in the name of the trustees of the 1985
settlement. The flat was used by Mr Botnar when in London in the last
two years under the appeal.
131. Meanwhile sporadic discussions took place with Nissan Motor Corp
for the sale of NUK shares. It would appear that those started in
1981. On 14 November 1985 Mr Botnar representing the shareholders
signed a 'memorandum of understanding' with Nissan Motor Corp and
Mitsui & Co Ltd for the gradual transfer of the shares and management
of NUK. He also signed, together with Mr Hunt and Mr Shannon, in a
personal capacity as a 'guarantor'. The memorandum provided for the
transfer of 26% of the NUK shares not later than 31 July 1986 and the
balance not later than 31 July 1988. The price was to be subject to
negotiation between the parties, independent valuers nominated by the
parties having reported. The guarantors were to retire from the
management after the sale was completed. Morgan Grenfell acted for
Nissan and Mitsui and Kleinwort Benson for the shareholders in NUK.
132. The timetable proved too ambitious. The shareholders of NUK
commissioned a report from Ernst and Whinney which was given to Morgan
Grenfell on 27 March 1987; the report, which ran to 850 pages,
produced 350 questions from Morgan Grenfell. A letter by Mr Botnar
dated 29 April 1987 refers to an understanding signed on 3 February
1987 for the purchase of 25% of the shares. On 10 June 1987 Kleinwort
Benson advised Mr Botnar that on an earnings basis the valuation would
be £750m. On 9 November 1987 Mr Botnar sent to Morgan Grenfell a copy
of a fax from Japan suggesting £400m for the whole group. A fax dated
12 November 1987 from Mr Botnar to Nissan Motor Corpstated that the
sale would be confined to the distribution business, the finance and
retail business being no longer for sale. Nissan Motor Corp replied
that they were willing to consider this and put forward a value of
£220m for the vehicle and spare parts distribution and internal
transport operations.
133. Sales rose sharply in the year to July 1986 to £671m giving
profits of £44m and in the following year profits were £65m on sales
of £796m. Sales to July 1988 declined somewhat to £796m with profits
down at £54m.
134. In 1987 the decision was taken to split NUK. A new company was
formed in November 1987 and on 26 November 1987 changed its name to
Automotive and Financial Group Holdings Ltd (AFGH). Another new
company Nissan United Kingdom Holdings Ltd (NUKH) was formed. The
shareholders of NUK received one share in AFGH and one share in NUKH
for each two shares in NUK. The effect was that EMVC had 71.5% of the
shares in each company. NUK was a wholly-owned subsidiary of NUKH.
135. On 31 July 1989 EMVC sold its shares in AFGH to Union Bank of
Switzerland; Otingo pledged cash assets to Union Bank as secretary; Mr
Mainz concluded that those shares were sold on a similar basis as the
put/call arrangement between Dissul and Handelsbank in respect of the
ITH shares.
136. In December 1990 Union Bank sold the AFGH shares to a Bahamian
subsidiary of Otingo.
137. Between May 1988 and April 1990 EMVC received £57,214,230 in
dividends from NUK and AFGH. Apart from the moneys in fact used in
connection with Eaton Square, the balance is held by Otingo or by
other companies controlled by the 1974 settlement.
138. Although the profits of NUK were down to £44m for the year to 31
July 1989, AFGH showed a profit of £40m. In the year to 31 July 1990
NUK made profits of £46m and AFGH made £44m. In the year to 31 July
1991 the profits of NUK were £37m before extraordinary items and those
of AFGH were £39m; interim dividends totalling £40m were paid after
the year-end. Charitable donations of £2.8m were paid during the year
including a first instalment of £152,000 of a donation of £8m towards
a new wing at Great Ormond Street Hospital. Total charitable
contributions in the years 1984 to 1990 came to in excess of £9.8m.
139. On 27 September 1990 Nissan Motor Co gave notice to NUKH
terminating the agreement for the supply of Nissan vehicles and parts
in the United Kingdom.
140. On 26 June 1991 the Revenue, acting under a warrant under s 20 of
the Taxes Management Act 1970, seized certain of the records of NUK.
The Mainz report
141. The Mainz's report was commissioned by Mr Botnar's solicitors to
establish the ownership of the controlling shareholding in NUK,
formerly DUK, and the ultimate recipient of the dividends paid on
those shares. Mr Mainz was not asked to report on Nustad. Mr Botnar
gave specific authority to Dr Lenz to disclose confidential material.
142. Although the report was commissioned by the taxpayer, Mr Mainz is
a partner in Coopers and Lybrand, a firm of the highest repute, and
there was no suggestion that he was not acting as an independent
expert. Subject to only one point of minor detail, we have no
hesitation in accepting the conclusions set out in para 202:
'In summary, I conclude that:
(a) the 1974 settlement has been the ultimate beneficial owner of the
controlling shareholding in NUK since 1974;
(b) the 1974 settlement's ownership of the shares in the NUK has been
channelled through various structures;
(c) Dr Lenz has at all times been the protector of the 1974 settlement
and has, in practice, controlled it since 1974;
(d) apart from two transactions in relation to which I have not been
able to reach a final conclusion, there is no evidence that Mr or Mrs
Botnar have benefited personally from the dividends and subsequent
investment income received by the 1974 settlement or its underlying
companies. The two transactions are:
(i) a payment to ABC Corporation of SwF 664,383 (approximately £0.3m);
and
(ii) two payments in respect of a residence at 22 Eaton Square,
London, totalling SwF 4,045,500 (approximately £1.5m);
(e) distributions have been made to two charitable organisations as
follows:
(i) The Camelia Botnar Foundation (UK) -- £3.3m;
(ii) Fondation Camelia Botnar (Switzerland) -- £0.8m;
(f) the only other past distribution from the 1974 settlement or its
underlying companies have been made to pay the fees of those
responsible for managing its affairs.'
143. The small point of detail is that it seems to us, based on para
561 of the report and the banking documents appended (AAJM 199), that
payments for the residence at Eaton Square were two sterling payments
totalling exactly £1.5m.
144. In respect of the ABC Corp Mr Mainz reported that a payment of
SwF 664,383 was made by EMVC on 2 February 1988. Mr Mainz stated:
'We have seen banking documentation at the premises of Dr Lenz which
satisfied me that the funds were transferred to a bank account of ABC
Corporation. I have not been able to establish whether any of these
funds were distributed to benefit Mr or Mrs Botnar.'
145. We have already mentioned the Eaton Square payments and we return
to those later.
146. Mr Mainz reported that from 1974 to 1980 DUK paid dividends
totalling £3,147,333, of which £2,305,616 went to OBL. OBL received an
additional £1,071,000 in interest on deposits and exchange gains. OBL
made charitable donations to CBF totalling £3,262,237 and the balance
was spent on administration costs.
147. He reported that from 1980 to 1984 EMV received £38,046,480 out
of a total of £59,117,000 dividends declared. EMV paid £31.5m in loan
repayments and interest to ITH together with £8.8m in dividends. ITH
paid £32.9m in loan repayments and interest to Otingo which made no
distributions benefiting either Mr or Mrs Botnar. ITH paid a dividend
of SwF 4m to Handelsbank.
148. Mr Mainz reported that from 1984 to 1988 EMVC received
£69,824,180 out of a total of £105m dividends paid by NUK. EMVC paid
dividends of £12.4m to Nabotar and made payments of £0.3m (SwF
664,383) to ABC Corp and £0.8m to Fondation Camelia Botnar.
149. He reported that from 1988 to 1992 EMVC received £85,821,480 in
dividends from NUKH out of total dividends of £120m. EMVC paid the
£1.5m expended on 22 Eaton Square. It distributed £31.6m to Otingo and
£103.8m to G F International Finance and Investments Ltd (GF) of
Nassau, Bahamas, a subsidiary of Otingo. EMVC received £91.3m from
Union Bank of Switzerland from the sale of the AFGH shares which
however remained under the control of Otingo.
150. This appeal raises a large number of issues both as to the law
and to the facts.
151. In the light of the evidence as a whole and in particular the
Lenz memorandum we record at the outset that we are clearly satisfied
that the establishment of the settlement was part of a series of
steps, including the exchange of shares with OBL, which were taken to
ensure that the DUK shares and the income therefrom could at some time
in the future be utilised for the benefit of Mr and Mrs Botnar, while
in the meantime minimising taxation and establishing a cloak which
concealed that intended future result.
Did the use of the cl 3(c) power in the way envisaged by the Lenz
memorandum involve a fraud on the power?
152. During the initial hearing neither party addressed us on this
issue. Mr Munby said that difficult questions might arise if a fraud
on the power was involved but said that it did not arise. Mr Park
understandably felt constrained from arguing the point.
153. When preparing our preliminary decision on liability we formed
the view that the use of the cl 3(c) power as envisaged in the
memorandum namely to benefit Mr or Mrs Botnar would be for a purpose
foreign to the power and thus void. We considered that we could not
properly ignore the point; however, since no argument had been
addressed to us we expressly provided in our preliminary decision that
the parties would be at liberty to adduce argument as to this aspect.
Accordingly, both parties addressed us on the question at the further
hearing.
154. Both parties agreed that in the absence of any evidence as to
Liechtenstein law, that law must be presumed to be the same as in
England. We observe that in the light of Dr Lenz's evidence and the
actual administration of the settlement, this is an artificial
assumption. However, we accept that it is the law.
155. In our judgment the whole plan in the memorandum by which it is
envisaged that Mr Botnar or his wife would benefit involves the
exercise of the cl 3(c) power in a way designed to benefit Mr Botnar
or his wife rather than the persons for whose benefit the power would
apparently be exercised. It is well-established law that an
appointment is vitiated if its intention is to benefit a non-object.
156. The law is conveniently set out in 36 Halsbury's Laws (4th edn)
para 962:
'962. Fraudulent appointments. A person who has a limited power must
exercise it in good faith for the end designed, otherwise the
execution is a fraud on the power, and so void. Fraud in this
connection does not necessarily imply any moral turpitude. It is used
to cover all cases in which the purpose of the appointment is to
effect some object that is beyond the purpose and intent of the power,
whether this be selfish or, in the appointor's belief, a more
beneficial mode of disposition of the property and more consonent with
that which he believes to be the real wish of the donor of the power
under the circumstances existing at the date of the appointment. The
true intention of the donor must be ascertained from the instrument
creating it, and not otherwise, even if the appointor is also the
donor.'
Halsbury's Laws cites Vatcher v Paull [1915] AC 372 where Lord Parker
of Waddington said (at 378) that the term fraud on a power 'merely
means that the power has been exercised for a purpose, or with an
intention, beyond the scope of or not justified by the instrument
creating the power'.
157. Mr Munby's basic submission was that the transfer of capital to
another settlement for the purpose of Mr Botnar or his wife was not
beyond the purpose of the power under cl 3(c) having regard to the
terms of the settlement and in particular to the wording of cl 3(c)
itself. He said that the power under cl 3(c) was by its express terms
a power to transfer assets to a different trust the objects of which
were not confined to members of the appointed class and which could
include Mr Botnar or his wife. In essence his case was that properly
construed the objects of the cl 3(c) power were not confined to
members of the appointed class but included any other beneficiaries or
discretionary objects under the terms of the transferee settlement;
these other beneficiaries or discretionary objects were, he said, not
merely incidental to the power exercisable in favour of the appointed
class but were themselves objects of the cl 3(c) power itself. He said
that the only necessary involvement of a member of the appointed class
in the recipient settlement was that such a member should be
interested within the definition in cl 4(a); it would be sufficient if
there was power to pay a very modest part of the income (say 1%) to
one member of the appointed class. He said that the power under cl
3(c) was exercisable for the benefit of those who were beneficiaries
of the recipient settlement regardless of who they were, provided only
that a member of the appointed class was interested.
158. Mr Munby pointed out that under cl 8(a) the appointed class could
be extended to include anyone in the world except an excluded person.
The fact that the recipient settlement might include persons excluded
under the 1974 settlement did not matter because cl 23 only precluded
excluded persons from taking any benefit 'in accordance with the terms
of [the 1974] settlement'. Once transferred under cl 3(c) the capital
passed out of the settlement. He contrasted cl 3(b) which was
exercisable 'for the benefit of' one or more members of the appointed
class with cl 3(c) which had no such limitation merely requiring that
a member of the appointed class should be 'interested' within cl 4(a).
159. Mr Munby said that following Re Manisty's Settlement [1974] Ch 17
the fact that the cl 8(a) power could be used to add to the appointed
class anyone who was not an excluded person or that anyone in the
world might be interested in the recipient settlement created no
problem of uncertainty.
160. Mr Park accepted that there was never any intention of benefiting
any member of the appointed class. His case was of course that Mr
Botnar's purposes were charitable. The memorandum, however, makes no
mention of charity and at this stage it is the exercise of the power
as envisaged in the memorandum with which we are concerned.
161. Mr Park's basic submission was that the power in cl 3(c) was a
standard form provision designed to enable assets to be transferred to
another settlement in which members of the appointed class were
interested notwithstanding that there might also be other
beneficiaries or objects under the recipient settlement; he pointed
out its similarity to that at 40 Forms and Precedents (5th edn) Form
88 [1635] (see now 40(1) Forms and Precedents (5th edn) (1997 reissue)
Form 93 [1442]). He said that the reference to trusts, powers or
provisions in favour of other persons was commonly inserted to remove
any doubt as to the validity of such transfer; such a provision was
not put into a settlement to enable the appointor trustees to provide
benefits to persons who were not objects of their own settlement.
162. He said that, if the power in cl 3(c) was intended to empower the
trustees to transfer the trust fund to trustees of any other
settlement regardless of who the beneficiaries might be, it should
have been differently worded. He said that the words used made it look
as if the power could only be exercised in the interests of members of
the appointed class and such was their effect. The objects of the cl
3(c) power were the members of the appointed class who had interests
under the recipient settlement. The use of the power to benefit other
persons was foreign to the power.
163. Mr Park relied on recital (A) to the settlement which read:
'The Settlor desires to provide a fund to be applied for the benefit
of the persons hereinafter described and accordingly to create such
trusts as hereinafter appear.'
He said that it would be alien to the recital to benefit third parties
including persons excluded under cl 23. He said that the 'persons
hereinafter described' included persons added to the 'Appointed Class'
but were not apt to include beneficiaries under another settlement.
164. Mr Munby accepted that the recital was relevant as an aid to
construction but said that it could not control the true legal effect
of the dispositive provisions of the settlement. He submitted that in
fact the wording of the recital was apt to include those coming in
under the cl 3(c) power. Properly construed the objects of the cl 3(c)
power could include Mr Botnar if he was interested in the transferee
settlement: the objects were not confined to members of the appointed
class. He said that the power could be validly exercised by appointing
to a settlement under which relatives of the trustees were
beneficiaries and were intended to benefit so long only as a member of
the appointed class was interested. He said that there was no warrant
for confining the objects of the cl 3(c) power to members of the
appointed class.
165. In our judgment this issue depends on the width of the cl 3(c)
power and, more specifically, on ascertaining the objects of that
power. The power is a special power in favour of a class and is valid
if it can be said with certainty that any given individual is or is
not a member of the class (see Re Manisty's Settlement [1974] Ch 17 at
22). In order to satisfy the requirement of certainty it is necessary
to be able to ascertain whether any given individual is or is not an
object of the power.
166. It is clear beyond argument that the objects of the power in cl
3(c) include all members of the appointed class. The question is,
however, whether those objects include all other persons who may
benefit under any other settlement provided only that a member of the
appointed class is interested under such settlement within the meaning
of cl 4(a).
167. If the use of the cl 3(c) power in the way envisaged in the Lenz
memorandum is to be valid, firstly any other persons who might benefit
under a transferee settlement must be objects of that power, and
secondly those objects must include Mr Botnar and his wife.
168. What is envisaged in the memorandum is not an application of
trust capital for the benefit of members of the appointed class which
may incidentally confer a benefit on Mr Botnar, but an application
intended specifically to benefit Mr Botnar. Unless Mr Botnar himself
is an object of the power such an exercise would be a fraud on the
power as being for a purpose foreign to the power.
169. Clause 23(b) of the settlement provides 'No part of the capital
or income of the trust fund shall be paid or lent or applied for the
benefit of any such excluded person'. Mr Munby did not address us on
that sub-clause presumably on the basis that it is confined by the
opening words of cl 23 to persons 'capable of taking any benefit in
accordance with the terms of this settlement [emphasis added]'. He
said that the operation of cl 23 was confined to the settlement
itself.
170. Clause 3(c) is, by its terms, concerned with the payment or
application of capital of the trust fund. The transfer of capital to a
new settlement under the power in cl 3(c) is in our view 'in
accordance with the terms of this settlement'. It seems to us that if
the true purpose of a transfer is to benefit Mr or Mrs Botnar, the
capital transferred thereby is being applied for the benefit of an
excluded person within cl 3(c). We do not accept that the words
'taking any benefit in accordance with the terms of this settlement'
at the beginning of cl 23 have the effect of confining the clause,
including in particular cl 23(b), to cases where the excluded person
takes a benefit directly under the express words of the settlement.
The width of cl 23(b) indicates that the opening words of cl 23 should
not be given a narrow and rigid construction.
171. In our judgment, quite apart from the specific wording of cl
23(b), when account is taken of cl 23 as a whole it is clear that
excluded persons cannot be objects of the cl 3(c) power. The
construction of cl 3(c) to include excluded persons as objects means
that such persons would be 'capable of taking a benefit in accordance
with the terms of this settlement'. It seems to us that if Mr Munby is
right the trustees could transfer the whole capital to a settlement
under which Mr Botnar was entitled absolutely contingently on
surviving, say, a year, with a default trust for a member of the
appointed class, without Mr Botnar taking a benefit 'in accordance
with the terms of this settlement'.
172. At one point Mr Munby submitted that the transferee settlement
under which a member of the appointed class is interested is an object
of the cl 3(c) power; however, in his reply his submission was that it
is the beneficiaries of that settlement who are the objects rather
than the settlement itself. We doubt whether in law a settlement (or
its trustees) could be the object of a power as opposed to its
beneficiaries.
173. It is to be noted that in fact para 12 of the memorandum
envisages the subsequent addition of Mr and Mrs Botnar as
beneficiaries of the transferee settlement. On that basis his
proposition involves cl 3(c) being capable of being used for the
purpose of benefiting persons who are not even beneficiaries of the
transferee trust at the time.
174. Quite apart from the effect of cl 23, it seems to us that, when
construed on its own, the power under cl 3(c) is, on its natural
meaning, exercisable solely for the benefit of members of the
appointed class and that any benefit to others with interests under a
transferee settlement is incidental. The words under which those
others may come in are --
'. . . notwithstanding that such other trust may also contain trusts
powers and provisions (discretionary or otherwise) in favour of some
other person or persons or objects.'
We consider that, on a normal use of English, particularly in the
light of the word 'notwithstanding' those 'other' persons or objects
are not the objects of the cl 3(c) power but are merely incidental
thereto. This is essentially a question of impression and not
susceptible to great elaboration.
175. Our conclusion is, therefore, that the use of the cl 3(c) power
in the way contemplated by the Lenz memorandum would be a breach of
trust as being for a purpose foreign to the power.
Was Mr Botnar 'such an individual' within s 478(1) of the 1970 Act and
s 739(2) of the 1988 Act?
176. Mr Park submitted that, following the decision of the House of
Lords in Vestey v IRC [1980] STC 10, [1980] AC 1148 (Vestey (No 2))
the phrase 'such an individual' in s 478(1) and (2) of the 1988 Act
means an individual who has sought to avoid income tax by a transfer
of assets by virtue or in consequence of which income becomes payable
to a non-resident.
177. In that case the House of Lords overruled its earlier decision in
Congreve v IRC (1948) 30 TC 163 where it had been held that 'such an
individual' simply meant an individual who was ordinarily resident in
the United Kingdom.
178. There is no dispute that the words 'such an individual' refer
back to the preamble in s 478. The dispute is over how much of the
preamble has to be read into the phrase and what is its effect.
179. Mr Park relied on the opinions of Viscount Dilhorne (see [1980]
STC 10 at 26 and 27, [1980] AC 1148 at 1183 and 1184), Lord Edmund-
Davies (see [1980] STC 10 at 36-37, [1980] AC 1148 at 1195-1196) and
Lord Keith. The point was put most succinctly by Lord Keith who said
([1980] STC 10 at 38, [1980] AC 1148 at 1197):
'I consider that the natural and intended meaning of the words "such
an individual" in s 412(1) is that they indicate not merely an
individual ordinarily resident in the United Kingdom, but an
individual so resident who has sought to avoid liability to income tax
by means of such transfers of assets as are mentioned in the
preamble.'
180. Mr Munby submitted that it is sufficient that the transferee
should in fact avoid tax by means of such transfers and that Vestey
(No 2) did not overrule Sassoon v IRC (1943) 25 TC 154, Latilla v IRC
[1943] AC 377, 25 TC 107, Philippi v IRC [1971] 1 WLR 1272, 47 TC 75
and Corbett's Exors v IRC (1942) 25 TC 305 at first instance, where it
was held that the legislation was not confined to transfers the
purpose of which was the avoidance of income tax. He argued that it
was inconceivable that the House of Lords would not have made express
reference to the fact if it had in truth intended the result advanced
by Mr Park. He said that this interpretation would make the escape
clause in s 741 redundant.
181. Mr Munby relied on the opinion by Lord Wilberforce in Vestey (No
2) where he said (see [1980] STC 10 at 20, [1980] AC 1148 at
1174-1175):
'There are undoubtedly two possible interpretations of s 412 of the
1952 Act, particularly having regard to the preamble. The first is to
regard it as having a limited effect; to be directed against persons
who transfer assets abroad; who by means of such transfers avoid tax,
and yet manage when resident in the United Kingdom to obtain or to be
in a position to obtain benefits from those assets. For myself I
regard this as being the natural meaning of the section.'
182. He stressed that Lord Wilberforce referred to 'tax' rather than
'income tax'.
183. He submitted that in the preamble to s 478 it is necessary to
distinguish between the transfer and the consequence of the transfer
and that 'liability to income tax' relates to the consequence. On his
submission the individual who is caught is an individual who by means
of a transfer brings about a certain state of affairs. The purpose
referred to in the preamble was, he submitted, the purpose of the
legislation not the purpose of the transfer.
185. It is clear that the meaning of the phrase 'such an individual'
must be found in the preamble and that it is not confined to an
individual 'ordinarily resident in the United Kingdom'. Once you go
beyond that restricted meaning in order to ascertain what individuals
are comprised in the phrase 'such an individual' it seems to us
difficult to find any logical stopping place short of importing the
whole of the preamble.
186. In our view it therefore follows that 'such an individual' is an
individual ordinarily resident in the United Kingdom who, by means of
a transfer of assets in consequence of which income becomes payable to
a non-resident, avoids liability to income tax apart from the
operation of these provisions.
187. The issue remains however whether the words 'by means of' are to
be interpreted as 'purposive' requiring that the result of the
avoidance of tax be intended or sought for, or whether they are
'consequential' and thus satisfied if the consequences of the
transfer, whatever the intention, is a potential avoidance of
liability to tax.
188. The natural meaning of 'by means of' does appear to be purposive
rather than merely causative. However, there is considerable force in
the argument that intention to achieve avoidance of liability to
income tax cannot be a necessary factor within the preamble in view of
the relief under sub-s (3). If the intention to avoid income tax has
to exist then one of the purposes of the transfer is inevitably the
avoiding of liability to taxation of some kind. The existence of the
relief under sub-s (3) presupposes that there can be a situation when
there is no purpose to avoid liability to any taxation but liability
might nevertheless arise if there were no relief.
189. Mr Park readily conceded that his interpretation ran counter to
the decision of the Court of Appeal in Sassoon. In that case Major
Sassoon created a Swiss company to which he and his wife transferred
investments. The Special Commissioners found that the only purpose of
the transfer was the avoidance of estate duty. The Court of Appeal,
dismissing the taxpayer's appeal rejected the contention that the
reference to 'taxation' in the proviso to s 18(1) of the Finance Act
1936 was confined to income tax. If Mr Park's interpretation of the
expression 'such an individual' is correct, the taxpayer would have
succeeded in that case without recourse to the proviso, which is in
similar, although by no means identical terms, to s 478(3). It is
therefore implicit in that decision that the expression 'such an
individual' is not confined to individuals who by means of transfers
of assets seek to avoid income tax.
190. Mr Park's construction which arises out of Vestey (No 2) has not
in fact been directly considered in any earlier case; Sassoon has been
regarded as good law in a number of other decisions before Vestey (No
2).
191. But for the opinions expressed in Vestey (No 2), we would be
bound by the implicit basis of those earlier decisions. If it is
merely necessary that income tax be avoided as a result of the
transfer, Mr Botnar is clearly 'such an individual' within s 478(1).
192. However, in the light of the interpretation put upon the preamble
by Lord Keith, Viscount Dilhorne and Lord Edmund Davies in Vestey (No
2) we consider it proper to consider the evidence on the footing that
the existence of an intention to avoid income tax by the individual
concerned is a required feature of 'such an individual'.
193. However, even on that basis we see no reason why the avoidance of
income tax needs to have been the sole or even the main purpose; it is
enough if it was one of the purposes.
194. Mr Park submitted that the only events to be examined when
deciding whether Mr Botnar was such an individual were the transfers
of shares to OBL in Guernsey, that being the transfer which caused the
income to be payable to a non-resident.
195. Mr Munby said that it is necessary to look also at the making of
the settlement. He relied on Phillipi. However, Phillipi was concerned
with the escape clause and does not in our view assist.
196. When determining whether an individual is 'such an individual'
Vestey (No 2) requires us to consider whether the individual in
question has made a transfer of the type referred to in the preamble
to s 478. Such a transfer is a transfer 'by virtue or in consequence
whereof, either alone or in conjunction with associated operations,
income becomes payable to' a non-resident. In the present case the
settlement itself did not cause the income to be payable to OBL; the
settlement affected the ownership of OBL. Later associated operations
caused the income to be payable to other non-residents, but again it
was not any transfer constituting the 1974 settlement which caused
income to be payable to EMV or EMVC.
197. However, when considering Mr Botnar's purpose in March 1974, we
regard it as wholly unrealistic to ignore what was done by him or on
his behalf between March and October of that year, since the later
actions cast light on the purpose of the transfer.
198. Mr Botnar's statement included the following: 'I think that the
only reason for the transfer of the Datsun UK shares to a non-UK
company was UK estate duty.' Later he said in relation to the
settlement: 'I do feel clear that avoiding income tax on future
dividends was not a factor in my mind.'
199. We do not find these statements to be credible. Between April and
October prominent counsel were heavily involved in the matter. We do
not believe either that Mr Whiteman did not know what Mr Botnar wanted
or that Mr Botnar did not know what was being done on his behalf. The
memorandum drafted by Mr Haddock and settled by Mr Whiteman shows that
very considerable thought was obviously directed at the income tax
aspect; it stated at para 10 that the trustees 'are fully aware of the
reasons why the settlement was drafted in this way'. The trustees can
only have been aware through being told by Dr Lenz. Mr Botnar clearly
had total confidence in Dr Lenz. It is inconceivable that with a
transaction of this importance Dr Lenz would not have been in close
contact with Mr Botnar ascertaining his wishes and informing him of
progress. Dr Lenz met Mr Whiteman once or twice before the settlement
was executed and met Mr Haddock in Basel in August; he also obtained
waivers from the proposed 'beneficiaries'. In addition Mr Haddock
explained the settlement to Mr Botnar.
200. Apart from the fact that Mr Grundy was replaced by Mr Whiteman we
see no reason to believe that income tax was not a factor from well
before the March transfer. We find it inconceivable that someone as
experienced as Mr Grundy would not have considered that aspect. Indeed
Mr Haddock told us that para 8 of the memorandum was based on Mr
Grundy's opinion. This was an opinion given by Mr Grundy in 1972.
201. Mr Shannon gave evidence that Mr Botnar beneficially owned some
65% of the shares in Nustad before the March transfer. While it is
necessary to treat his evidence with some caution, since he is serving
a custodial sentence for an offence in relation to NUK's tax affairs
following prosecution by the Revenue, we have no hesitation in
accepting this part of his evidence and that the 79,000 shares in DUK
transferred by Nustad represented the full 65% interest of Mr Botnar
in the shares in DUK held by Nustad. It was accordingly accepted by Mr
Park that, if Mr Shannon's evidence was accepted, this transfer was
attributable to Mr Botnar.
202. As a shareholder in Nustad Mr Shannon was in a position to know
of Mr Botnar's shareholding. It follows from his evidence that the
answers given by Rothchilds to the Bank of England on 8 January and 30
July 1974 regarding the ownership of Nustad were incorrect.
203. We are satisfied from the evidence that Mr Botnar was
instrumental in establishing DUK but did not become a director or
shareholder until late 1971. Mr Shannon's evidence was that initially
it was desired that Mr Botnar's brother, Mr Bunford, should not know
the identity of the shareholders in DUK. This is consistent with the
evidence of Mr Smith that he was not the beneficial owner of the
shares registered in his name but had executed blank transfers. Mr
Shannon told us that the DUK shares were transferred from Mr Smith and
Mrs Quodling to Nustad because it was realised that it was tax
effective to have the shareholding held abroad since resident
shareholders would be taxed on the dividends; he said that he held 15%
of Nustad himself. His evidence on this is consistent with the other
facts. We accept it.
204. The shareholding of Nustad in DUK was substantially diluted
before 1974. There was no suggestion of any compensation to Nustad for
this dilution. None was of course needed if Nustad was owned by Mr
Botnar and his colleagues. When the transfer to DUK took place, Nustad
co-operated in the sale of DUK shares to OBL as to assist in the
saving of stamp duty.
205. Mr Botnar must have been aware that the effect of the transfer of
the DUK shares to Nustad was prima facie to reduce his liability to
income tax. There was no evidence as to whether he was aware in 1971
of s 478. Dividends were paid by DUK on 22 March 1972 and 31 July 1973
when there were high marginal rates of tax. Subject to s 478 (and
arguably pt XVI) the transfer of DUK shares to OBL had the same
effect. Mr Botnar who clearly took an active interest in his tax
affairs attending a conference with Mr Grundy must have been aware of
this. We infer that Mr Botnar made no declaration for United Kingdom
tax purposes of his share of the dividends paid to Nustad on 22 March
1972 and 31 July 1973.
206. Mr Park submitted that shareholders in a private company such as
DUK would have sought to avoid the tax arising on distributions by
ploughing back profits for expansion.
207. Mr Shannon's evidence, which on this point we fully accept, was
that this business was unusual in that expansion generated more cash
since DUK was paid for sales before it had to pay Nissan in Japan.
Units were imported on 90-day bills, the average passage took 30 days
and they could be sold to dealers immediately on arrival. We conclude
that in practice the close company regime and the risk of shortfall
assessments would have made it difficult for DUK to avoid considerable
distributions.
208. Mr Haddock was not apparently actively involved in the March 1974
transfer. He said that in 1976 during a conference in Mr Whiteman's
chambers Mr Botnar stated that the intentions of the settlement were
charitable and there was no intention that he or Mrs Botnar should
profit. This was clearly news to his advisers since on this basis most
of the work in 1974 was wholly misdirected. From the evidence given by
Mr Haddock and Mr Shannon, we do not believe that Mr Botnar would have
failed to make his intentions clear in 1974. We consider that Mr
Botnar's statement in 1976 was prompted by the questions already being
raised by the Revenue.
209. We do not accept Dr Lenz's statement that he 'always understood'
that such income as was to be produced would be for charity and that
neither Mr nor Mrs Botnar was to benefit. This is not consistent with
the memorandum unless solely directed at income in a technical sense.
We find his evidence that the memorandum meant very little to him to
be disingenuous. Indeed we would find it extraordinary if a man of his
standing in the Swiss legal profession undertook the administration of
a settlement without even a basic understanding of what it was
designed to achieve and how. Mr Haddock gave evidence that he visited
Dr Lenz in Basel on 20 August 1974 to pass on counsel's advice and to
explain that the 'beneficiaries' were not to benefit.
210. We find and conclude that Mr Botnar was 'such an individual'
within ss 478(1) and 739(2) in respect of the transfers to OBL in
March 1974 of his 180,350 shares in DUK and the 79,000 shares in DUK
transferred by Nustad.
Was the income of OBL, EMV and EMVC 'so dealt with' as to be
'calculated' to enure for the benefit of Mr Botnar or his wife within
s 478(5)(a) and s 742(2)(a)?
211. Our initial conclusion was that the income of OBL, EMV and EMVC
was dealt with in accordance with the Lenz memorandum and was so dealt
with as to be calculated to enure for the benefit of Mr Botnar and his
wife.
212. At the outset of the second hearing, however, Mr Munby conceded
that if the use of the cl 3(c) power as visualised in the Lenz
memorandum would be in breach of trust then Mr Botnar did not have
power to enjoy within s 478(5)(a). This was on the basis of the
opinion of Lord Normand in Vestey's Exors v IRC (1949) 31 TC 1 at 89
--
'. . . nothing in either [s 18 or s 38] authorises resort to extrinsic
evidence to ascertain intention or warrants an assumption that breach
of trust will be committed or tolerated.'
Section 18 of the Finance Act 1936 was the predecessor of s 478. Mr
Munby's submission was of course that the use of cl 3(c) envisaged in
the Lenz memorandum was not a fraud on the power.
213. If he failed on the fraud on the power issue, Mr Munby did not
merely accept that the Special Commissioners should follow Lord
Normand; he went further and accepted the correctness of Lord
Normand's proposition for the purposes of this appeal and did not
reserve the issue for argument before a higher court.
214. At one stage during his submissions on the issue of fraud on the
power he submitted that Mr Botnar might benefit incidentally under the
cl 3(c) route without that being the purpose of the trustees so as to
involve a fraud on the power, this being relevant if his submissions
on the ambit of cl 3(c) were rejected.
215. It seems to us, however, that in relation to s 478(5)(a) that
this submission by Mr Munby is beside the point. We say this because
in the relevant years as appears below we hold that the income was in
fact dealt with in accordance with the plan in the Lenz memorandum,
under which cl 3(c) was to be used to benefit Mr and Mrs Botnar. That
being so the possibility that the plan could have been changed or the
route varied is irrelevant. The memorandum stated at para 10 that the
trustees were aware of the reasons why the settlement was drafted as
it was. This particular submission seems to rest on the assumption
that the trustees would adopt a different method under which they
would execute deeds intending at that time to benefit persons within
the cl 3(c) power rather than Mr Botnar with Mr Botnar only coming in
through the independent action of some other persons. This is wholly
unreal in the light of the memorandum.
216. It follows from Mr Munby's basic concession based on Vestey's
Exors v IRC that, whatever our conclusion as to how the income of OBL,
EMV and EMVC was dealt with as a matter of fact, since it cannot be
assumed that the trustees would act in breach of trust, the claim to
tax under s 478(5)(a) must fail given our conclusion as to the fraud
on the power issue.
217. However, since it is clearly possible that there will be an
appeal in this case, we proceed to consider this head on the footing
that we are wrong in our view that the use of cl 3(c) as envisaged in
the memorandum would constitute a fraud on the power.
218. Mr Park submitted that the dealing within s 478(5)(a) is dealing
at the time when the income arises and not years after. Initially, Mr
Munby said that it is necessary to look at the whole history of
dealing with income, but later said that in relation to each tax year
it is necessary to examine the history down to that year.
219. It seems to us to be particularly important in this case to focus
upon what income is to be considered under s 478(5). The 'income'
referred to in the opening lines of s 478(5) seems to us to be
particular income, it is not simply income in the round. It is
referred to as 'the income' in paras (a), (b), (d), and (e) and as
'that income' in para (c). The income to be considered within ss
478(5) and 742(2) is each dividend received by OBL, EMVC and EMV. The
fact that Mr Botnar or his wife may have had power to enjoy one
dividend does not mean that as a matter of law they had power to enjoy
all. When you come back to s 478(1) it is the income which the
taxpayer had power to enjoy which is deemed to be his income (see
Congreve v IRC (1948) 30 TC 163 at 199 per Cohen LJ).
220. In practice the definitions of 'power to enjoy' are so extensive
that this will often make no difference and on the evidence there may
be no reason to distinguish between income received at different times
or years. That does not, however, entitle us to take a simple broad
brush approach.
221. Income tax is an annual tax charged in each successive Finance
Act for that year. Even a section as wide as s 478 is concerned with
the income chargeable for separate years of assessment (see Vestey (No
2) [1980] STC 10 at 15, [1980] AC 1148 at 1167 per Lord Wilberforce).
222. We accept Mr Park's submission that ss 478(5)(a) and 742(2)(a)
are concerned with how particular income is dealt with when it arises.
Mr Park, however, conceded that this is not confined to its immediate
handling on receipt or even to what happens in the year of assessment,
if for example it is received late in the year, but that we should
look at how it is dealt with within a reasonable time of receipt.
223. Mr Park relied on the judgment of Walton J in Vestey (No 2)
[1978] STC 567 at 578-579, [1979] Ch 198 at 208 where he expressed the
opinion opposed to 'likely'; Mr Park put forward 'deliberately
intended, thought out, planned'. Mr Munby argued in favour of 'likely'
citing to us a number of authorities, concerning the meaning of
'calculated' in other statutory contexts. The judgment of Browne J in
R v Davison [1972] 1 WLR 1540 at 1544 shows the need to read the
paragraph as a whole.
224. It seems to us that, when the word 'calculated' is considered in
the context that it refers to income which is 'in fact so dealt with',
the meaning 'likely' is to be preferred to 'thought out' in the sense
of 'intended'; however, we are not sure that either 'likely' or
'intended' gives exactly the same flavour as 'calculated'.
'Calculated' here combines an element of objectivity with an element
of forethought.
225. It may not, however, make much difference because if any income
was intended to enure for the benefit of Mr Botnar it is obviously
more probable that it was likely to so enure and that it would be seen
objectively as likely to so enure.
226. We find it convenient to start by looking at the dividend of
£129,675 received by OBL on 8 November 1974. The accounts of OBL to 31
December 1974 show £129,000 as being held on deposit. It seems clear
to us that substantially the whole of the dividend was placed on
deposit and that the £129,000 on deposit could be traced to the
dividend. Paragraph 8 of the memorandum prepared by Mr Botnar's
advisers for Dr Lenz contemplated that the dividends would be
reinvested and retained by OBL rather than distributed to the
settlement. This is what happened in 1974. There was no suggestion by
Mr Park or any witness that OBL would not act in accordance with Dr
Lenz's instructions.
227. Mr Park submitted that something far more specific than retention
and investment is required to come within para (a). While beguiling at
first sight, this submission overlooks the fact that the memorandum
specifically contemplated retention by OBL until Mr and Mrs Botnar
ceased to be resident in the United Kingdom or until DUK was sold or
wound up. We hold that the 1974 dividend was in fact so dealt with as
to be calculated to enure for the benefit of Mr Botnar or his wife. We
hold that as both intended and likely.
228. All the dividends received up to the end of 1978 were dealt with
similarly.
229. In 1979 one dividend of £317,054 was received by OBL in May.
Charitable donations of £1m were given during 1979 to the CBF, the
first being of £350,000 in May. We conclude that this particular
dividend was not in fact so dealt with as to be calculated to enure
for the benefit of Mr or Mrs Botnar.
230. In our judgment the fact that thereafter the retained income of
OBL was in the event applied for charitable purposes does not alter
the fact that it was initially so dealt with as to be calculated to
enure for the benefit of Mr Botnar or his wife.
231. This brings us to the dividends received by EMV from December
1980 to November 1983. Mr Mainz concluded that these totalled
£38,046,480. EMV used the dividend income to repay the principal and
to pay the interest on the loan of SwF 93m from its parent ITH and a
further loan of SwF 3m. Apart from a dividend of SwF 4m to
Handelsbank, the money passed to Otingo which was itself owned by the
1974 settlement. We find that the dividends received by EMV were so
dealt with as to be calculated to enure for the benefit of Mr or Mrs
Botnar, again being both intended and likely to do so.
232. In making the above findings we have taken account of Mr
Haddock's evidence that Mr Botnar stated at the 1976 conference with
Mr Whiteman that he had no intention that he or his wife should ever
benefit from the settlement. We accept that Mr Botnar did say
something to that effect. However, we do not accept that such
assertion was in accordance with the facts. Consideration was given in
1976 and 1977 to converting the settlement into an exclusively
charitable trust. But this, and we infer deliberately, was not
proceeded with. None of the named beneficiaries were intended to
benefit. Clause 3(c) and the memorandum were retained unamended. There
is no evidence to suggest that the administration of the settlement
(in so far as it was administered at all) or of the companies under
its control changed in any way after the 1976 conference. If it was
not anticipated that Mr or Mrs Botnar would benefit it is not easy to
see what purpose the continuation of the whole structure served. The
charitable donations out of the settlement are modest when compared
with the income received by the companies controlled by the
settlement. If the purpose of the settlement at least from 1976 was
charitable we can see no satisfactory reason why no attempt was made
to identify appropriate charities apart from the CBF and the Swiss
foundation. Mr Botnar's interest in charities, and in particular in
children's charities and health, is not in dispute.
233. It seems to us to be pertinent that a United Kingdom charitable
trust would have been able to recover the tax credit on dividends
provided they were applied for charitable purposes. The companies
controlled by the settlement were (apart from EMV for a brief period)
unable to recover any tax credit. If the purpose was to benefit
charity, the structure was both expensive and inefficient.
234. The transactions involving EMVC were also convoluted. Mr Mainz
concluded that dividends totalling £69,824,180 were received by EMVC
between 1984 and 1988. Of this SwF 2.1m was paid to Dr Lenz's firm and
thence to the Swiss foundation. At the point of time when SwF 2.7m, of
which the SwF 2.1m was part, was sent to Dr Lenz the most recent
dividend was that of £7,157,790 paid on 2 October 1987. The accounts
of EMVC at 31 December 1987 show nearly all of the balances as
invested. The cash at the bank was substantially less than SwF 2.7m.
Focusing on that particular dividend there is no evidence to suggest
to us that it was initially so dealt with in a manner not calculated
to enure for the benefit of Mr or Mrs Botnar.
235. All the rest of the income of EMVC after expenses has remained
under the indirect control of the trustees of the settlement.
236. We hold that the entirety of the income received by EMVC was so
dealt with as to be calculated to enure for the benefit of Mr or Mrs
Botnar. It was both intended and likely so to enure. We cannot accept
Mr Park's submission that the dealings were neutral.
237. Before leaving this head of 'power to enjoy' we consider the
submissions by Mr Munby on the meaning of 'benefit'. He submitted that
'benefit' bears the widest meaning and is not confined to financial
advantage. He cited Hoffmann J in IRC v Brackett [1986] STC 521 at 540
where he referred to: 'discharge of the taxpayer's moral obligations,
which were constantly in his mind, to provide for Zsuzsi and his
children.' Mr Munby also cited Re Clore's Settlement Trusts [1966] 1
WLR 955 where the court approved a payment from a trust fund to a
charitable foundation as conferring a benefit on Mr Alan Clore, aged
21, who recognised an obligation to make appropriate donations to
charity. Mr Munby pointed to the wording of s 478(6) which provides
that account shall be taken of all benefits 'irrespective of the
nature or form of the benefits'.
238. As Mr Park pointed out the obligation of Mr Brackett to Zsuzsi
who was his mistress and the mother of two of his children may well
have been a legal obligation.
239. We note that s 478(6) covers benefits 'which may at any time
accrue to the individual'. It does not seem to us on a normal use of
English that a benefit 'accrued' to Mr Botnar by reason of the
payments by OBL to CBF.
What is the extent of the liability under s 742(2)(c)?
240. There is no dispute that subject to the 'such an individual'
point a liability arises under s 742(2)(c) by reason of the Eaton
Square flat payments in October 1988. There is, however, a substantial
dispute as in the quantum of such liability.
241. The payments for the flat were in fact misapplications of trust
funds. On the evidence before us we accept that they were made by
mistake and that the payments should have been made out of the 1985
settlement funds.
242. Mr Park contended that the benefit received was the actual use of
the flat. Mr Munby contended that there were four benefits: first, the
payments of the purchase price; second, the payment to refurbish the
flat; third, Mr Botnar's ability to use the flat, and, fourth, the
transfer of the property of the flat to Mr Botnar or the settlement.
243. We accept Mr Park's submissions as to this. The evidence was that
the flat was purchased in the name of the 1985 settlement trustees; we
hold that the payments were to them and the transfer was to them.
244. The real question under s 742(2)(c) is the question of liability
in the light of s 743(5). Mr Munby submitted that it widened the
charge otherwise imposed whereas Mr Park submitted that it cut it
down.
245. It seems to us that in the case of actual receipt of a benefit
(as opposed to mere entitlement to receive) s 743(5) is determinative
of the charge to tax thus producing a radically different result. The
subsection provides that the individual receiving a benefit provided
out of the income of a non-resident under 742(2)(c) 'shall be
chargeable for the year of assessment in which the benefit is received
on the whole of the amount or value of that benefit'. Where the power
to enjoy arises the tax is charged not on the income which the
taxpayer has power to enjoy but on the value of the benefit. This may
bear no relationship whatsoever to the income of the non-resident as
long as it originated from it even indirectly. We do not accept that s
743(5) only operates where the benefit received in a year exceeds the
relevant income. It seems to us that the words 'notwithstanding
anything in subsection (1) above' would have been better placed later
in the subsection perhaps after 'the amount or value of that benefit'.
246. If the parties are unable to agree the value of the benefit under
s 742(2)(c) on the basis of this decision the matter will need to be
relisted for further hearing.
247. Before leaving s 742(2)(c) we observe that Mr Munby did not
submit that the payments to the CBF constituted the receipt by Mr
Botnar of a benefit under this head on the basis of Brackett and
Clore.
Does s 473(5)(d) and s 742(2)(d) apply on the footing that in the
event of the exercise of powers by any person Mr Botnar might become
entitled to the beneficial enjoyment of the income of the recipient
companies?
248. Although s 478(5)(d) was amended by the Finance Act 1981, neither
counsel submitted that this made difference to the present case.
249. Mr Park submitted that in the present case something would have
to happen which is not the exercise of a power if Mr Botnar was to
receive income of OBL, EMV or EMVC. The use of cl 3(c) would involve
the establishment of a settlement of which both Mr Botnar and a member
of the appointed class under the 1974 settlement were beneficiaries;
this would not constitute the exercise of a power. He submitted that s
478(5)(d) does not apply where something has to be done which is not
the exercise of a power.
250. Mr Munby said that there was no such limitation.
251. Initially Mr Munby submitted that the whole company structure
should be disregarded as artificial and the income of the companies
should be treated as that of the settlement. However, at another point
he expressly disclaimed any submission that the structure was a sham.
252. He expressly accepted that for the purpose of s 478(5)(d) 'power'
means a lawful power although not limited to its narrow meaning in
trust law.
253. It does not seem to us that s 478(5)(d) can apply to the exercise
of a power which in law constitutes a fraud on the power. If this was
the law then it would be irrelevant that a settlor is expressly and
effectively excluded. Section 478(5)(d), which presumes legality, does
not apply to the improper exercise of a power by trustees.
254. Although we have already concluded that the use of the cl 3(c)
power in the way envisaged by the Lenz memorandum would involve a
fraud on the power, it does seem to us that, apart from the submission
of Mr Park which we have accepted in para 256 below, it is possible
that Mr Botnar might become entitled to beneficial enjoyment of the
income or part of it without a fraud on the power. This could happen
if capital is transferred to a further settlement with the genuine
intention of benefiting members of the appointed class notwithstanding
that Mr Botnar or his wife is or subsequently becomes a beneficiary
also. This may seem fanciful but many assumptions in this case are
fanciful. It would of course involve a departure from the Lenz
memorandum which we cannot assume under s 478(5)(a). In our judgment
we should not assume adherence to the Lenz memorandum for the purposes
of s 478(5)(d).
255. We were not addressed as to this in relation to s 478(5)(d)
because Mr Munby accepted that (subject to an appeal) the claim to tax
under this head failed because of our conclusion on Mr Park's other
argument.
256. Mr Park's other argument was that even if Mr Botnar did become
entitled to beneficial enjoyment of income which could be traced to
the companies it would not be 'the income' of those companies. He
relied on Lord Simonds in Vestey's Exors v IRC 31 TC 1 at 86. He
submitted that Viscount Dilhorne's observations in Vestey (No 2)
[1980] STC 10 at 30, [1980] AC 1148 at 1188 were directed at s 478(2).
We accept this.
257. We hold that s 478(5)(d) did not apply to the income received by
the companies after the formation of the settlement in October 1974.
Was Mr Botnar able to control the application of the income of OBL,
EMV and EMVC within s 478(5)(e) and s 742(2)(e)?
258. Mr Munby submitted that Mr Botnar in fact controlled Dr Lenz and
that Dr Lenz in fact controlled the companies. He said that for
control decisive influence is enough. He said that the question was:
'Are you in a position to ensure that they will act in accordance with
your wishes?' By this we understood him to mean, was Mr Botnar in a
position to ensure that the companies would act in accordance with his
wishes in applying their income? Mr Munby put it this way:
'There will be control if, on the evidence, A is a person in
accordance with whose decisions or instructions B is accustomed to
act, or if the situation is one in which "a wink is as good as a
nod".'
259. The operation of s 478(5)(e), the predecessor of s 742(2)(e), was
considered at length by Vinelott J in IRC v Schroder [1983] STC 480.
The taxpayer had transferred shares to four non-resident discretionary
trusts. Subject to the consent of the committee of protectors the
trustees had power to appoint capital and income but the taxpayer, his
wife and the committee were excluded. The taxpayer could appoint new
or additional trustees and in the event of a vacancy could appoint new
members of the committee. The committee could remove trustees. The
Crown argued that the taxpayer could in effect make and unmake
trustees until he had secured a body which would prove compliant with
his wishes. Vinelott J said ([1983] STC 480 at 502):
'It is one thing to say that a settlor is in a position to influence
or even that in the absence of any other considerations which ought
properly to be taken into account by the trustees he is in a position
to exercise a decisive influence on the exercise by the trustees of
their fiduciary powers: it is quite another to say that he is in a
position to control the exercise of those powers.'
Later, he said (at 505):
'The question is whether he was able to control the application of the
income, and to answer that question affirmatively it must in my
judgment be possible to say at least that he was in a position to
ensure that the trustees would act in accordance with his wishes
without themselves giving any independent consideration and
accordingly to act in disregard of their fiduciary duty.'
260. It seems to us that due importance must be given to the words
'able . . . to control' in s 478(5)(e) bearing in mind the words 'in
any manner whatsoever, and whether directly or indirectly'. An example
of indirect control is to be found in Lee v IRC (1941) 24 TC 207,
where the taxpayer as majority shareholder could appoint and remove
the directors of the company in question.
261. In our judgment the ability to control must go beyond an
assumption that those controlling the companies will comply with the
transferor's wishes and the fact that they do comply is immaterial. We
accept the question posed by Mr Munby, viz whether Mr Botnar was in a
position to ensure that the companies would act in accordance with his
wishes.
262. There was in fact no material before us to indicate that Mr
Botnar could have done anything if Dr Lenz had declined to do what he
wanted. The position might have been different if Dr Lenz was for
example an employee who might have been dismissed in the event of
failing to co-operate. There was, however, no evidence to suggest
this. We are satisfied that the directors of the companies would have
carried out his instructions. We have no doubt that Mr Botnar was
justified in assuming that Dr Lenz would do what he wanted. However,
we do not consider that the mere fact that Dr Lenz was in the saddle
of the settlement meant that Mr Botnar was able to ensure that the
income would be applied for his benefit. On the authority of Schroder
even decisive influence is not enough.
263. We readily accept Mr Munby's submission that Mr Botnar wished to
ensure that the shares in DUK later NUK would remain in friendly
hands. In a sense it could be said that he did in fact control the
settlement and the companies because in fact Dr Lenz did comply with
his wishes: there was no evidence of any action by Dr Lenz which was
contrary to Mr Botnar's wishes. That is not, however, the same as Mr
Botnar having the ability, even indirectly, to ensure that the income
would be applied in accordance with his wishes.
Did Mr Botnar 'receive any capital sum' within s 739(3)?
264. As an alternative to s 742(2)(c), Mr Munby submitted that Mr
Botnar received the payment for the flat and that provision of the
flat constituted the receipt of a capital sum by Mr Botnar.
265. We find as a fact that the flat was purchased in the name of the
1985 settlement trustees and that the purchase price was paid on their
behalf to the vendor. There is no evidence that Mr Botnar was a party
to the purchase contract or that this third person 'received' anything
at his direction within s 739(5). We find that Mr Botnar did not
receive a payment in respect of the purchase price. There was no
evidence that he received any payment for the refurbishment.
266. In our judgment the entitlement to use the flat is not a capital
sum within the definition in s 739(4); in particular we hold that the
entitlement to use was not a 'sum' within any normal use of English.
Conclusions as to basic liability
267. (1) Whether or not the phrase 'such an individual' in s 478(1)
and s 739(2) is limited to an individual who sought to avoid income
tax by means of transfers of assets, we hold that Mr Botnar was such
an individual. (2) We hold that the implementation of the proposals
envisaged in the memorandum would have involved a fraud on the power.
We hold that Mr Botnar did have power to enjoy within s 742(2)(c) for
1988-89 and 1989-90, but that otherwise he did not have power to enjoy
within paras (a), (d) and (e) of s 478(5) or s 742(2). (4) We hold
that Mr Botnar did not receive any capital sum within s 739(3).
Extended time limit assessments
268. We now turn to consider the extended time limit assessments for
the years from 1974-75 to 1984-85, totalling £27,076,418. The
assessments for the five years to 1989-90 totalling £37,783,923 were
in time.
269. Mr Park submitted that we should defer this part of the hearing
until we had reached a final decision on basic liability in the light
of the fraud on the power issue and that we should only consider fraud
or wilful default (fraudulent or negligent conduct from 1983-84) if he
was unsuccessful in relation to the relevant years on the issue of
basic liability.
270. We rejected this submission. Both sides indicated that an appeal
was likely on the basic issues and it is clearly desirable that the
High Court should be able to deal with all issues.
271. Section 36 of the Taxes Management Act 1970, as in force at the
time of making the assessments in respect of the years 1982-83 and
earlier, provided:
'Subject to section 41 below, where any form of fraud or wilful
default has been committed by or on behalf of any person in connection
with or in relation to tax, assessments on that person to tax may, for
the purpose of making good to the Crown any loss of tax attributable
to the fraud or wilful default, be made at any time.'
Section 41 requires that leave be given for such assessments and it is
accepted that leave was given.
272. The onus of proof lies on the Crown to establish that s 36
applies (see Amis v Colls (Inspector of Taxes) (1960) 39 TC 148).
273. The law regarding the standard of proof required is confusing. Mr
Munby relied on the recent decision of the House of Lords, Re H (a
minor) [1996] 2 WLR 8, which concerned the proof needed to establish
that a young child is likely to suffer significant harm for the
purpose of making a care order.
274. Lord Nicholls said (at 23-24):
'Where the matters in issue are facts the standard of proof required
in non-criminal proceedings is the preponderance of probability,
usually referred to as the balance of probability. This is the
established general principle. There are exceptions such as contempt
of court applications, but I can see no reason for thinking that
family proceedings are, or should be, an exception . . .
The balance of probability standard means that a court is satisfied an
event occurred if the court considers that, on the evidence, the
occurrence of the event was more likely than not. When assessing the
probabilities the court will have in mind as a factor, to whatever
extent is appropriate in the particular case, that the more serious
the allegation the less likely it is that the event occurred and,
hence, the stronger should be the evidence before the court concludes
that the allegation is established on the balance of probability.
Fraud is usually less likely than negligence . . . Built into the
preponderance of probability standard is a generous degree of
flexibility in respect of the seriousness of the allegation. Although
the result is much the same, this does not mean that where a serious
allegation is in issue the standard of proof required is higher. It
means only that the inherent probability or improbability of an event
is itself a matter to be taken into account when weighing the
probabilities and deciding whether, on balance, the event occurred.
The more improbable the event, the stronger must be the evidence that
it did occur before, on the balance of probability, its occurrence
will be established.'
Later, Lord Nicholls said (at 24) that it was better to stick to the
established law on the subject.
275. It becomes clear from the opinion of Lord Lloyd in that case (at
15) that all three counsel agreed that the correct standard of proof
was 'the balance of probabilities, but so that the more serious the
allegation the more convincing is the evidence needed to tip the
balance in respect of it' and that there was no citation of earlier
authority.
276. In fact the approach was formulated somewhat differently by the
House of Lords in R v Home Secretary, ex p Khawaja [1984] AC 74, which
concerned the standard of proof of fraud or deception rendering a
person an illegal immigrant liable to removal.
277. Lord Scarman said (at 113-114):
'The flexibility of the civil standard of proof suffices to ensure
that the court will require the high degree of probability which is
appropriate to what is at stake . . . A preponderance of probability
suffices: but the degree of probability is such that the court must be
satisfied.'
278. Lord Fraser of Tullybelton said (at 97):
'With regard to the standard of proof, I agree with my noble and
learned friend, Lord Scarman, that for the reasons explained by him,
the appropriate
standard is that which applies generally in civil proceedings, namely
proof on a balance of probabilities, the degree of probability being
proportionate to the nature and gravity of the issue. As cases such as
those in the present appeals involve grave issues of personal liberty,
the degree of probability required will be high.'
Lord Bridge and Lord Templeman said that in view of the gravity of the
charge and the consequences which would follow the court should be
satisfied to a high degree of probability.
279. Re Dellow's Will Trusts [1964] 1 WLR 451 was cited as authority
both by Lord Scarman in Khawaja and by Lord Nicholls in Re H. Ungoed-
Thomas J said (at 455):
'The more serious the allegation the more cogent is the evidence
required to overcome the unlikelihood of what is alleged and thus to
prove it . . . In this case the issue is whether or not the wife
feloniously killed her husband. There can hardly be a graver issue
than that, and its gravity weighs very heavily against establishing
that such a killing took place, even for the purposes of deciding a
civil issue.'
Since we have some difficulty in reconciling Re H and Khawaja we adopt
Ungoed-Thomas J's formulation because Re Dellow was approved in both
cases.
280. Fraud clearly involves intentional deception. In Wellington v
Reynolds (1962) 40 TC 209, Wilberforce J said, in relation to wilful
default (at 215) --
'. . . what I have to find is some deliberate or intentional failure
to do what the taxpayer ought to have done, knowing that to omit to do
so was wrong.'
Mr Munby submitted that it is enough that there is a default in the
sense of failing to do something which ought to be done and that it is
the spontaneous act of a free agent being neither casual, accidental
or unintentional. He said that it is not necessary to show conscious
wrongdoing or anything blameable. He said that the entry of an
incorrect figure on a tax return was a default and would constitute a
wilful default even if it was an honest mistake. We cannot accept
this. In any event we are bound by Wellington.
281. We now return to the facts of this case.
282. Mr Munby relied on answers given by Mr Botnar's accountants in
letters dated 1 April 1976 and 23 October 1978 as being untrue
misrepresentations constituting fraud or wilful default by Mr Botnar.
He made no allegations against Thornton Baker or any other advisers.
His contention was that Mr Botnar misled them and via them the
Revenue.
283. Mr Munby did not rely on the fact that the income from the
transferred shares was not included on Mr Botnar's tax returns.
284. On 10 November 1975 Mr Renow of the technical division of the
Revenue wrote to Thornton Baker, Mr Botnar's accountants, stating that
his income tax returns were being reviewed and enclosing a
questionnaire.
285. Question (c) read as follows:
'Has any such transfer as in b. above been made at any time since 5
April 1969 with the cognizance of your client . . . by any
company . . . in which he . . . had any direct or indirect interest of
any kind?'
The transfer referred to in (b) was, inter alia, a transfer of assets
to a company outside the United Kingdom and 'transfer of assets' was
stated to include transfers by way of subscription for shares.
286. On 1 April 1976, Thornton Baker replied 'No'.
287. This was incorrect since shares had been issued by DUK in which
Mr Botnar was interested to Nustad which was a company outside the
United Kingdom. Whatever the initial beneficial ownership of DUK (and
we consider that Mr Botnar was beneficially interested from the start)
on 15 November 1972 when 61,538 £1 shares were issued to Nustad at par
Mr Botnar was already a registered shareholder in DUK. There was no
suggestion that the issue of shares to Nustad was in the ordinary
course of carrying on a trade or business.
288. We have already found as a fact that Mr Botnar was beneficially
interested in Nustad. We regard the evidence for this as compelling.
Mr Shannon's evidence on this is supported by the surrounding
circumstances.
289. While it will be sufficient for the Revenue, in the light of our
later comments, to rely on our finding of the incorrectness of the
answer to question (c) in the letter of 1 April 1976, we consider it
appropriate to comment also on other answers in that letter, and in
particular on the answer to question (d).
290. Question (d) of the letter of 10 November 1975 asked whether Mr
Botnar had at any time since 5 April 1969 had any direct or indirect
interest in any company, trust or partnership outside the United
Kingdom other than a company whose shares were quoted on a recognised
stock exchange at the time when the interest was acquired. The answer
in the letter of 1 April 1975 was 'Please see reply to Question (b)
above'.
291. Question (b) had asked whether Mr Botnar or his wife at any time
since 5 April 1969 transferred any assets directly to a company, trust
or partnership outside the United Kingdom. The answer, after stating
that Mrs Botnar had not made any such transfer simply referred to the
transfer by Mr Botnar on 15 March 1974 of his holding of shares in DUK
to OBL in exchange for shares in OBL.
292. It follows that the answer to question (d) did not refer to or
disclose in any way Mr Botnar's interest in Nustad. It was not a full
or frank answer to the question. The facts stated in the answer given
are not in themselves untruths, but the answer is so partial a truth
that it is wholly misleading. The answer, since it was given, and
given without qualification, must have been intended to be read as a
complete answer. As such it was a clear untruth evident to someone
such as Mr Botnar who knew of his interest in Nustad.
293. The other letter on which Mr Munby relied was Thornton Baker's
letter of 23 October 1978. This was in response to a letter from Mr
Rook, of the technical division, dated 15 September 1978. Mr Rook had
observed that Mr Botnar had paid Nustad SwF 1,264,000 so that the
remaining 1,580 shares in OBL should be held to the order of Anafi; he
had then written this:
'I find it difficult to accept that Mr Botnar would have expended
approximately £350,000 of his own money with the object of placing
shares in an overseas company securely beyond the reach of either
himself or a member of his immediate family, and I shall be obliged if
you will provide some background information to help my understanding
of these transactions.'
Thornton Baker's letter of 23 October 1978, after two introductory
paragraphs, read as follows:
'You are already aware that in March 1974 O Botnar Limited made an
offer to all shareholders of Datsun UK Ltd which was accepted by Mr
Botnar in respect of all his own shares and by Nustad Holding AG in
respect of a further 79,000 shares which resulted in control of Datsun
UK Ltd being vested in O Botnar Limited. At the same time Mr Botnar
agreed to purchase Nustad's shares in O Botnar Limited in order to
acquire complete control of O Botnar Limited, and all the shares in O
Botnar Limited were accordingly registered in the name of Old Court
Ltd. Old Court Ltd was directed to hold the shares in O Botnar Limited
to the order of the Anafi Establishment on 20th March 1974. The
factual background to the transactions set out briefly above is as
follows: Mr Botnar's motives in purchasing the shares from Nustad and
in
parting with his shares of O Botnar Limited were entirely charitable.
It may be of assistance in this connection if we explain that in 1974
Mr and Mrs Botnar had more than adequate financial resources abroad
for their likely needs in all eventualities, quite apart from the
shares in question, and had no "immediate family", their only child
Camelia having died as the result of a car accident in December 1972.
The trustees of the settlement were at all times aware of the
overriding charitable intention underlying the settlement although no
specific objectives were defined at that time beyond a general
intention to benefit children in need. Initially the assets of the
trust fund consisted entirely of shares so that it was necessary to
accumulate cash in O Botnar Limited before any such objective could be
implemented. We are informed that the policy has been followed to
date, although we understand the situation has now changed in that a
charitable trust has recently been constituted in England on the
instruction of the trustees called "The Camelia Botnar Foundation",
the objects of which are associated with the establishment of a centre
or centres providing residential, recreational, and other leisure time
occupations for the benefit of children in need of such facilities by
reason of infirmity, disablement, poverty, or social and economic
circumstances. Moreover, the trustees are currently considering other
charitable objectives both in this country and abroad. Thus, as we
have demonstrated above, the explanation for the whole series of
transactions in question, which has "somewhat puzzled" you, is simple:
Mr Botnar, motivated by the highest ideals, wished to create a fund to
be used solely for charitable purposes. We trust that this background
information will complete your understanding of the transactions and
enable you to close your file.'
294. We are quite unable to accept that the purpose of the settlement
was wholly charitable. In our judgment the complicated structure set
up made no sense whatsoever if the objective was as asserted in the
letter.
295. We have considered again the evidence as to Mr Botnar's
intentions in 1974 and we find the evidence to be cogent and
compelling that the purpose was the avoidance of tax and not as
represented in the letter.
296. We accept that Mr Botnar told his advisers in 1976 that the
intentions of the settlement were charitable and that there was no
intention that he or Mrs Botnar should profit. We are wholly satisfied
that this assertion was incorrect; in saying this we take account of
the death in December 1972 of Camelia his only child.
297. It is inconceivable that Mr Botnar did not know of the
correspondence between Thornton Baker and the Revenue. We are driven
to the conclusion that he fed false information to them intending to
mislead the Revenue.
298. We accept that Mr Botnar was advised by his advisers that the
scheme set out in the Lenz memorandum was effective to avoid income
tax.
299. The statement of Mr Potter, a leading member of the Revenue Bar
at the relevant time, who was not in any way himself concerned in
advising Mr Botnar, was directed at the general view of the Bar and
solicitors and accountants at the relevant time as to the meaning and
effects of s 478. He posited a person ordinarily resident in the
United Kingdom transferring assets abroad which were in consequence
owned by an overseas company whose shares were held directly or
through holding companies by trustees outside the United Kingdom
holding on discretionary trusts under which the transferor or his
spouse while having no legal or equitable title might benefit by the
exercise of a fiduciary discretion; he further posited a document such
as the Lenz memorandum. He stated that the generally held view was
that the income of the overseas company was proof against attack under
s 478(5)(a) and that the transferor was commonly regarded as not
having 'power to enjoy' income of such company controlled by overseas
trustees merely because the individual was an object of the
discretionary trust.
300. While Mr Munby questioned the relevance and admissibility of Mr
Potter's statement he did not question its accuracy and did not cross-
examine Mr Potter.
301. We accept this evidence regarding the views among those concerned
with advising taxpayers. There was, however, no evidence that these
views were shared by the Revenue. Indeed the method of drafting the
settlement, which was clearly designed to cloak the possibility of cl
3(c) being used to benefit Mr Botnar, is a strong indication that it
was appreciated that the Revenue would challenge the scheme if the
full facts were known.
302. Mr Park accepted that if a taxpayer chooses to write a letter to
the Revenue and in it says something which he knows is untrue and puts
it in for the purpose of diverting the Revenue from taxing him that
that is fraud. He did not suggest that it was an answer to an
allegation of fraud that the taxpayer believed that, although an
assessment would be likely to follow a truthful answer to questions,
the assessment might in the long run be defeated on appeal. Nor did Mr
Park dispute that, if Mr Botnar knew that the full answer to a
question is A and B, and to avoid assessment only gives the fact A as
his answer, that would be wilful default.
303. Mr Park made a substantially different submission. He said that
there was no basis for accepting the Revenue's assertion that the
reason why the file was closed in 1979 was the assertion that Mr
Botnar's motives were charitable. He challenged the nexus between the
answers in this case and the loss of tax.
304. It seems to us that we must consider what the reaction of the
Revenue would have been if a truthful answer (or no answer) had been
given in April 1976 and if the letter of 23 October 1978 had not
contained the erroneous statements about charitable purposes.
305. If the Revenue had been given a correct answer in April 1976 they
must have immediately realised that Mr Botnar was liable to tax on the
dividends paid on 22 March 1972 and 31 July 1973 to Nustad which had
not been declared. The inference must have been irresistible that Mr
Botnar would have been assessed under s 478 on the income received by
Nustad from DUK. That income is of course not the subject of the
assessments before us. However, having raised assessments in respect
of those five years, it defies logic to believe that the Revenue would
not have gone on to raise further assessments for later years unless
provided with convincing explanation as to why they should not do so.
306. The assumption must have been that the inquiries by the technical
division would have been pursued with greater energy. It must be
assumed that the letter of 15 September 1978 would have been written
much earlier. If the reply to that letter had contained nothing which
was not true, Mr Rook's scepticism would have been reinforced.
307. Indeed it is difficult to see what truthful answer could have
been given without adding to the Revenue's suspicions. The only
truthful answer regarding Mr Botnar's motives was that he anticipated
benefiting in the future and that the shares were not securely beyond
his reach. Add such a response to the failure to declare the 1972 and
1973 dividends received by Nustad on his returns and the inference
must be irresistible that assessments would have been made some 15
years earlier.
308. We do not place great reliance on Mr Rook's evidence not because
we question his honesty but because we are unsure about his
recollection even when supported by the contemporary letters and
files. It is far from clear who took the decision to cease inquiries
in 1979 and what were the real reasons unless it was simply a lack of
evidence. The relevance of Mr Botnar's alleged charitable motives to
the issue whether Mr Botnar had power to enjoy was not explained to
us.
309. We find as a fact that the letters of 1 April 1976 and 23 October
1978 contained material untruths intended by Mr Botnar to mislead the
Revenue. We are satisfied that, if a true answer had been given in
1976 and if the Revenue had not been misled in 1978, assessments would
have been raised within the time limits; we hold that each of the
untruths constituted fraud or wilful default and that the sums now
assessed represent tax lost attributable thereto, subject of course to
our finding of fraud on the power.
310. We hold that in relation to the years 1983-84 and 1984-85 that
the tax assessed represented tax lost attributable to fraudulent or
negligent conduct, namely the answers given in the letters of 1 April
1976 and 23 October 1978.
311. The conclusion which follows from our decision on the fraud on
the power issue is that all the assessments with the exception of
those for 1988-89 and 1989-90 based on s 742(2)(c) should be
discharged. We direct that if the parties do not notify to us the
agreed figures for 1988-89 and 1989-90 on the basis of this decision
within 28 days that the matter be relisted in relation to that issue.
1. At hearings before two commissioners for the special purposes of
the Income Tax Acts on 14, 16, 17, 18, 21, 22, 23, 24 and 25 November
1994 and 4, 5, 6 and 7 March 1998, 5 August 1996 and 15 October 1997,
Otto Octave Botnar appealed against assessments to income tax laid on
him under s 478 of the Income and Corporation Taxes Act 1970 (the 1970
Act) and s 739 of the Income and Corporation Taxes Act 1988 (the 1988
Act) for the 16 years from 1974-75 to 1989-90. This case concerned the
assessments for the last two years which were also the subject matter
of the further hearings on 5 August 1996 and 15 October 1997 and which
were in the following amounts:
£ £(tax)
1988-89 47,679,999 7,152,000.60
1989-90 50,000,000 7,500,000.00
2. The question in issue was whether Mr Botnar being ordinarily
resident in the United Kingdom had by means of transfers of assets
within s 739(1) of the 1988 Act power to enjoy income of a person
resident out of the United Kingdom in the respective years of
assessment.
3. At the initial hearings, Mr Andrew Park QC and Mr Thomas Ivory,
instructed by Jeffery Green Russell, represented Mr Botnar, and Mr
James Munby QC and Mr Christopher Tidmarsh, instructed by the
Solicitor of Inland Revenue, represented the Commissioners of Inland
Revenue. At the hearing on 5 August 1996, Mr Botnar was represented by
Mr Park and Mr Ivory and the Revenue were represented by Mr Tidmarsh.
At the hearing on 15 October 1997 Mr Botnar was not represented and Mr
Munby appeared on behalf of the Revenue.
4. Statements and supplemental statements by Mr Botnar, Dr Peter Lenz
and Mr Manfred Weder were submitted under s 8(2)(b) of the Civil
Evidence Act 1968.
5. A statement by Mr D C Potter QC as an expert was not challenged.
6. Oral evidence was given by Frank Nicholas Frazer Haddock, Andrew
Frazer Smith FCA, Frank Shannon and John Reginald Rook.
[Paragraph 7 listed the documents which were put in evidence.]
8. At the conclusion of the initial hearings the commissioners
reserved the decision which they gave on 22 May 1996. A copy of that
decision was annexed to and formed part of a case stated by us on 12
November 1996 in respect of the years of assessment 1974-75 to
1987-88. That decision was amended to take account of the fact that
that case concerned the years of assessment prior to the 1988 Act.
9. The hearings on 5 August 1996 and 15 October 1997 were concerned
with the quantum of liability arising under ss 742(2)(c) and 743(5) of
the 1988 Act by reason of payments totalling £175m in October 1988
from the 1974 settlement used to finance the purchase of Flat 95M,
Eaton Square, London SW1, which property was used by Mr Botnar in
1988-89 and 1989-90. Those hearings were conducted on the basis that
the commissioners's decision of 22 May 1998 was correct although of
course that decision was the subject of the case stated on 12 November
1996 in so far as it concerned the years of assessment up to 1987-88.
Since the decision of 22 May 1996 also concerned the years 1988-89 and
1989-90 it was also annexed hereto and formed part of this case.
10. At the conclusion of the hearing on 5 August 1996 the
commissioners reserved their decision which they gave on 15 August
1996 headed 'Supplementary Decision'. A copy of that decision was
annexed hereto and formed part of this case. That decision was
concerned with the principles of quantification of the benefit under s
743(5), evidence on such quantification being left by agreement
between the parties for a further hearing.
11. Shortly before the hearing fixed for 15 October 1997 the
commissioners were informed that Mr Botnar agreed the Revenue's
valuations. At the hearing the commissioners accordingly determined
the assessments in the sums of £44,350 on which the tax was £17,740
for 1988-89 and £98,800 (£39,520 tax) for 1989-90.
12. The facts and contentions of the parties were set out in the
decisions. It would be seen therefrom in their decision of 22 May 1996
that the commissioners decided that because the use of the power in cl
3(c) of the settlement dated 11 October 1974 in the manner envisaged
by the memorandum of Dr Lenz would involve a fraud on the power Mr
Botnar did not have power to enjoy the income giving rise to the
assessments. In the event that they were wrong on their primary
finding, the commissioners also made a series of other findings.
13. In their supplementary decision the commissioners held that the
value of a non-convertible benefit, here the use of the flat, should,
in the absence of any other objective means of valuation, be measured
by reference to what it would have cost the individual receiving it,
here Mr Botnar.
14. In addition to the cases referred to in the decisions, the
following cases were also cited in argument:
Abbott v Philbin (Inspector of Taxes) [1961] AC 352, 39 TC 82.
Attorney-General for Ireland v Jameson [1905] 2 IR 218.
Bambridge v Inland Revenue Comrs [1955] 1 WLR 1329, 36 TC 313.
Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515.
Bater v Bater [1951] P 35.
Broome v Cassell & Co [1972] AC 1027.
Canadian Eagle Oil Co Ltd v R [1946] AC 119, 27 TC 205.
Cassell, Re, Public Trustee v Mountbatten [1927] 2 Ch 275.
Chapman, Re, Cocks v Chapman [1898] 2 Ch 763.
City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407.
Derry v Peek (1889) 14 App Cas 337.
Erven Warnink BV v J Townend & Son (Hull) Ltd [1979] AC 731.
Fen Farming Co Ltd v Dunsford (Inspector of Taxes) (No 2) [1974] STC
373.
Furniss (Inspector of Taxes) v Dawson [1984] STC 153, [1984] AC 474.
Gartside v IRC [1968] AC 553.
Gestetner Settlement, Re, Barnett v Blumka [1953] Ch 672.
H (a minor), Re [1996] 3 WLR 506.
Haythornthwaite and Sons Ltd v Kelly (Inspector of Taxes) (1927) 11 TC
657.
Heatons Transport (St Helens) Ltd v Transport and General Workers'
Union [1973] AC 15.
Hornal v Neuberger Products Ltd [1957] 1 QB 247.
Howard De Walden (Lord) v IRC [1942] 1 KB 389, 25 TC 121.
IRC v Crossman [1937] AC 26.
IRC v Pratt [1982] STC 756.
Knight v IRC [1974] STC 156.
Kovac v Morris [1985] STC 183.
Lack v Doggett (Inspector of Taxes) (1970) 46 TC 497.
Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665, [1983] 2 AC
861.
Nicoll (Inspector of Taxes) v Austin (1935) 19 TC 531.
Pepper (Inspector of Taxes) v Hart [1992] STC 898, [1993] AC 593.
Pilkington v IRC [1964] AC 612, 40 TC 416.
Pleasants v Atkinson (Inspector of Taxes) [1987] STC 728.
Potts' Executors v IRC [1951] AC 443, 32 TC 211.
Ramsay (W T) Ltd v IRC [1981] STC 174, [1982] AC 300.
Redgrave v Hurd (1881) 20 Ch D 1.
Ridehalgh v Horsfield [1994] Ch 205.
Tennant v Smith (Surveyor of Taxes) [1892] AC 150, 3 TC 158.
Topham v Duke of Portland (1869) 5 LR Ch App 40.
Turner v Shearer [1972] 1 WLR 1387.
Young and Harston's Contract, Re (1886) 31 Ch D 168.
15. Following the determination of the appeal, the Commissioners of
Inland Revenue forthwith by their counsel required the commissioners
to state a case for the opinion of the High Court pursuant to the
Taxes Management Act 1970, s 58.
16. The questions of law for the opinion of the High Court were
whether: (a) the commissioners had erred in law in holding that the
use of the power in cl 3(c) of the settlement dated 11 October 1974 in
the manner envisaged by the memorandum of Dr Lenz (set out in para 69
of the decision) would involve a fraud on the power; (b) the
commissioners had erred in law in finding and concluding that Mr
Botnar was 'such an individual' within s 739(2) of the 1988 Act in
respect of the transfers to O Botnar Ltd (OBL) in March 1974 of his
180,350 shares in Datsun United Kingdom Ltd (DUK) and the 79,000
shares in DUK transferred by Nustad AG; (c) the commissioners had
erred in law in finding (subject to their conclusion as to the fraud
on the power) that the dividends received by OBL, European Motor
Vehicles Ltd (EMV) and European Motor Vehicles Corp (EMVC) were 'so
dealt with' as to be 'calculated' to enure for the benefit of Mr
Botnar or his wife within s 742(2)(a) of the 1988 Act; (d) the
commissioners had erred in law in holding (regardless of their
conclusion as to the fraud on the power) that s 742(2)(d) of the 1988
Act did not apply to the income received by OBL, EMV and EMVC after
the formation of the settlement in October 1974; (e) the commissioners
had erred in law in holding (regardless of their conclusion as to the
fraud on the power) that Mr Botnar was not able to control the
application of income of OBL, EMV and EMVC within s 742(2)(e) of the
1988 Act; (f) there had been evidence to justify their conclusion that
(subject to their conclusion as to the fraud on the power) the tax
assessed in respect of the years 1974-75 to 1982-83 represented tax
lost attributable to fraud or wilful default and the tax assessed in
respect of 1983-84 and 1984-85 represented tax lost attributable to
fraudulent or negligent conduct; and (g) the commissioners had erred
in law in holding that in the case of an actual receipt of a benefit
under s 742(2)(c), s 743(5) of the 1988 Act was determinative of the
charge to tax and that the value of a non-convertible benefit should
be measured by reference to what it would have cost the recipient.
[The decision of 22 May 1996 is set out above (see p 41 to p 79)].
SUPPLEMENTARY DECISION
1. This decision, which is supplementary to that given on 22 May 1996,
concerns the quantum of liability arising under ss 742(2)(c) and
743(5) of the Income and Corporation Taxes Act 1988 (the 1988 Act) by
reason of the payments totalling £1.5m in October 1988 from the 1974
settlement used to finance the purchase of 95M, Eaton Square which was
used by Mr Botnar in 1988-89 and 1989-90.
2. Mr Park accepted that Mr Botnar received a benefit within s 742(2)
(c), notwithstanding that the property was purchased by the trustees
of the 1985 settlement, since the purchase was financed by funds from
the 1974 settlement, albeit by mistake.
3. This decision concerns the quantification of the benefit under s
743(5) on the basis that we have already held that, in the case of
actual receipt of a benefit, s 743(5) is determinative of the charge
to tax (see para 245 of the decision).
4. Section 743(5) provides as follows:
'In any case where an individual has for the purposes of . . . section
[739] power to enjoy income of a person abroad by reason of his
receiving any such benefit as is referred to in section 742(2)(c),
then . . . the individual shall be chargeable to income tax by virtue
of section 739 for the year of assessment in which the benefit is
received on the whole of the amount or value of that benefit except in
so far as it is shown that the benefit derives directly or indirectly
from income on which he has already been charged to tax for that or a
previous year of assessment.'
5. The debate was concerned with the words 'on the whole of the amount
or value of that benefit'. Put shortly, Mr Park submitted that, there
being no statutory definition of 'value' as used in s 743(5), the
correct approach in the case of a non-money advantage was to ask into
what amount of money the use of the flat could be converted. On the
facts he submitted that this was negligible.
6. This brings us to the facts.
7. On 14 October 1988, the trustees of the 1985 settlement took an
underlease to 25 March 2006 of 95M Eaton Square for a premium of
£801,652 and a rent of £5,000 pa reviewable in 1988 and 2003. The
property forms part of the Grosvenor estate. The trustees were
obliged, inter alia, to pay their share of the insurance premiums, to
keep the demised premises in good repair including painting and to
contribute to the cost of the gardens in Eaton Square. Clause 2(15)(e)
obliged the trustees --
'. . . to keep and use the demised premises as a high class private
residence only without any sub-dividing but as a single unit in the
occupation of the Tenant and the Tenant's family only (or in the case
of the demised premises being sub-let then in the occupation of the
sub-tenant and the sub-tenant's family only) PROVIDED THAT so long as
the term hereby demised is vested in the said Mercotrust
Aktiengesellschaft Dr Werner Keicher and Dr Peter Lotz the demised
premises may be occupied by a beneficiary of the Tenant and his family
first approved of in writing by the landlord.'
8. The property was substantially refurbished at the expense of the
1985 settlement. This involved internal modernisation to provide three
bedrooms, reception, dining room, guest toilet, two independent
bathrooms, master en-suite bathroom, together with dressing room, new
windows to the rear elevation, sound proofing to the floor and dry run
plumbing.
9. Mr and Mrs Botnar were the only beneficiaries of the 1985
settlement. The settlement was an accumulation settlement with powers
exercisable for the appointed class which included Mr and Mrs Botnar.
Clause 20 and Sch 4 set forth additional powers.
10. Paragraph 2(a) of Sch 4 empowered the trustees to invest in
property of whatsoever nature whether involving liability or not and
whether producing income or not 'including the purchase and
improvement of any property as a residence for any person or persons
who may be a beneficiary or a member of the Appointed Class
hereunder'. Para 9 of Sch 4 provided:
'The Trustees shall have power to permit any beneficiary or member of
the Appointed Class to reside in any dwelling/house occupy any
land . . . which may from time to time be subject to the trusts hereof
upon such conditions as to payment of rent, rates, taxes and other
expenses and outgoings and generally upon such terms as the Trustees
in their absolute discretion shall think fit.'
11. The proper law of the settlement was that of Liechtenstein. There
was no evidence as to that law.
12. Mr Haddock acted for the 1985 settlement trustees in the purchase
of the property. He arranged for the Grosvenor estate to send the rent
and service charge demands addressed to Mecrotrust AG to Mrs Botnar
for settlement. Mrs Botnar paid these together with other regular
outgoings such as council tax, repairs, maintenance and insurance.
13. The 1985 settlement trustees also held 22 Eaton Place which was
available for Mr and Mrs Botnar if necessary.
14. Mr and Mrs Botnar had been advised for tax reasons not to own or
rent a property in the United Kingdom in their own name.
15. Dr Lenz acted as a link between Mr and Mrs Botnar and the 1985
settlement trustees, the settlement being administered in his office.
Mr Botnar asked the trustees to consider buying 95M Eaton Square which
his wife had seen and liked. Dr Lenz was aware of the trustees powers
under paras 2(a) and 9 of Sch 9. The trustees did not pass any formal
resolution concerning the terms on which Mr and Mrs Botnar could
occupy the flat nor was anything put in writing as to such terms. Mr
and Mrs Botnar furnished the flat at their own expense.
16. Mr Botnar made a short statement in which he said that he and Mrs
Botnar used the flat 'on average a few days per month', staying
principally at their home in Worthing when not abroad. The flat was
used principally for entertaining business associates and for meeting
members of the press and others. Mr Botnar stated that if the trustees
had not bought the flat there would have been no question of himself
or his wife buying or renting it 'in our own names and at our own
expense'. He pointed out that the trustees still owned a maisonette at
22 Eaton Place and that he had not owned or rented a property in the
United Kingdom since 1974.
17. Mr Park submitted that there was no possible way by which Mr
Botnar and/or his wife could have converted the benefit comprised in
their right to occupy the flat into cash. Mr Tidmarsh accepted this
and we so find. The right was purely personal. Mr and Mrs Botnar had
no interest capable of being assigned; they were not tenants and could
not therefore sub-let. The lease only permitted occupation by
beneficiaries approved by the Grosvenor estate.
18. The right of occupation was terminable at any time by the
trustees. The trustees' duty was of course to act in the interests of
the beneficiaries so that they could not act capriciously. We do not
consider that they could properly have terminated the rights of Mr and
Mrs Botnar without notice unless there was some adequate reason. Mr
Tidmarsh suggested that 28 days' notice would have been reasonable.
Since Mr and Mrs Botnar had furnished the flat this might have been on
the short side. It must be remembered that Mr and Mrs Botnar must have
incurred considerable expense in furnishing the property.
19. Mr Park's starting point was the undeniable fact that the term
'value' as used in s 743(5) of the 1988 Act is not defined or expanded
in any way. The commonly used statutory definition of 'open-market
value' as in s 272 of the Taxation of Chargeable Gains Act 1992 is not
applied and nor is the expression 'annual value' as in s 837 of the
1988 Act. There are no other measuring provisions comparable to those
for Sch E.
20. He submitted that in the absence of any such extending or deeming
provision the correct test, where a non-money advantage of some kind,
such as a 'perquisite' under general principles of Sch E or a
'benefit' as here, falls to be taxed is to value it by reference to
the money for which it could be turned to account: this was nil in the
present case. He relied on Tennant v Smith (Surveyor of Taxes) [1892]
AC 150, 3 TC 158, Wilkins (Inspector of Taxes) v Rogerson [1961] 1 Ch
133, 39 TC 344, and Heaton (Inspector of Taxes) v Bell [1970] AC 728,
46 TC 211 per Lord Reid. He cited Whiteman on Income Tax (3rd edn,
1990) para 23.87 on similar words in s 740(2).
21. Mr Tidmarsh submitted that the words 'the whole of the amount or
value of the benefit' were to be construed in the present case as the
amount that would have to be paid on the open market for the right to
use the flat on similar terms to those on which the use was granted to
Mr Botnar, taking account of the precarious nature of the right, the
fact that Mr and Mrs Botnar furnished the flat and that Mr and Mrs
Botnar met the recurrent outgoings personally.
22. By s 742(3) of the 1988 Act all benefits accruing as a result of
the transfer of assets shall be taken into account under s 742(3)
'irrespective of the nature or form of the benefits' whether or not
the individual 'has rights at law or in equity in or to these
benefits'. The wording is clearly wide enough to cover benefits
enjoyed as a discretionary beneficiary. Indeed it is quite clear that
discretionary benefits are covered.
23. Section 743(5) applies by reason of an individual 'receiving any
such benefit as is referred to in s 742(2)(c)'. Under s 742(3) it does
not matter that he has no right in law or equity to the benefit. The
benefit may take many forms.
Clearly one of the most common potential fact situations will be the
use or enjoyment of an asset or facility. It might be the use of a
leasehold property as here, the use of a car, the loan of a picture, a
box at the opera, a free holiday or maybe the provision of education.
All of these would confer a real and substantial benefit and would be
of value in that sense but none might be transferable. If s 743(5) is
to be construed as resulting in a nil value for any benefit which
cannot be converted into money terms its effect would be to relieve
from taxation many benefits which fall within s 742(2)(c). If this was
its potential effect, this would be a powerful argument in favour of
the submission of Mr Munby which we rejected in our earlier decision.
24. It seems to us, however, that in the context in which they are
used the words 'the whole of the amount or value of the benefit' must
be given a broad meaning commensurate with the wide variety of types
of benefit falling within s 742(2)(c).
25. In our judgment the 'open market' tests from other statutes would
have been inappropriate for benefits many of which would of their
nature not be susceptible of such valuation. The 'annual value'
measure would only be relevant to certain property and would take no
account of the terms under which the property was made available.
26. Mr Park relied strongly on the opinion of Lord Reid in Heaton v
Bell. It should be remembered, however, that that case was concerned
with the meaning of 'perquisites' in r 4 of Sch E to the Income Tax
Act 1918. Having quoted from r 4, Lord Reid said ([1970] AC 728 at
744, 46 TC 211 at 245):
'And the passage which I have quoted appears to me to indicate that
perquisites here must mean money perquisites, if profits mean money
profits.'
27. Given the width of possible benefits, the context of s 743(5) is
very different. It is pertinent to note that Lord Reid commented that
'value' is an elusive word and gave a series of possible meanings
which did not purport to be exhaustive.
28. It seems to us that the whole of the value of a non-convertible
benefit should, in the absence of any other objective means of
valuation, be measured by reference to what it would have cost the
individual receiving it. Mr Park said that on the evidence Mr and Mrs
Botnar would not have bought or rented the property. That is as may
be, although Mr Botnar's statement qualified his statement with the
words 'in our own names'. When measuring what benefit an individual
receives it is not in our view relevant to ask whether he would have
purchased the benefit himself. If that were the test a penurious
individual receiving a non-money benefit under s 742(2)(c) would
escape tax however substantial the benefit since he could not have
paid for it.
29. The measurement of the benefit by reference to what it would have
cost the individual will take account of the terms on which it was
provided. In this case although nothing was recorded in writing, there
is a clear inference that the use of the property was provided on the
footing that Mr and Mrs Botnar bore the recurrent outgoings.
30. It may be that it will not be easy for a valuer to assess what the
cost of a benefit such as this would have been since it is wholly
hypothetical there being no market for such benefits. However, it
seems to us that one approach may be to take the open market rental
and to adjust this by reference to the lack of security of tenure, non-
assignability and outgoings born by Mr and Mrs Botnar and any other
special factors.
31. The case shall now be relisted for the value of the benefit to be
determined. Statements of any witnesses as to the value should be
served at the tribunal not less than 48 hours before the adjourned
hearing.
COUNSEL:
James Munby QC for the Crown; The taxpayer did not appear.
JUDGMENT-READ:
Cur adv vult 19 November. The following judgment was delivered.
PANEL: EVANS-LOMBE J
JUDGMENTBY-1: EVANS-LOMBE J
JUDGMENT-1:
EVANS-LOMBE J: These are appeals by way of two cases stated dated 12
November 1986 and 17 October 1997 in respect of the tax affairs of
Otto Octav Botnar (the taxpayer). The appeals concern assessments to
income tax pursuant to s 478(1) of the Income and Corporation Taxes
Act 1970 (the 1970 Act) for the years 1974-75 to 1989-90 inclusive and
pursuant to s 739 of the Income and Corporation Taxes Act 1988 (the
1988 Act) (the statutory successor to s 478 of the the 1970 Act) for
the years 1988-89 and 1989-90. The appeals are from some of the
conclusions reached by the Special Commissioners contrary to the
submissions of the Revenue in their decision dated 22 May 1996.
Before the Special Commissioners both the Revenue and the taxpayer
appeared by leading and junior counsel. Before me, only counsel for
the Revenue appeared to argue the appeals. The taxpayer was on notice
of the date for hearing the Revenue's appeals. Shortly before the
hearing commenced I was shown communications to the court by
solicitors appearing to be instructed on behalf of the taxpayer to the
effect that his ill-health prevented him from either appearing in
person on the appeals or instructing others to appear on his behalf.
The clear implication of the communications was that the court should
adjourn the hearing so that Mr Botnar should be given an opportunity
to recover sufficiently from his ill-health either himself to argue or
to instruct others to argue on his behalf contrary to the Revenue's
submissions on the appeals although no request for an adjournment was
made in express terms. In the result I elected to proceed with the
appeals.
The factual background of the decision appealed from is set out by the
Special Commissioners in paras 1 to 151 of their decision and which I
will not repeat here. It is the central contention of the Revenue that
Mr Botnar is assessable to income tax on the income flowing from
certain shares in Datsun United Kingdom Ltd (later by change of name
Nissan United Kingdom Ltd) to which he was beneficially entitled, but
which, by a series of transactions starting in March 1974, were
transferred to be held upon the trusts of a settlement established in
Liechtenstein. Notwithstanding the situs of the settlement, to the
extent that the conclusions of the Special Commissioners were based on
a construction of the provisions of the settlement, it was accepted
that, in the absence of any evidence adduced either by the Revenue or
the taxpayer, of Liechtenstein law, that the law to be applied in the
construction of the settlement was English law.
As presented by Mr Munby QC, leading counsel for the Revenue, the
appeals fall into three parts. The first part concerns the Revenue's
appeal from the conclusion of the Special Commissioners that on the
proper construction of the relevant provisions of the settlement, and
in particular cll 3(c) and 23, any attempt to operate the provisions
of cl 3(c) to resettle the trust fund upon fresh trusts under which Mr
Botnar or his family could benefit (they being 'excluded persons' and
prevented from benefiting under the terms of the settlement by cl 23)
would constitute a 'fraud on a power' and that thus Mr Botnar had no
'power to enjoy' the income flowing from the shares under the
provisions of s 478(1) of the 1970 Act.
The second part is the Revenue's appeal against the Special
Commissioners' conclusions rejecting the Revenue's alternative
contention, based on s 478(5)(d), that on a true construction of the
provisions of the settlement and in the events which have happened, Mr
Botnar might become entitled to the beneficial enjoyment of the income
flowing from the shares and so constitute himself an individual with
power to enjoy the income within sub-s (1).
The third part arises from the accepted fact that during the tax years
1988-1989 and 1989-1990 Mr Botnar enjoyed the use of a flat in Eaton
Square purchased by the trustees of the settlement with money derived
from income flowing from the shares. The Special Commissioners
rejected the Revenue's further alternative contention that the whole
of the income of the shares for those two years of assessment, became
assessable for income tax on Mr Botnar pursuant to s 739(2) of the
1988 Act by reason of the provisions of s 742(2)(c) of that Act
notwithstanding the provisions of s 743(5). It was the Special
Commissioners' conclusion based on s 743(5) that Mr Botnar was only
assessable in the years in question on the value to him of his
enjoyment of the flat.
Clause 1 of the settlement defines three classes of persons for its
purposes. The first class, 'the beneficiaries', consists of persons
named in the second schedule to the settlement and which were foreign
resident professionals. The second class, 'the appointed class',
consists of 'the beneficiaries' but also includes relatives of the
beneficiaries and employees and their relatives of the settlor, a
Liechtenstein corporate entity. The third class, the 'excluded
persons', consists of persons specified in the third schedule to the
settlement, the class being relevant for the purpose of this appeal
only because it included Mr Botnar and his wife.
By cl 2 of the settlement the trustees held the trust fund which, in
effect, consisted of the shares in question upon trust for the
'appointed class'. By cl 3(c) of the settlement the trustees,
notwithstanding those trusts, were to have power to:
'Pay or transfer the whole or any part or parts of the capital of the
trust fund to the trustees for the time being of any other trust
wheresoever established or existing and whether governed by the proper
law governing this settlement at the time of the exercise of the power
contained herein or by the law of any other state or territory under
which any one or more of the members of the appointed class are
interested notwithstanding that such other trust may also contain
trusts, powers and provisions (discretionary or otherwise) in favour
of some other person or persons or objects and so that after such
transfer the money, investments and property so transferred shall:
[i] cease to be regarded as held upon the terms of this settlement for
all the purposes of this settlement; and
[ii] cease to be regarded as the trust fund or part of the trust fund
of this settlement as the case may be for all the purposes of this
settlement.'
By cl 4(a) of the settlement a person was to be deemed to be
'interested' in any such further settlement as should be created by cl
3(c), 'if any capital or income comprised in the trust is or may
become liable to be transferred, paid, applied or appointed to him or
her or for his or for her benefit either pursuant to the terms of the
trust or in consequence of any exercise of any power or discretion
thereby conferred on any person'.
By cl 7 the trustees were to have power to exclude persons from the
appointed class and to increase those falling within the class of
excluded persons and by cl 8(a) the trustees were to have power to add
any person not being an excluded person to the appointed class.
Clause 23 of the settlement provides:
'No excluded person shall be capable of taking any benefit in
accordance with the terms of this settlement and in particular but
without prejudice to the generality of the foregoing provisions of
this clause:
(a) The trust fund shall henceforth be possessed and enjoyed to the
entire exclusion of any such excluded person and of any benefit to him
by contract or otherwise.
(b) No part of the capital or income of the trust fund shall be paid
or lent or applied for the benefit of any such excluded person.'
In evidence before the Special Commissioners was a document known as
the 'Lenz memorandum'. The settlement, it seems, was prepared on the
advice of English lawyers and provided for a 'protector' of the
settlement. The first protector was to be a Dr Lenz, a Liechtenstein
lawyer, and the memorandum came into existence to describe to him the
purpose and effect of the provisions of the settlement. The memorandum
contains passages which give the writer's view of the effect of
certain of the provisions of the settlement and in particular at paras
9 and 10 describe how the provisions of cl 3(c) of the settlement
could be used to confer benefits on Mr and Mrs Botnar by resettling
upon trusts for them the capital of the trust fund.
For the purposes of this appeal s 478(1) of the 1970 Act and s 739(2)
of the 1988 Act are in substantially similar terms. It is convenient
to consider this part of the appeal against the provisions of s
478(1). That section provides:
'For the purpose of preventing the avoiding by individuals ordinarily
resident in the United Kingdom of liability to income tax by means of
transfers of assets by virtue or in consequence whereof, either alone
or in conjunction with associated operations, income becomes payable
to persons resident or domiciled out of the United Kingdom, it is
hereby enacted as follows:
(i) Where by virtue or in consequence of any such transfer, either
alone or in conjunction with associated operations, such an individual
has within the meaning of this section power to enjoy whether
forthwith or in the future any income of a person resident or
domiciled out of the United Kingdom which, if it were income of that
individual received by him in the United Kingdom, would be chargeable
to income tax by deduction or otherwise, that income shall, whether it
would or would not have been chargeable to income tax apart from the
provisions of this section, be deemed to be income of that individual
for all the purposes of the Income Tax Acts . . .'
At para 210 of the decision the Special Commissioners conclude that Mr
Botnar was 'such an individual' within the meaning of s 478(1). There
is no appeal from that conclusion. It was Mr Munby's submission before
the Special Commissioners, repeated before me, that, by reason of the
provisions of cl 3(c) of the settlement, Mr Botnar had 'power to
enjoy' the income of any transferee settlement because he might have
been constituted a beneficiary of such transferee settlement (together
with a minimum of one member of the appointed class prescribed by the
subclause) or might become one after the transfer. It was Mr Munby's
submission that benefiting Mr Botnar in the future was the plain
purpose of the interlocking provisions of cll 3(c) and 23 of the
settlement. He further contended in support of that submission that
the Lenz memorandum plainly showed that such was one of the intended
purposes of cl 3(c). He contended that the contents of the memorandum
constituted part of the 'factual matrix' surrounding the drafting and
execution of the settlement, the contents of which I was entitled to
take into account in coming to a conclusion as to what the drafter of
the settlement intended to achieve by the provisions of cl 3(c).
It seems to me that it would not be legitimate for me to rely on the
contents of the Lenz memorandum in construing the provisions of cl
3(c) of the settlement. To do so would be to offend against the rules
of construction prescribed by the House of Lords in Prenn v Simmonds
[1971] 1 WLR 1381. It seems to me that the circumstances of this case
are indistinguishable in principle from those with which the Court of
Appeal was dealing in Rabin v Gerson Berger Association Ltd [1986] 1
WLR 526 where the court was considering evidence contained in opinions
written by the drafter of a trust deed, contemporaneously with its
creation, in which he described his view of the purposes which the
deed sought to achieve. Fox LJ said (at 534) --
'. . . it seems to me the only purpose of the admission of the
documents is to obtain an indication of the draftsman's intention in
order to avoid the effect of the written words which he has used. What
is being sought in my view goes far beyond anything contemplated by
the "surrounding circumstances" principles, as stated by the House of
Lords in Prenn v Simmonds . . . They were concerned with objective
external facts, and what is sought here is the admission of evidence
of the personal legal knowledge of the draftsman. It seems to me that
that has no purpose, except as an indication of his intention in
relation to the deed which he drew, and it would be quite artificial
to regard reference to the opinions as having any other effect. The
opinions (or any part of their contents) are not "surrounding
circumstances" in the terms in which that has been understood on the
authorities; they go directly to intention.'
I have, however, come to the conclusion, disregarding the contents of
the Lenz memorandum and having regard only to the provisions of the
settlement itself, that the interlocking provisions of cl 3(c) and cl
23, seen against the background of the other provisions of the
settlement which I have set out above, were intended to make it
possible to apply the trust fund by resettling part or all of it upon
trusts which might include an excluded person as well as a member of
the appointed class in its list of beneficiaries, so as to benefit Mr
Botnar or his wife in the future.
The Special Commissioners, in arriving at their conclusion, placed
reliance on the provisions of cl 23(b) which I have already set out.
It is, however, of note that sub-cl (b) is a particular provision
expressed to be without prejudice to the generality of the preamble of
the clause which provides that 'no excluded person shall be capable of
taking any benefit in accordance with the terms of this settlement
[emphasis added]'. Clause 3(c) of the settlement gives the trustees
power to transfer the whole or part of the trust fund to the trusts of
any other trust under which: (i) a member of the appointed class is
interested; (ii) other person or persons not members of the appointed
class may be interested; and (iii) under whose provisions the property
transferred ceases to be regarded as held 'upon the terms of this
settlement for all the purposes of this settlement and ceases to be
regarded as the trust fund or part of the trust fund of this
settlement'.
It follows, it seems to me, that the drafter of the settlement
intended that persons taking under a transferee settlement were not to
be treated as 'taking any benefit in accordance with the terms of' the
settlement itself and that accordingly he had in contemplation that an
excluded person, and in particular Mr Botnar, might become a
beneficiary under such transferee settlement.
This construction is supported by the opening words of cl 3 which
indicate that by that clause the trustees were to have power,
including a power to transfer the whole or part of the trust fund to a
transferee settlement with beneficiaries not confined to the appointed
class, 'notwithstanding the trusts and provisions hereinbefore
declared and contained' in favour of the appointed class. It is
further supported by a comparison between the provisions of cl 3(c)
and those of cl 3(a), (b) and (d) where, by contrast with cl 3(c) the
exercise of the powers conferred on the trustees by those other sub-
clauses is expressly confined to being exercised in favour of the
appointed class only.
In the result I have come to a conclusion on this point of
construction contrary to that arrived at by the Special Commissioners
at para 171 of their decision. In my judgment excluded persons,
including Mr Botnar and his wife, are potential beneficiaries of the
power contained in cl 3(c) of the settlement and each being 'such an
individual' within the meaning of s 478(1) they have 'power to enjoy'
the income of a person resident outside the United Kingdom within the
meaning of that subsection.
This conclusion makes it unnecessary for me to deal with the Revenue's
appeal under the second and third heads which I have set out earlier
in this judgment which were put forward as alternative methods of
arriving at the same result as that put forward under the first head.
It seems to me that in the absence of argument on behalf of the
taxpayer I should only deal with those points which are necessary to
dispose of the Revenue's appeals and I should not express a view on
points which, in the result, it is unnecessary for me to consider in
disposing of these appeals.
I would therefore allow the Revenue's appeal in so far as it concerns
assessments for the years 1974-75 to 1989-90.
DISPOSITION:
Appeals allowed.
SOLICITORS:
Solicitor of Inland Revenue.
google....@spamgourmet.com
Inland Revenue Commissioners v Botnar
[1999] STC 711
HEARING-DATES: 26, 27, 28 May, 23 June 1999
23 June 1999
CATCHWORDS:
Tax avoidance -- Transfer of assets abroad -- Power to enjoy income of
person resident or domiciled out of United Kingdom -- Taxpayer
transferring shares to trust fund in Liechtenstein -- Taxpayer
excluded from benefiting from trust -- Trustees empowered to transfer
capital and income to another trust -- Whether taxpayer might become
beneficiary under other trust -- Whether taxpayer had power to enjoy
income from shares -- Whether income so dealt with as to be calculated
to enure for benefit of taxpayer -- Whether taxpayer might become
entitled to beneficial enjoyment of income -- Income and Corporation
Taxes Act 1970, s 478(1), (5)(a), (d).
Tax avoidance -- Transfer of assets abroad -- Power to enjoy income of
person resident or domiciled out of United Kingdom -- Benefit provided
out of income -- Liability to tax -- Extent of liability -- Taxpayer
transferring shares to trust fund in Liechtenstein -- Flat in London
purchased with income arising from fund -- Taxpayer staying in flat
during tax years 1988-89 and 1989-90 -- Whether taxpayer liable to tax
on value of use of flat or on income arising to fund for tax years
1988-89 and 1989-90 -- Income and Corporation Taxes Act 1988, ss
739(2), 742(2)(c), 743(5).
HEADNOTE:
>From March 1974 the taxpayer transferred shares in Datsun (United
Kingdom) Ltd (the company) to which he was beneficially entitled to be
held upon trusts of a settlement established in Liechtenstein.
Thereafter the shares were controlled by the trustees of the
settlement through one or more intermediate companies. The immediate
holding company of the shares in the company was OBL, which was
succeeded in turn by EMV and EMVC, which were all companies resident
outside the United Kingdom. The settlement defined three classes of
persons: (i) 'the beneficiaries'; (ii) 'the appointed class'
consisting of the beneficiaries, some of their relatives and employees
of the settlor, a Liechtenstein corporate entity; and (iii) 'the
excluded persons' which included the taxpayer and his wife. Clause 23
of the settlement provided that no excluded person was to be capable
of taking any benefit in accordance with the terms of the settlement.
Clause 3 conferred on the trustees various dispositive powers over the
capital of the trust fund, 'notwithstanding the trusts and provisions
hereinbefore declared and contained' including, by cll 3(a), (b) and
(d), respectively, power to appoint, to raise out of the capital and
apply, and to settle capital on members of the appointed class, all of
which were to be exercised 'for the benefit of members of the
appointed class'. Clause 3(c) gave the trustees the power to transfer
the whole or part of the trust fund to the trustees of any other trust
fund 'under which any one or more of the members of the Appointed
Class are interested notwithstanding that such other trust may also
contain trusts powers and provisions . . . in favour of some other
person or persons or objects' so that after such transfer the property
transferred would cease to be regarded as held 'upon the terms of this
Settlement for all the purposes of this settlement' or as 'the Trust
Fund or part of the Trust Fund of this Settlement'. Clause 4(d)
provided that on any transfer by the trustees, pursuant to cl 3(c), of
any money or property to the trustees of any other trust, 'the
Trustees hereof shall not be bound to see to the further application
of such money or property'. By para 14 of the seventh schedule to the
settlement the trustees had the power to take counsel's opinion
concerning any difference arising under the settlement or any matter
in any way relating to the trust or to their duties in connection with
the trusts and to act in accordance with that opinion. In 1985 a
further settlement was established for the express benefit of the
taxpayer and his wife, with funds provided by the trustees of the 1974
settlement, and in 1988 the trustees of the further settlement
purchased a flat in London. The flat was used by the taxpayer during
the years 1988-89 and 1989-90. Between 1974 and 1990 the company paid
substantial dividends to its immediate parent. In 1991 the Revenue,
pursuant to an order made under s 20 of the Taxes Management Act 1970,
seized, inter alia, a copy of the settlement and a memorandum
describing the origin and underlying purpose of the settlement. It was
clear from the memorandum that, prior to establishing the settlement,
legal advice was received from counsel, which was accepted by the
trustees when entering into the settlement, that cl 3(c) enabled the
assets of the settlement to be transferred to another settlement under
which the taxpayer and his wife, despite being excluded persons under
the settlement, would benefit. In 1992 the taxpayer was assessed to
income tax on the income of OBL, EMV and EMVC for the years 1974-75 to
1989-90 on the ground that he had 'power to enjoy' the income of those
non-resident persons within the meaning of s 478(1) (Section 478, so
far as material, is set out at p 717 b to p 718 f, post.) of the
Income and Corporation Taxes Act 1970 (and its statutory successor).
The taxpayer appealed. The Revenue contended that the assessments were
correct because the taxpayer and his wife had power to enjoy the
income of those persons as the income had in fact been so 'dealt with
by any person as to be calculated . . . to enure for the benefit of'
the taxpayer or his wife, within the meaning of s 478(5)(a) or,
alternatively, because the taxpayer and his wife might 'in the event
of the exercise or successive exercise of one or more powers . . .
become entitled to the beneficial enjoyment' of that income within the
meaning of s 478(5)(d). They further contended that, if the taxpayer
did not have 'power to enjoy' the income pursuant to s 478(5)(a) and
(d), then he did have such power in respect of the years 1988-89 and
1989-90 pursuant to ss 739(2) (Section 739(2) provides: 'Where . . .
an individual has . . . power to enjoy . . . any income of a person
resident or domiciled outside the United Kingdom . . . that income
shall . . . be deemed to be income of that individual . . .') and
742(2)(c) of the Income and Corporation Taxes Act 1988 as he had
received a benefit, the London flat, provided out of the income and
that, furthermore, income tax was chargeable on the whole of the
relevant income in those years of assessment and was not, under s
743(5), chargeable on the value of the use of the flat by the taxpayer
since that value did not exceed the amount of the income for the
relevant years. The Special Commissioners allowed the appeal holding,
inter alia: (i) that the taxpayer had no 'power to enjoy' the relevant
income because the taxpayer and his family were 'excluded persons' and
prevented from benefiting under the terms of the settlement by cl 23;
(ii) that, even if the taxpayer did become entitled to beneficial
enjoyment of income within the meaning of s 478(5)(d) which could be
traced to the companies, the beneficial enjoyment would not be of 'the
income' of those companies but of assets which represented such
income; and (iii) that the taxpayer was only assessable for 1988-89
and 1989-90 on the value to him of his enjoyment of the flat and not
on the whole of the relevant income for those two years. Evans-Lombe J
allowed the Revenue's appeal on the ground that the interlocking
provisions of cll 3(c) and 23, seen against the background of the
other provisions of the settlement, were intended to make it possible
to apply the trust fund by resettling part or all of it upon trusts
which might include an 'excluded person' as well as a member of the
appointed class in its list of beneficiaries, so as to benefit the
taxpayer or his wife in the future. Accordingly, he concluded that as
the taxpayer and his wife were potential beneficiaries of the power
contained in cl 3(c) of the settlement they had 'power to enjoy' the
income of a person resident outside the United Kingdom within the
meaning of s 478(1). The taxpayer appealed and the Revenue cross-
appealed in respect of the Special Commissioners' second and third
holdings. On 11 July 1998 the taxpayer died and his appeal was
continued, pursuant to an order of the court, by L, the taxpayer's
Swiss lawyer. L contended, inter alia: (i) that the retention and
investment of the income of the company by OBL, EMV or EMVC did not
satisfy the requirement of s 478(5)(a) that the income was in fact so
'dealt' with; (ii) that even if at the beginning of the period 1974 to
1990 the requirement of s 478(5)(a) that the income was so dealt with
as to 'be calculated . . . to enure' for the benefit of the taxpayer
or his wife was satisfied that was not subsequently the case, since
the income had not been used for the benefit of the taxpayer or his
wife; and (iii) that the exercise of the power under cl 3(c) would not
be sufficient for the purposes of s 478(5)(d) as it would be necessary
to set up the transferee settlement first and the constitution of that
settlement would not be the exercise of a power but the action of an
absolute beneficial owner.
Held -- (1) (Per Aldous and Mance LJJ) Clause 3(c) of the settlement
was expressed in wide words. Further, the closing part of cl 3(c)
providing for the effect of the transfer in pursuance of the power
read with cl 4(d) made it clear that after a transfer of capital to
another settlement the capital was no longer to be regarded as part of
the settlement but as part of the other settlement. Moreover, cl 23
did not prevent an excluded person from taking a benefit under the
terms of another settlement. It followed that cl 23 did not prevent
the trustees from settling capital under cl 3(c) so long as the
restrictions imposed by cl 3(c) were complied with. The taxpayer, an
excluded person under that settlement, could be a potential
beneficiary under another settlement to which capital could be
transferred under cl 3(c). It followed that he had the 'power to
enjoy' the income of a person resident outside the United Kingdom
within the meaning of those words in s 478(5)(a) and its statutory
successor. If (per Morritt and Mance LJJ) the trustees acting in good
faith sought and obtained the advice of counsel pursuant to the power
contained in para 14 of the seventh schedule, the power contained in
cl 3(c) would be capable of being exercised for the purpose of
benefiting the taxpayer as well as incidentally having that result.
Accordingly, the powers contained in cl 3(c) and para 14 of the
seventh schedule might be exercised so as to confer on the taxpayer a
'power to enjoy' within s 478(5)(a).
(2) The provision in s 478(5)(a) that the income was in fact so dealt
with did not require a positive act. The particular treatment of a
particular subject matter might amount to a dealing even though it
was, in some senses, entirely passive. In the context of the scheme
indicated in the memorandum, the retention and investment of the
income for future use was clearly a dealing with that income.
Moreover, the reference in s 478(5)(a) to 'enure for the benefit of'
was not only to the receipt of money for the purposes of funding the
recipient's personal consumption. It was by no means uncommon for a
successful businessman to wish to retain funds for the purpose of
using them in the future to fund such existing or future activity
whether commercial or philanthropic or otherwise for such purposes as
he might, in the future, determine.
Accordingly, the taxpayer had power to enjoy the income of OBL, EMV
and EMVC within s 478(5)(a) and its statutory successor and the appeal
would therefore be dismissed.
(3) Section 478(5)(d) applied where a taxpayer might in the event of
'the exercise or successive exercise of one or more powers' become
entitled to 'the beneficial enjoyment of the income'. The word 'power'
was a term of art denoting an authority vested in a person, the
'donee', to deal with or dispose of property not his own and was to be
distinguished from the dominion that a person had over his or her own
property. However, the powers conferred by cl 3(d) could have been
exercised so as to set up the transferee settlement, to be followed in
due course by an exercise of the power contained in cl 3(c) in the
light of counsel's advice. Accordingly, there were available more than
sufficient powers, strictly so called, to enable a benefit to be
provided to the taxpayer. Further, the words 'the income' in s 478(5)
(d) clearly required that what the transferor had beneficial enjoyment
of in the future should be identified as having been the income of the
companies in the year of assessment in which the transferor was taxed.
Parliament could not have intended that when the transferor obtained
his beneficial enjoyment the underlying asset had still to possess the
characteristics of being the income of the companies. Indeed
beneficial enjoyment by the transferor would be substantially if not
entirely inconsistent with the income in question being or remaining
the income of the transferee. Accordingly, the taxpayer also had
'power to enjoy' under s 478(5)(d) and its statutory successor. Dicta
of Lord Simonds in Vestey's Exors v IRC (1946) 31 TC 1 at 86, Walton J
in Vestey v IRC (No 2) [1978] STC 567 at 585, and Viscount Dilhorne
and Lord Keith of Kinkel in Vestey v IRC (Nos 1 and 2) [1980] STC 10
at 31 and 38 considered.
(4) Section 743(5) of the 1988 Act was a charging provision in
substitution for that contained in s 739(2). It dealt specifically
with the consequences of the actual receipt of benefit and, in the
absence of clear words to the contrary, was therefore to be regarded
as superseding the more general charging provision contained in s
739(2). Moreover, even in a penal section, to tax a man on more than
he actually received in cases where there was no power to enjoy apart
from that actual receipt went well beyond what Parliament was likely
to have considered to be necessary for deterrent purposes.
Accordingly, if the taxpayer had no 'power to enjoy' within the
meaning of s 478(5)(a) and (d) or their successor provisions for the
years 1988-89 and 1989-90, he was not liable for tax on more than the
amount specified in s 742(5), namely the whole amount or value of the
benefit actually received.
NOTES:
For the liability of a transferor who seeks to avoid tax by a transfer
of assets abroad by individuals, see Simon's Direct Tax Service
E1.731-733.
For the Income and Corporation Taxes Act 1970, s 478 (now the Income
and Corporation Taxes Act 1988, ss 739, 741, 742), see ibid, Part G1.
For the Income and Corporation Taxes Act 1988, ss 739, 742, 743, see
ibid, Part G1.
CASES-REF-TO:
Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191,
[1984] 3 All ER 229, HL.
Atlantic Lines and Navigation Co Inc v Hallam Ltd, The Lucy [1983] 1
Lloyd's Rep 188.
De Tchihatchef v Salerni Coupling Ltd [1932] 1 Ch 330.
Hankey v Clavering [1942] 2 KB 326, [1942] 2 All ER 311, CA.
Howard De Walden (Lord) v IRC [1942] 1 KB 389, 25 TC 121, CA.
Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 WLR 896, [1998] 1 All ER 98, HL.
IRC v Duke of Westminster [1936] AC 1, 19 TC 490, HL.
IRC v McGuckian [1997] STC 908, [1997] 1 WLR 991, [1997] 3 All ER 817,
69 TC 1, HL.
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC
749, [1997] 3 All ER 352, HL.
National Society for the Prevention of Cruelty to Children v Scottish
National Society for the Prevention of Cruelty to Children [1915] AC
207, HL.
Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd, The Karen
Oltmann [1976] 2 Lloyd's Rep 708.
Pilkington v IRC [1964] AC 612, [1962] 3 All ER 622, 40 TC 416, HL.
Prenn v Simmonds [1971] 1 WLR 1381, [1971] 3 All ER 237, HL.
Rabin v Gerson Berger Association Ltd [1986] 1 WLR 526, [1986] 1 All
ER 374, CA.
Ramsay (WT) Ltd v IRC [1981] STC 174, [1982] AC 300, [1981] 1 All ER
865, 54 TC 101, HL.
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, [1976]
3 All ER 570, HL.
Vestey v IRC (Nos 1 and 2) [1980] STC 10, [1980] AC 1148, [1979] 3 All
ER 976, 54 TC 503, HL; varying Vestey v IRC [1977] STC 414, [1979] Ch
177, [1977] 3 All ER 1073 and Vestey v IRC (No 2) [1978] STC 567,
[1979] Ch 198, [1979] 2 All ER 225.
Vestey's Exors v IRC [1949] 1 All ER 1108, 31 TC 1, HL.
Cases referred to in skeleton arguments
Beatty (decd), Re [1990] 1 WLR 1503, [1990] 3 All ER 844.
Chetwode (Lord) v IRC [1977] STC 64, [1977] 1 WLR 248, [1977] 1 All ER
638, 51 TC 647, HL.
Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, [1955] 3 All ER
48, 36 TC 207, HL.
Hay's Settlement Trusts, Re [1982] 1 WLR 202, [1981] 3 All ER 786.
Manisty's Settlement, Re [1974] Ch 17, [1973] 2 All ER 1203.
Vatcher v Paull [1915] AC 372, PC.
INTRODUCTION:
By a notice of appeal dated 17 December 1997 Otto Octav Botnar (the
taxpayer) appealed from a decision of Evans-Lombe J of 19 November
1997 ([1998] STC 38). The taxpayer had transferred shares in Datsun
(United Kingdom) Ltd to which he was beneficially entitled to be held
upon trusts of a settlement established in Liechtenstein. The trustees
controlled the shares through one or more intermediate companies, and
the shares were held by a succession of immediate holding companies,
all of which were resident outside the United Kingdom. The judge
allowed the Revenue's appeal by way of case stated from the decision
of the Special Commissioners that the taxpayer had no 'power to enjoy'
the income of the immediate holding companies within the meaning of s
478(1) of the Income and Corporation Taxes Act 1970 (and its statutory
successor, ss 739, 741 and 742 of the Income and Corporation Taxes Act
1988) because the taxpayer and his family were 'excluded persons' and
prevented from benefiting under the terms of the settlement. The facts
and grounds of appeal are set out in the judgment of Morritt LJ.
COUNSEL:
T Ivory QC for the taxpayer; J Munby QC and C Tidmarsh for the Crown.
JUDGMENT-READ:
Cur adv vult 23 June. The following judgments were delivered.
PANEL: MORRITT, ALDOUS, MANCE LJJ
JUDGMENTBY-1: MORRITT LJ
JUDGMENT-1:
MORRITT LJ:
1. In 1974 the late Mr Otto Botnar (1913-1998) owned or controlled
301,888 shares in Datsun (United Kingdom) Ltd (the company), which
held the United Kingdom concession in respect of Datsun, later Nissan,
cars, representing over 63% of its issued share capital. In March 1974
Mr Botnar exchanged 259,350 of those shares for shares in O Botnar Ltd
(OBL), a company incorporated in Guernsey. Shortly thereafter he
directed that the shares in OBL received in such exchange, which
represented its entire share capital, should be held to the order of
Botnar Establishment (the Anstalt), a Liechtenstein Anstalt set up on
his behalf by Allgemeines Treuunternehmen. On 11 October 1974
Allgemeines Treuunternehmen, again on behalf of Mr Botnar, executed a
settlement, to be governed by the law of Liechtenstein, in favour of
classes of beneficiary from which Mr Botnar and his wife were
specifically excluded but which contained unusually wide powers for
the application of the capital by transfer to other settlements. The
trust fund, as defined in the settlement, included the funds then
subject to the trusts of the Anstalt.
2. Thereafter the shares in the company, subsequently renamed Nissan
(United Kingdom) Ltd, were controlled by the trustees of the
settlement through one or more intermediate companies. The immediate
holding company of the shares in the company was from 1974 to 1979
OBL, from 1980 to 1984 European Motor Vehicles BV (EMV), a company
incorporated in the Netherlands and from 1984 to 1988 European Motor
Vehicles Corp (EMVC), a company incorporated in Panama. From 1988 to
1990 Nissan (United Kingdom) Holdings Ltd, a company incorporated in
the United Kingdom and a wholly-owned subsidiary of EMVC, held the
shares in the company. Between 1974 and 1990 the company declared and
paid to its immediate parent £166.3m by way of dividend.
3. In December 1990 the concession granted to the company by the
Japanese manufacturers of the relevant motor vehicles was terminated.
In June 1991 the Revenue seized the company's books and records
pursuant to an order made under s 20 of the Taxes Management Act 1970
and found amongst them a copy of the settlement and a document (the
Lenz memorandum) describing the origin and underlying purpose of the
settlement. In the light of those documents, and, no doubt, others, in
January 1992 Mr Botnar was assessed to tax on the income of OBL, EMV
and EMVC for the years 1974-75 to 1989-90 pursuant to the provisions
of s 478 of the Income and Corporation Taxes Act 1970 (the 1970 Act)
and s 739 of the Income and Corporation Taxes Act 1988 (the 1988 Act)
on the footing that he had power to enjoy the income of those non-
resident persons.
4. Mr Botnar appealed against those assessments to the Special
Commissioners. The commissioners dismissed his appeal against the
assessments for the years 1974-75 to 1984-85 on the ground that they
were out of time because, as found by them, the conduct of Mr Botnar
had been fraudulent or negligent (see [1998] STC 38). But they allowed
his appeals against the assessments for all the years in question,
except for 1988-89 and 1989-90, on the ground that Mr Botnar did not
have the requisite power to enjoy the income of OBL, EMV or EMVC. In
the case of 1988-89 and 1989-90 the amount of the assessment was
reduced, but due to the special circumstances pertaining for those
years, was not discharged altogether. The Revenue's appeal to the High
Court by way of case stated was allowed by Evans-Lombe J on one only
of the several points for which the Revenue contended (see [1998] STC
38). He did not deal with the other points, quite rightly, because
they were not necessary to his conclusion of the appeal and Mr Botnar
was neither present nor represented. Mr Botnar then appealed. The
Revenue served a respondents' notice raising some of the other points
argued by them before the judge. Mr Botnar died on 11 July 1998 and
his appeal has been carried on by Dr Peter Lenz, a Swiss lawyer,
pursuant to an order of this court made on 18 January 1999. Before us
both sides have been represented and all points have been fully
argued. To explain what those points are it is first necessary to set
out the relevant legislation and the terms of the settlement.
5. The relevant legislation was first introduced by s 18 of the
Finance Act 1936. It has been amended from time to time. The
legislation in force in 1974 was contained in s 478 of the 1970 Act.
Minor amendments were made between then and 1988 but it is not
suggested that they made any material difference to the points arising
in this appeal. Likewise it is not suggested that the re-enactment of
those provisions in ss 739-746 of the 1988 Act made any relevant
change. Accordingly it is both sufficient and convenient to set out
only the provisions of s 478 of the 1970 Act as amended though when
dealing with the separate points arising on the years 1988-89 to
1989-90 I will refer to the relevant provisions of the 1988 Act.
6. The relevant provisions of s 478 of the 1970 Act are the following:
'Provisions for preventing avoidance of income tax by transactions
resulting in the transfer of income to persons abroad
For the purpose of preventing the avoiding by individuals ordinarily
resident in the United Kingdom of liability to income tax by means of
transfers of assets by virtue or in consequence whereof, either alone
or in conjunction with associated operations, income becomes payable
to persons resident or domiciled out of the United Kingdom, it is
hereby enacted as follows:-
(1) Where by virtue or in consequence of any such transfer, either
alone or in conjunction with associated operations, such an individual
has, within the meaning of this section, power to enjoy, whether
forthwith or in the future, any income of a person resident or
domiciled out of the United Kingdom which, if it were income of that
individual received by him in the United Kingdom, would be chargeable
to income tax by deduction or otherwise, that income shall, whether it
would or would not have been chargeable to income tax apart from the
provisions of this section, be deemed to be income of that individual
for all the purposes of the Income Tax Acts . . .
(3) Subsections (1) and (2) of this section shall not apply if the
individual shows in writing or otherwise to the satisfaction of the
Board either --
(a) that the purpose of avoiding liability to taxation was not the
purpose or one of the purposes for which the transfer or associated
operations or any of them were effected; or
(b) that the transfer and any associated operations were bona fide
commercial transactions and were not designed for the purpose of
avoiding liability to taxation.
The jurisdiction of the Special Commissioners on any appeal shall
include jurisdiction to review any relevant decision taken by the
Board in exercise of their functions under this subsection.
(4) For the purposes of this section, "an associated operation" means,
in relation to any transfer, an operation of any kind effected by any
person in relation to any of the assets transferred or any assets
representing, whether directly or indirectly, any of the assets
transferred, or to the income arising from any such assets, or to any
assets representing, whether directly or indirectly, the accumulations
of income arising from any such assets.
(5) An individual shall, for the purposes of this section, be deemed
to have power to enjoy income of a person resident or domiciled out of
the United Kingdom if --
(a) the income is in fact so dealt with by any person as to be
calculated, at some point of time, and whether in the form of income
or not, to enure for the benefit of the individual, or
(b) the receipt or accrual of the income operates to increase the
value to the individual of any assets held by him or for his benefit,
or
(c) the individual receives or is entitled to receive, at any time,
any benefit provided or to be provided out of that income or out of
moneys which are or will be available for the purpose by reason of the
effect or successive effects of the associated operations on that
income and on any assets which directly or indirectly represent that
income, or
(d) the individual may, in the event of the exercise or successive
exercise of one or more powers, by whomsoever exercisable and whether
with or without the consent of any other person, become entitled to
the beneficial enjoyment of the income, or
(e) the individual is able in any manner whatsoever, and whether
directly or indirectly, to control the application of the income.
(6) In determining whether an individual has power to enjoy income
within the meaning of this section, regard shall be had to the
substantial result and effect of the transfer and any associated
operations, and all benefits which may at any time accrue to the
individual (whether or not he has rights at law or in equity in or to
those benefits) as a result of the transfer and any associated
operations shall be taken into account irrespective of the nature or
form of the benefits.
(7) For the purposes of this section, any body corporate incorporated
outside the United Kingdom shall be treated as if it were resident out
of the United Kingdom whether it is so resident or not.
(8) For the purposes of this section --
(a) a reference to an individual shall be deemed to include the wife
or husband of the individual,
(b) "assets" includes property or rights of any kind and "transfer",
in relation to rights, includes the creation of those rights,
(c) "benefit" includes a payment of any kind,
(d) references to income of a person resident or domiciled out of the
United Kingdom shall, where the amount of the income of a company for
any year or period has been apportioned under paragraph 1 of Schedule
16 to the Finance Act 1972, include references to so much of the
income of the company for that year or period as is equal to the
amount so apportioned to that person, and that amount shall be treated
as increased by such proportion thereof as corresponds to the rate of
advance corporation tax applicable to a distribution made at the end
of the accounting period to which the apportionment relates,
(e) references to assets representing any assets, income or
accumulations of income include references to shares in or obligations
of any company to which, or obligations of any other person to whom,
those assets, that income or those accumulations are or have been
transferred . . .'
7. It is not now disputed that Mr Botnar is, by virtue of the transfer
of the shares in the company to OBL, 'such an individual' within the
meaning of those words in s 478(1). The issue is whether he had
'within the meaning of this section, power to enjoy, whether forthwith
or in the future, any income of' OBL and its successors as the holders
of the shares in the company or of its United Kingdom holding company,
Nissan Holdings United Kingdom Ltd. The Revenue claim that Mr Botnar
had power to enjoy the income of OBL, EMV and EMVC within the terms of
paras (a) or (d) of s 478(5) because of the terms of the settlement
when properly construed in the light of the relevant surrounding
circumstances. It is, therefore, necessary to set out the relevant
terms of the settlement in some detail.
8. The settlement was made between Allgemeines Treuunternehmen of the
one part and three individuals resident in Switzerland, Germany and
Liechtenstein respectively, described as the original trustees of the
other part. Allgemeines Treuunternehmen is a trust corporation
carrying on its business in and from Vaduz, Liechtenstein. It is
common ground that in this, as in much else, it acted for Mr Botnar on
instructions received from him through Dr Lenz. The original trustees
were partners or associates of Dr Lenz. The settlement recited that
the settlor wished to provide a fund 'for the benefit of the persons
hereinafter described and accordingly to create such trusts as
hereinafter appear' and wished the fund then held by the Anstalt to be
transferred to the original trustees to be held on the trusts
thereinafter contained. Clause 1 contained a number of definitions.
'The Trust Fund' was defined to mean the funds then subject to the
trusts of the Anstalt, any further property paid or transferred to and
accepted by the trustees and the investments and property from time to
time representing the same. 'The Trust Period' was to commence on the
execution of the settlement and expire on the earliest of the
expiration of 80 years or a Royal Lives perpetuity period or such date
as the trustees might in their discretion appoint.
9. Clause 1 also contained definitions of three classes of person.
First was the definition of 'the Beneficiaries' as meaning the persons
specified in the second schedule thereto. The second schedule
contained the names of six individuals resident in Switzerland each of
whom was a Swiss lawyer and a friend or associate of Dr Lenz but not
of Mr Botnar. The second was the definition of 'the Appointed Class'
as meaning, subject to the power to add further persons contained in
cl 8, 'the Beneficiaries', their spouses, children and partners or
employees present or past. 'Excluded Person' meant the persons or
classes of person specified in the third schedule or anyone
constituted an excluded person pursuant to cl 7 thereof. The third
schedule specified eight persons, namely Allgemeines Treuunternehmen,
Mr Botnar 'of Duesseldorf (Germany)' and six other individuals of
Duesseldorf or Hamburg. The specified classes included any spouse,
child or issue, whether adopted or legitimated of any such individual.
In addition there was a definition of 'the Protector' as meaning the
person 'constituted as Protector of this Settlement by clause 20
hereof'. That clause provided that the first protector should be Dr
Lenz. By cl 21 it was provided that the powers contained in, amongst
others, cl 3 and each paragraph of the seventh schedule might only be
exercised with prior or simultaneous written consent of the protector.
10. By cl 2 the trustees were directed 'to hold the trust fund and the
income thereof until the determination of the trust period upon the
following trusts'. The precise terms of those trusts are not material.
They may be summarised as (1) a trust to accumulate the entire income
of the trust fund for the whole of the trust period as an accretion to
the capital thereof; and (2) at the end of the trust period to stand
possessed of the capital of the trust fund for (a) such members of the
appointed class as the trustees might appoint; in default of such
appointment for (b) such of the beneficiaries then living as the
trustees might appoint and in default thereof for (c) the
beneficiaries then living in equal shares, and subject to those trusts
for (d) such charitable purposes as the trustees should determine.
11. Clause 3 conferred on the trustees in wide terms six dispositive
powers over the capital of the trust fund. It is unnecessary to set
out the full terms of all of them. So far as material cl 3 provided:
'3. NOTWITHSTANDING the trusts and provisions hereinbefore declared
and contained relating to the capital of the Trust Fund the Trustees
may at any time or times during the Trust Period exercise the
following powers in relation to the capital but not the income of the
Trust Fund if in their absolute discretion they shall so think fit:
(a) [power in conventionally wide terms to appoint "for the benefit
of . . . the members of the Appointed Class"]
(b) [power to raise out of the capital and apply "for the benefit
of . . . the members of the Appointed Class" such sums and in such
manner as the Trustees think fit]
(c) Pay or transfer the whole or any part or parts of the capital of
the Trust Fund to the trustees for the time being of any other trust
wheresoever established or existing and whether governed by the proper
law governing this Settlement at the time of the exercise of the power
contained herein or by the law of any other state or territory under
which any one or more of the members of the Appointed Class are
interested notwithstanding that such other trust may also contain
trusts powers and provisions (discretionary or otherwise) in favour of
some other person or persons or objects and so that after such
transfer the money investments and property so transferred shall (i)
cease to be regarded as held upon the terms of this Settlement for all
the purposes of this settlement and (ii) cease to be regarded as the
Trust Fund or part of the Trust Fund of this settlement as the case
may be for all the purposes of this Settlement
(d) [to settle capital "on . . . members of the Appointed Class" on
such terms as the Trustees might think proper "for the benefit
of . . . the Appointed Class"]
(e) [to apply capital in discharging the tax liabilities in any part
of the world of the trustees of any trust in which any member of the
Appointed Class might be interested]
(f) [to form and capitalise companies in any part of the world]'
12. The other material provisions are as follows:
'4. (a) FOR the purposes of Clause 3 hereof the word "trust" shall
mean any trust created by any settlement declaration of trust will or
codicil or other instrument under the law in force in any part of the
world and a person shall be deemed to be interested under a trust if
any capital or income comprised in the trust is or may become liable
to be transferred paid or applied or appointed to him or her or for
his or her benefit either pursuant to the terms of the trust or in
consequence of an exercise of any power or discretion thereby
conferred on any person . . .
(d) Upon the payment or transfer pursuant to the said Clause 3 of any
money or property to the trustees of any other trust the Trustees
hereof shall not be bound to see to the further application of such
money or property.'
Clause 7 enables the trustees to declare that persons or classes of
persons who might otherwise be or become members of the appointed
class shall be excluded therefrom. Clause 8 empowers the trustees to
add to the appointed class 'any persons or classes of persons (not
being an Excluded Person or Excluded Persons)'.
The settlement further provided:
'12. (a) THE Trustees shall exercise the powers and discretions vested
in them as they shall think most expedient for the benefit of all or
any of the persons actually or prospectively interested under this
settlement and may exercise (or refrain from exercising) any power or
discretion for the benefit of any one or more of them without being
obliged to consider the interest of the others or other.
(b) Subject to the previous sub-clause and to Clause 21 hereof every
discretion vested in the Trustees shall be absolute and uncontrolled
and every power vested in them shall be exercisable at their absolute
and uncontrolled discretion and the Trustees shall have the same
discretion in deciding whether or not to exercise any such power . . .
23. NO Excluded Person shall be capable of taking any benefit in
accordance with the terms of this Settlement and in particular but
without prejudice to the generality of the foregoing provisions of
this Clause:-
(a) The Trust Fund shall henceforth be possessed and enjoyed to the
entire exclusion of any such Excluded Person and of any benefit to him
by contract or otherwise
(b) No part of the capital or income of the Trust Fund shall be paid
or lent or applied for the benefit of any such Excluded Person.'
Subsequent clauses declared the settlement to be irrevocable (cl 24)
and, subject to any change thereof pursuant to cl 10, to be
established under the law of Liechtenstein (cl 26). Clause 25
incorporated the additional trust powers and provisions set out in the
seventh schedule. Paragraph 14 of the seventh schedule provided:
'The Trustees shall have power to take the opinion of counsel locally
or where necessary or appropriate elsewhere concerning any difference
arising under this Settlement or any matter in any way relating to the
Trust or to their duties in connection with the trusts hereof and in
all matters to act in accordance with the opinion of such counsel.'
13. At the time of the execution of the settlement Mr Botnar was 61.
His only child, then aged 20, had died in a car crash in December 1972
and, as is apparent from the definition of excluded persons, future
children of Mr Botnar could not obtain any benefit. Moreover the
individuals comprised in the defined class of beneficiaries were
linked with the protector of the settlement, Dr Lenz, not with Mr
Botnar. It is improbable therefore that anyone envisaged at the time
the settlement was executed that any of them would ever receive a
distribution from the trust fund for his or her own benefit. Had it
been the intention only to benefit charity then, as the commissioners
observed, the structure was more complicated and fiscally expensive
than was necessary. The presence of Dr Lenz as the protector with the
powers of veto conferred on him by the settlement necessarily
restricted the trustees' power of disposition. Mr Botnar had been a
client of Dr Lenz since about 1968. They had got to know each other
well, though not on first name terms. It is unlikely therefore that,
where required, Dr Lenz would have given his consent to an exercise of
a power in any manner of which Mr Botnar disapproved. In these
circumstances it is not surprising that the commissioners rejected the
case of Mr Botnar that the overall purpose of the settlement was to
benefit charity. In my view the obvious inference to be drawn from
these circumstances which, it was common ground, may be regarded in
approaching the construction of the settlement is that the scheme was
to preserve the income of the company in as fiscally beneficial an
environment as possible. But the mere preservation of the income in
such an environment would not give rise to a liability on Mr Botnar if
it could not be used for the benefit of himself or his wife.
The scope of the powers
14. Accordingly the first question is whether any of the powers
contained in the settlement was capable of being used to provide a
benefit for Mr Botnar or his wife. The Revenue accept that in
determining the answer to that question the court should only have
regard to the proper use of such powers. If no power could be properly
used for that purpose then the income could not be dealt with so as to
be calculated to enure for the benefit of Mr Botnar or his wife within
s 478(5)(a); and if no power could properly be exercised with that
result then there could be no beneficial enjoyment of the income of
OBL, EMV or EMVC within para (d) of the same subsection. The answer to
the question is to be ascertained by the normal processes of
construction. Although the settlement is established under and
therefore to be construed in accordance with the law of Liechtenstein
no evidence as to the principles of that law was adduced before the
commissioners. Thus, no other relevant principle having been proved as
a matter of fact, the principles of the law of England must be
applied.
15. The judge concluded that it would not be right to have regard to
the contents of the Lenz memorandum on this question. Neither side
suggested that he was wrong in that respect. Both agreed that whatever
the width of the principles established in Mannai Investment Co Ltd v
Eagle Star Life Assurance Co Ltd [1997] AC 749 and Investors
Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR
896 they did not warrant the introduction of evidence of the
subjective intention of the settlor such as was excluded in Rabin v
Gerson Berger Association Ltd [1986] 1 WLR 526. At one stage it
appeared that there might be some material difference of opinion as to
the extent of the surrounding circumstances to which, in accordance
with those principles, the court might pay regard. In the event I do
not think that there is. The circumstances on which the Revenue rely
are apparent from the matters to which I have already referred without
reference to the contents of the only two paragraphs of the Lenz
memorandum they invited us to consider in this connection. The matters
which Dr Lenz sought to exclude either did not add to what I have
inferred from the circumstances to which I have already referred (sc
the waivers signed by the beneficiaries) or were, as the Revenue, in
effect, accepted, evidence of the subjective intention of Mr Botnar or
his advisers and for that reason inadmissible.
16. The two powers on which the Revenue rely are cl 3(c) and para 14
of the seventh schedule. The latter was not relied on before the
commissioners or the judge. During the course of the hearing we gave
leave to the Revenue to amend their respondents' notice so as to raise
it. I will deal with the construction of cl 3(c) first for if the
Revenue are right in respect of the scope of that power then they do
not need to rely on para 14 of the seventh schedule. But if they are
wrong then the proper construction of the latter power becomes
material.
17. In the case of cl 3(c) Mr Botnar contended that any exercise of cl
3(c) so as to confer any benefit on him would be a fraud on the power
and therefore void. The commissioners considered ([1998] STC 38 at 71,
para 254) that --
'. . . it is possible that Mr Botnar might become entitled to
beneficial enjoyment of the income or part of it without a fraud on
the power. This could happen if capital is transferred to a further
settlement with the genuine intention of benefiting members of the
appointed class notwithstanding that Mr Botnar or his wife is or
subsequently becomes a beneficiary also. This may seem fanciful but
many assumptions in this case are fanciful.'
That conclusion was reached for the purposes of the Revenue's
alternative claim under s 478(5)(d) when the question is whether it is
possible for Mr Botnar or his wife to become entitled to the
beneficial enjoyment of the income. But they also considered (at 63,
paras 174 and 175) in connection with the principal claim under s
478(5)(a) that --
'. . . cl 3(c) is on its natural meaning, exercisable solely for the
benefit of members of the appointed class and that any benefit to
others with interests under a transferee settlement is
incidental . . . We consider that, on a normal use of English,
particularly in the light of the word "notwithstanding" those "other"
persons or objects are not the objects of the cl 3(c) power but are
merely incidental thereto . . . Our conclusion is, therefore, that the
use of the cl 3(c) power in the way contemplated [sc for the purpose
of conferring a benefit on Mr Botnar] . . . would be a breach of trust
as being for a purpose foreign to the power.'
Mr Botnar disputed the first of those conclusions; the Revenue the
second.
18. Before Evans-Lombe J, Mr Botnar being absent and unrepresented,
argument was only addressed on the second point. The judge accepted
the argument of the Revenue. His conclusion was that ([1998] STC 38 at
88) --
'. . . the interlocking provisions of cl 3(c) and cl 23, seen against
the background of the other provisions of the settlement . . . were
intended to make it possible to apply the trust fund by resettling
part or all of it upon trusts which might include an excluded person
as well as a member of the appointed class in its list of
beneficiaries, so as to make it possible to benefit Mr Botnar or his
wife in the future.'
In the circumstances it was unnecessary for the judge to express any
view on the first conclusion of the commissioners.
19. In opening his appeal counsel for Dr Lenz submitted that the issue
was one of fraud on the power. But the doctrine of fraud on the power
is one which invalidates the exercise of a power which appears to be
in conformity with its terms but is in fact made for some collateral
purpose not within its proper scope. The issue in this case is the
proper scope of the power. If it entitles the donee of the power to
confer a benefit on Mr Botnar only incidentally to the benefit
conferred on a member of the appointed class, as the commissioners
thought, or for the primary purpose of conferring a benefit on Mr
Botnar, as the judge thought, then such respective appointments could
not be a fraud of the power. Accordingly I accept the submission for
the Revenue that the question is one of construction of the scope of
the power.
20. For Dr Lenz it was submitted that the power contained in cl 3(c)
could only be exercised for the benefit of a member of the appointed
class. He submitted that the structure of the sub-clause supported
that view because the words following the word 'notwithstanding' were,
on the face of them, incidental to and consequential on what had gone
before. In this respect, he contended, there was no difference between
the scope of the powers contained in, at least, sub-cll (a), (b) and
(d) and that contained in sub-cl (c). Each of them was exercisable for
the purpose only of conferring a benefit on a member of the appointed
class. Were it otherwise, he submitted, why include in sub-cl (c) a
reference to a member of the appointed class at all. He suggested that
the judge was wrong to consider that the opening words of cl 3
'notwithstanding the trusts and provisions hereinbefore declared and
contained' were in derogation of the trusts in favour of the members
of the appointed class. He argued that the judge was also wrong to
draw a distinction between sub-cl (c) and sub-cll (a), (b) and (d) by
reference to the identity of the persons for whose benefit the power
might be exercised. Thus far his argument supported the second view of
the commissioners to which I have referred.
21. Counsel for Dr Lenz also relied on the provisions of cl 23. He
suggested that the provisions of its sub-paragraphs in fact expanded
the prohibition contained in the opening words. In any event, so he
contended, the prohibition was to be applied before any transfer was
made and qualified the words 'some other person or persons' appearing
in cl 3(c) so as to exclude a transfer whereunder even an incidental
benefit was conferred on Mr Botnar or his wife. By this argument he
sought not only further to support the second view of the
commissioners but also to challenge the first.
22. The Revenue contended that the judge was right for the reasons he
gave on the purpose for which the power conferred by cl 3(c) might be
exercised. In that event the commissioners must have been right to
decide that an incidental benefit to Mr Botnar was permissible. There
were a number of steps in the argument. First, counsel relied on the
opening words of cl 3 as demonstrating an intention to derogate from
the trusts set out in cl 2 both by reference to the time when they
were to be exercisable, ie during the trust period and the identity of
the beneficiaries. So, he submitted, it is not possible to limit the
exercise of the cl 3 powers by reference to the provisions of cl 2.
Second, he drew a contrast between the provisions of sub-cll (a), (b)
and (d) which made it plain that the power was to be exercised for the
benefit of members of the appointed class and sub-cl (c) which did
not. He submitted that the only question in respect of sub-cl (c) is
what type of trust is a permissible transferee or recipient
settlement. If the trust comes within what is permissible then each
and every one of its beneficiaries is a potential beneficiary of the
power. Third, he submitted that the words following the word
'notwithstanding' in cl 3(c) reinforced his second submission. Fourth,
he contended that the words in cl 3(c) which follow the words 'and so
that' are not inserted for the purpose of exonerating the trustees,
for cl 4(d) does that, but must be read with cl 23. Fifth, he relied
on the fact that the specific exclusion of an excluded person from the
power conferred by cl 8 was not included in cl 3(c).
23. With regard to cl 23 counsel for the Revenue drew a distinction
between the terms of that clause and the standard form to be found in
40(1) Forms and Precedents (5th edn) (1997 reissue) Form 105 [1461].
In the standard form the prohibition is placed on the exercise of the
powers of the trustees so as to produce the consequence that the
capital or income of the trust fund may be paid or applied 'in any
manner or in any circumstances whatsoever' for the benefit of the
settlor. In cl 23(b) the forbidden consequence is the payment or loan
to or application for the benefit of any excluded person, the words
'in any circumstances whatsoever' being omitted. And that result is to
be achieved, not by prohibiting the exercise of powers in a specified
manner but by making an excluded person ineligible from 'taking any
benefit in accordance with the terms of this settlement'. It is
suggested that the reference to 'this settlement' is deceptively
innocent for when read with the concluding words of cl 3(c) it can be
seen that benefit under a transferee or recipient settlement is
clearly envisaged and to be regarded as separate from a benefit under
this settlement.
24. I regard the point as very nicely balanced and my mind has
fluctuated during the course of the excellent arguments presented to
us on both sides. But giving the matter the best consideration I can I
prefer the arguments for Dr Lenz.
25. First, it appears to me that the distinction sought to be drawn by
the Revenue between the standard form and cl 23 is one without any
material difference. It is true that the words 'in any circumstances
whatsoever' have been omitted from the latter. But their inclusion is
directed at the provisions formerly contained in ss 405(2) and 415(2)
of the Income Tax Act 1952 and the comparable provisions contained in
ss 447(2) and 457(6) of the 1970 Act and ss 673(2) and 685(1) of the
1988 Act whereby the income accruing to trustees resident in the
United Kingdom might be taxable as that of the settlor if he or she
was not entirely excluded from the property comprised in the
settlement. Such provisions would have had no application to this
settlement anyway because the trustees, the trust property and all the
beneficiaries were non-resident. In this connection it is relevant to
observe the inclusion of United Kingdom residents in the categories of
excluded persons by para 1 of the third schedule. Further I do not
consider that the fact that in the standard form the prohibition is on
the exercise of powers so as to achieve a result but the prohibition
in cl 23 is on the result without reference to the powers can make a
difference. It was contended that paras (a) and (b) were not expansive
of the prohibition contained in the opening words but, as stated,
merely particulars of it. It is not necessary to form a concluded view
on that point because I consider that the opening words suffice. There
are two elements to the prohibition namely (1) 'taking any benefit'
and (2) 'in accordance with the terms of this settlement'. The taking
of the benefit is necessarily the obverse of the conferment of the
benefit, the one cannot be separated from the other. The conferment of
the benefit is, for the purposes of the argument, assumed to be by the
exercise of the power contained in cl 3(c). That power is one of the
terms of the settlement. It must follow that the conferment and taking
of the assumed benefit can only be 'in accordance with the terms of
this settlement'.
26. Second, the concluding words of cl 3(c) apply only to the position
after the relevant transfer. They can have no effect on the
eligibility of the persons intended to benefit by the transfer. That
question must be considered by the trustees before deciding whether or
not to make the transfer.
27. Third, I accept the submission that the words in cl 3(c) occurring
after the word 'notwithstanding' are but incidental to and
consequential on the earlier part of the sub-clause. This appears to
me to be clear from the inclusion of the word 'also' and the use of
the words 'some other person' instead of any other person in the next
line. This also confirms my view that it is not intended that there
should be a difference between the class of persons in whose favour
the power contained in cl 3(c) may be exercised when compared with, at
least, paras (a), (b) and (d) of the same clause.
28. Thus, in my view, the power contained in cl 3(c) may not be
exercised for the purpose of conferring a benefit on Mr Botnar for he
is made ineligible for such benefit by the terms of cl 23. In this
respect I disagree with Evans-Lombe J but agree with the
commissioners. However, it does not follow that Dr Lenz is right in
his contention that the first view of the commissioners is wrong. If
the power contained in cl 3(c) is properly exercised so as to transfer
capital to another settlement in which Mr Botnar is not then
interested but he subsequently obtains some interest therein by, for
example, being added to the class of potential appointees by a power
contained in the recipient settlement I can see nothing in cll 3(c) or
23 to prevent it, even though in accordance with cl 4(a) Mr Botnar
might be deemed to have an interest under the recipient settlement. At
the time of the transfer Mr Botnar could not take a benefit in
accordance with the terms of this settlement. Accordingly, in
agreement with the first view of the commissioners, I would reject the
contrary submission of Dr Lenz.
29. It follows from my conclusions on the ambit of the power contained
in cl 3(c) that it could not be exercised so as to give Mr Botnar
power to enjoy within s 478(5)(a) but might be exercised to as to give
him such power within s 478(5)(d). Accordingly it is necessary to
consider the scope of the power contained in para 14 of the seventh
schedule. In my view it is plain that if the trustees acting in good
faith seek and obtain the opinion of suitably qualified counsel on any
matter relating to the trust or their duties in connection with it,
whether or not it has given rise to 'a difference', then they are
entitled to act on that opinion. Such action is a permissible exercise
of not only that power but of any other power the scope of which was
the matter on which counsel's advice was sought. If advice had been
sought and obtained immediately before the execution of the settlement
I do not see why the trustees should not adopt it without having to
reinstruct the same counsel to give the same opinion immediately after
such execution. It follows that in my view the limitation on the power
contained in cl 3(c), which I have already described as nicely
balanced, might well be overcome by the advice of counsel. In that
event the power contained in cl 3(c) would be capable of being
exercised for the purpose of benefiting Mr Botnar as well as
incidentally having that result. In the end therefore I would accept
that the powers on which the Revenue rely may together or separately
be exercised so as to confer on Mr Botnar a 'power to enjoy' within
both paras (a) and (d) of s 478(5).
Power to enjoy within s 478(5)(a) of the 1970 Act
30. The exercise in construction having been concluded there is no
restriction on the facts as found by the commissioners, save
relevance, which may be relied on to satisfy the other conditions for
the application of the section. The principal such fact is the Lenz
memorandum. This document was founded on a draft prepared originally
by Mr Haddock, Mr Botnar's English solicitor. In 1974 it was passed to
Mr Peter Whiteman of counsel to approve. He revised it again in 1975.
The version so revised was obtained by the Revenue as part of the
books and papers of the company seized by them in June 1991. The
commissioners reproduced the complete document in para 69 of their
decision (see [1998] STC 38 at 48-51). For present purposes it is
sufficient to refer to paras 8-12. They are in the following terms:
'8. It is hoped that this structure ie Settlement -- Establishment --
Guernsey Company -- Datsun shares, will also be effective to avoid
United Kingdom income tax in excess of the basic rate on distributions
or deemed distributions (including dividends) out of Datsun UK Ltd.
The result is more likely to be achieved if dividends are not
distributed by O Botnar Ltd or the Anafi Establishment to the
Trustees, and with this in view a provision is being inserted in the
Statutes of the Anafi Establishment and in the Articles of O Botnar
Ltd prohibiting such a distribution. Dividends will, therefore, be
reinvested and the resulting capital and income retained and
accumulated in O Botnar Ltd until it is liquidated or some other
satisfactory means is devised of applying the funds elsewhere. At one
time it was envisaged that O Botnar Ltd would be liquidated by the
Establishment at some time after 5th April 1975: however UK Tax
Counsel has advised it would be preferable to retain the Guernsey
Company for the time being if only for the important reason that it
can then appear in the Datsun books as the registered holder of the
Datsun Shares, and further advice should be sought if it is desired to
alter the structure for any reason.
9. The Settlement executed on 9th October 1974 by Allgemeines
Treuunternehmen was settled by UK Tax Counsel with a view to avoiding,
so far as possible, UK capital gains tax on a disposal of the Datsun
shares, and UK income tax in excess of the basic rate on distributions
out of Datsun UK Ltd. See Note on Settlement dated 29th July 1974
annexed signed by Mr Peter Whiteman of Counsel. For this reason
neither Mr nor Mrs Botnar are named as "Beneficiaries" in the Second
Schedule: furthermore their names appear in the list of "excluded
persons" in the Third Schedule. The only way in which Mr and Mrs
Botnar can therefore benefit under the Settlement is by the Trustees
exercising their powers in relation to the capital (but not the
income) of the trust fund (ie the Funds of the Anafi Establishment
owning the shares of O Botnar Ltd owning the Datsun Share) under
Clause 3(c) of the settlement by paying or transferring "the whole or
any part or parts of the capital of the Trust Fund" to the trustees
for the time being of any other trust wheresoever established or
existing, and whether governed by the proper law governing the present
Settlement at the time of the exercise of the power contained therein
or by the law of another state [or] territory, under which any one or
more of the members of the appointed class are interested,
notwithstanding that such other trust may also contain trusts powers
and provision (discretionary or otherwise) in favour of some other
person or persons (ie Mr and/or Mrs Botnar) or objects, and so that
after such transfer the money investments and property so transferred
shall (i) cease to be regarded as held upon the terms of the present
settlement for all the purposes of the present settlement and (ii)
cease to be regarded as the trust fund or part of the trust fund of
the present settlement as the case may be for all the purpose of the
present settlement [emphasis added].
reason for leaving the shares in O Botnar Ltd for the time being.'
31. It is clear from the terms of para 10 that the trustees had
accepted the advice of counsel that the power contained in cl 3(c)
might be used for the purpose of conferring a benefit on Mr Botnar or
his wife. Thus, on the facts, it is apparent that the power contained
in para 14 of the seventh schedule was available to supplement the
deficiencies in the cl 3(c) power and would be used as and when
necessary. It is clear from para 211 of their decision (see [1998] STC
38 at 67) that the commissioners considered that as a matter of fact
the income of OBL, EMV and EMVC was dealt with in accordance with the
Lenz memorandum and was so dealt with as to be calculated to enure for
the benefit of Mr Botnar or his wife. Given that the power so to do
existed in the manner I have suggested then, subject to the two points
made by counsel for Dr Lenz, it must follow that Mr Botnar had power
to enjoy within s 478(5)(a).
32. The two points arise from the requirement that the income 'is in
fact so dealt with . . . as to be calculated . . . to enure for the
benefit of the individual'. First, it is suggested that the retention
and investment of the income of the company by OBL, EMV or EMVC cannot
amount to a dealing. Second, it was submitted that even if at the
beginning of the period 1974 to 1990 the requirement that it should
'be calculated . . . to enure' was satisfied that was not so later on.
It was contended that the commissioners had been asked specifically to
consider whether the original inference was justified later but had
failed to do so.
33. With regard to the elements required for 'a dealing' it was
submitted that 'simply' retaining and investing the income was
entirely neutral and therefore insufficient. I do not accept that
submission. A dealing does not have to involve a positive act such as
dealing cards. The particular treatment of a particular subject matter
may amount to a dealing even though it is, in some senses, entirely
passive. In the context of the scheme indicated in the Lenz memorandum
the retention and investment of the income for future use was, in my
view, clearly a dealing with that income.
34. I would also reject the second point. The commissioners considered
and found as a fact that the income had been so dealt with as to be
calculated at some point of time to enure for the benefit of Mr Botnar
or his wife in all the years up to the end of 1978 (see [1998] STC 38
at 69, paras 227 and 228), with the exception of one dividend in 1979
(see [1998] STC 38 at 69, paras 229 and 230), in the period 1980 to
1983 (see [1998] STC 38 at 69, para 331), and the entirety of the
income received by EMVC up to the end of 1990 (see [1998] STC 38 at
70, para 236).
35. Counsel for Dr Lenz submits that these conclusions are not all
conclusions open to a reasonable body of commissioners properly
instructed as to the law. He suggests that as time passed the
inference to be drawn in the earlier years is superseded by other
considerations. The other considerations on which he relies are: (1)
by the early 1980s OBL had been wound up and its place taken by EMV;
(2) in the period 1980 to 1984 £38m had been received but Mr Botnar
had also received £35m on the sale of Nissan Suisse; (3) between 1984
and 1988 another £59m was received but none of it used for Mr Botnar
or indeed anything else; and (4) in the period 1988 to 1990 a yet
further £57m was received but not used.
36. All these facts were known to the commissioners. They specifically
observed (at 69, para 232) that the administration of the settlement
did not change in any way after 1976. They had already concluded that
neither charity nor the named beneficiaries were intended to benefit.
This only left the Botnars. In my view the fallacy in the submission
for Dr Lenz is that it assumes that the only relevant benefit is the
receipt of money for the purposes of funding the recipient's personal
consumption. This is not so. It is by no means uncommon for a
successful businessman to wish to warehouse funds for the purpose of
using them in the future to fund such existing or future activity
whether commercial or philanthropic or otherwise for such purposes as
he may, in the future, determine. As the commissioners observed (at
70, para 237) 'benefit' is not confined to financial advantage. In my
view the conclusions to which the commissioners came were entirely
reasonable.
37. For these reasons, though different from those of the judge, I
conclude that Mr Botnar had power to enjoy the income of OBL, EMV and
EMVC within s 478(5)(a) of the 1970 Act and s 742(2)(a) of the 1988
Act. It is not now suggested that the other conditions for the
application of s 478 of the 1970 Act and s 739 of the 1988 Act are not
satisfied. Accordingly I would dismiss the appeal. In those
circumstances the cross appeal does not arise. But as the points were
fully argued and this case may go further I will deal with them
shortly.
Power to enjoy within s 478(5)(d) of the 1970 Act
38. The Revenue claimed that if Mr Botnar did not have power to enjoy
under s 478(5)(a) he had such power under s 478(5)(d). For that claim
to succeed it must be made out that Mr Botnar might --
'. . . in the event of the exercise or successive exercise of one or
more powers, by whomsoever exercisable and whether with or without the
consent of any other person, become entitled to the beneficial
enjoyment of the income . . .'
This provision looks to what might happen in the future, whether
calculated or not.
39. It is apparent from the Lenz memorandum, in particular para 12,
and in the light of my conclusions on the scope of the power conferred
by cl 3(c) that it was at least possible that Mr Botnar might, in the
future, obtain a benefit indirectly from the funds subject to the
trusts of the settlement. The only two questions are whether (1) such
benefit would arise from 'the exercise or successive exercise of one
or more powers' and (2) whether the benefit would be 'the beneficial
enjoyment of the income'. I will deal with each in turn.
40. The commissioners considered that the power contained in cl 3(c)
was a power within the subsection and might be used to confer a
benefit on Mr Botnar. Thus their conclusion on this point was in
favour of the Revenue. But counsel for Dr Lenz contends that the
exercise of the cl 3(c) power would not be enough because it would be
necessary to set up the transferee settlement first. He contended that
the constitution of that settlement could not be the exercise of a
power, as opposed to the action of an absolute beneficial owner. The
response of the Revenue was to submit that the ability of such an
owner was the exercise of a power for the purposes of this subsection,
the necessary limitation being derived from the consideration that the
section only applies to one who has sought to avoid tax in the manner
described in the preamble. I do not accept that submission. As stated
in 36 Halsbury's Laws (4th edn) para 801 the word 'power' is a term of
art denoting an authority vested in a person, called 'the donee', to
deal with or dispose of property not his own and is to be
distinguished from the dominion that a person has over his or her own
property. It appears to me to have been used in that sense in s 478(5)
(d). If 'power' includes dispositions made of his property by an
absolute beneficial owner then there is virtually no limit to the
application of the section.
41. The Revenue submitted that it was not necessary to insert the
establishment of a hypothetical transferee settlement because, from 27
March 1985, there was such a settlement. On that day Allgemeines
Treuunternehmen executed a settlement for the express benefit of Mr
Botnar and his wife (the 1985 settlement). The trustees were Dr Lenz's
senior partner and two other persons resident in Liechtenstein. The
trust fund consisted of the shares in Tavella Finance Corp (Panama)
apparently established by the settlor. It would have been possible to
add to that trust fund by an exercise of the power contained in cl
3(c). It is true that the beneficiaries under that settlement did not
include a member of the appointed class as defined in the settlement.
But that would not have mattered if the trustees had then obtained the
opinion of counsel as to the scope of cl 3(c). But I do not think that
even that was necessary. I do not see why it should have been
impossible for the powers conferred by cl 3(d) to be exercised so as
to set up the requisite transferee settlement, to be followed in due
course by an exercise of cl 3(c) in the manner indicated in para 12 of
the Lenz memorandum. By one means or another there were available more
than sufficient powers, strictly so called, to enable a benefit to be
provided to Mr Botnar.
42. I turn then to the question of whether the benefit provided to Mr
Botnar by those means could be said to be 'the beneficial enjoyment of
the income'. On this point the commissioners accepted the argument of
counsel for Mr Botnar that 'even if Mr Botnar did become entitled to
beneficial enjoyment of income which could be traced to the companies
it would not be "the income" of those companies' (see [1998] STC 38 at
72, para 256). They considered that this conclusion was supported by
the speech of Lord Simonds in Vestey's Exors v IRC (1946) 31 TC 1 at
86 and Viscount Dilhorne's observations in Vestey v IRC (Nos 1 and 2)
[1980] STC 10 at 30, [1980] AC 1148 at 1188.
43. This reasoning is supported by counsel for Dr Lenz. He points out
that 'the income' in s 478(5)(d) refers back to sub-s (1) in which the
income is described as 'income of a person resident . . . out of the
United Kingdom which, if it were income of that individual [sc the
transferor] received by him in the United Kingdom, would be chargeable
to income tax'. Put more shortly the income referred to is the income
of OBL, EMV and EMVC. He also draws attention to the fact that, unlike
sub-s (5)(c) assets representing such income are not included.
44. Counsel for the Revenue submits that the commissioners were wrong
and that the passages to which they referred in Vestey's Exors v IRC
(1946) 31 TC 1 and Vestey v IRC (Nos 1 and 2) [1980] STC 10, [1980] AC
1148 do not support their proposition. He relies on the words used and
the ease with which the subsection could be avoided if the
commissioners were right. He submits that his construction is
supported by Viscount Dilhorne and Lord Keith of Kinkel who agreed
with him in Vestey v IRC (Nos 1 and 2) [1980] STC 10, [1980] AC 1148.
45. I prefer the submissions for the Revenue. The subsection is
looking at possibilities at any time in the future. The words 'the
income' clearly require that of which the transferor has beneficial
enjoyment in the future to be identified as having been the income of
the companies in the year of assessment in which the transferor is
taxed. It cannot have been intended that when the transferor obtains
his beneficial enjoyment the underlying asset must still possess the
characteristics of being the income of the companies. Indeed
beneficial enjoyment by the transferor would be substantially if not
entirely inconsistent with the income in question being or remaining
the income of the transferee.
46. I do not think that the authorities indicate any different
conclusion. Dealing with them chronologically the first is the
statement of Lord Simonds in Vestey's Exors v IRC (1946) 31 TC 1 at
86. In that case the issue was whether one who had power to direct the
investment of the income could be said to have the beneficial
enjoyment of it if he directed that it be lent to him. Lord Simonds
described an affirmative answer as a misuse of language. But a loan
necessarily involves an obligation to repay and does not indicate any
beneficial enjoyment except and to the extent that there is no
interest payable or the rate thereof is lower than the market rate.
Even then the beneficial enjoyment is not of the asset used in making
the loan. In Vestey v IRC (No 2) [1978] STC 567 at 585, [1979] Ch 198
at 216 Walton J, at first instance, dismissed as 'fantastic' the
suggestion that the income of a company and income derived by a
shareholder from the company are the same incomes. No doubt that is
right but it does not, to my mind, deal adequately with the temporal
aspects of the subsection. What the subsection is concerned with is
the beneficial enjoyment in the future of what in the past was the
income of the company. Of course at that future time property
beneficially enjoyed will not then be the income of the company. But
if in the year of assessment in which it arose it can be predicated
that it is possible by the exercise of powers for that income to be
beneficially enjoyed in the future by the transferor I see no
requirement that it should be beneficially enjoyed at that future time
as the income of the company. In other words the reference to 'the
income' is by way of identification in the year of assessment in which
it arose not the prescription of the legal attributes to be present at
the time of its beneficial enjoyment. Though the reasoning is not made
clear it seems to have been the view of Viscount Dilhorne in Vestey v
IRC (Nos 1 and 2) [1980] STC 10 at 31, [1980] AC 1148 at 1189 that the
recipients of capital payments arising from the accumulation of the
income in question did by reason of the receipt become entitled to the
beneficial enjoyment of 'the income' for the purposes of s 478(5)(d).
Lord Keith of Kinkel agreed with Viscount Dilhorne (see [1980] STC 10
at 38, [1980] AC 1148 at 1197), the other members of the Appellate
Committee did not find it necessary to refer to the point.
47. Accordingly I disagree with the commissioners as to the
applicability of s 478(5)(d). In my view Mr Botnar had 'power to
enjoy' under that provision as well.
Extent of liability arising from receipt of a benefit within s 742(2)
(c) of the 1988 Act
48. I turn then to the final point arising from the cross-appeal of
the Revenue. It only arises if Mr Botnar did not have power to enjoy
pursuant to s 478(5)(a) or (d). If he had no such power under those
provisions then the contention is that he did have such power in
respect of the years 1988-89 and 1989-90 pursuant to s 742(2)(c) of
the 1988 Act. That subsection provides:
'An individual shall, for the purposes of section 739, be deemed to
have power to enjoy income of a person resident or domiciled outside
the United Kingdom if -- . . . (c) the individual receives or is
entitled to receive, at any time, any benefit provided or to be
provided out of that income or out of moneys which are or will be
available for the purpose by reason of the effect or successive
effects of the associated operations on that income and on any assets
which directly or indirectly represent that income . . .'
49. What happened is recorded by the commissioners in para 130 of
their decision (see [1998] STC 38 at 57). In effect EMVC funded the
acquisition by the trustees of the March 1985 settlement of a flat at
22 Eaton Square. The relevant payments amounting to £1.5m were made in
October 1988. Thereafter during the years 1988-89 and 1989-90 the flat
was used by Mr Botnar when in London. The commissioners accepted that
the payments by the trustees of the settlement to the trustees of the
March 1985 settlement were misapplications and mistaken. It was
accepted by Mr Botnar that mistaken or not he had thereby received a
benefit within s 742(2)(c). The question was the extent of his
liability.
50. Section 743 provides, so far as material:
'Supplemental provisions
(1) Income tax at the basic rate shall not be charged by virtue of
section 739 in respect of income which has borne tax at the basic rate
by deduction or otherwise but, subject to that, income so chargeable
shall be charged under Case VI of Schedule D . . .
(5) In any case where an individual has for the purposes of that
section power to enjoy income of a person abroad by reason of his
receiving any such benefit as is referred to in section 742(2)(c),
then notwithstanding anything in subsection (1) above, the individual
shall be chargeable to income tax by virtue of section 739 for the
year of assessment in which the benefit is received on the whole of
the amount or value of that benefit except in so far as it is shown
that the benefit derives directly or indirectly from income on which
he has already been charged to tax for that or a previous year of
assessment.'
The commissioners considered ([1998] STC 38 at 71-72, para 245) that
the extent of the liability was the amount or value of the benefit
actually received.
51. The Revenue contend that the commissioners are wrong. It is
submitted that once a power to enjoy is ascertained under any
paragraph of s 742(2) then the whole of the income arising in that
year of assessment is deemed to be that of the individual having such
power to enjoy whether or not the power is exercised and whether or
not the power to enjoy is co-extensive with the income deemed to be
his. It is suggested that this is recognised by s 743(5) the ancillary
purpose of which is to ensure that if 'the whole of the amount or
value of that benefit' exceeds the income deemed to be that of the
individual tax is also paid on the excess. What it does not do, so it
is submitted, is to cap the liability to the amount of the benefit if
the income is more. The consequence of the point is considerable. The
value of the use of the flat by Mr Botnar is agreed at £134,000 but
the income arising to EMVC in the two years in question was £57m.
52. The principle that liability to tax on income is not co-extensive
with the power to enjoy was established in Lord Howard De Walden v IRC
[1942] 1 KB 389, 25 TC 121 under the legislation then in force, namely
s 18 of the Finance Act 1936. In that case Lord Greene MR ([1942] 1 KB
389 at 397, 25 TC 121 at 134) observed that the section was a penal
one and its consequences whatever they might be were intended as a
deterrent to tax avoiders. Nevertheless in Vestey's Exors v IRC (1946)
31 TC 1 at 81 Lord Simonds remarked 'that it remains the taxpayer's
privilege to claim exemption from tax unless his case is fairly
brought within the words of' s 18 of the Finance Act 1936. Section 18
of the Finance Act 1936 was re-enacted in s 412 of the Income Tax Act
1952. In neither the 1936 nor the 1952 Act was there any equivalent to
s 743(5) of the 1988 Act. The precursor of that section was s 33(4) of
the Finance Act 1969.
53. The question, put shortly, is whether s 743(5) is a charging
provision in substitution for or in addition to that contained in s
739(2). I prefer the first alternative. It is true that it is unusual
to find a charging provision in the final subsection of a section
entitled: 'Supplemental provisions'. But as it deals specifically with
the consequences of the actual receipt of benefit in my view it should
be regarded as superseding the more general charging provision
contained in s 739(2) unless there are clear words to the contrary.
There are no such words. Moreover even in a penal section to tax a man
on more than he actually received in cases where there is no power to
enjoy apart from that actual receipt goes well beyond what Parliament
is likely to have considered to be necessary for deterrent purposes.
At least it would require even clearer words than are to be found in
this legislation to make it plain that that is what Parliament did
intend. The point does not arise for decision and I need say no more
about it.
Conclusion
54. In summary, I would uphold the assessments on the grounds that Mr
Botnar had power to enjoy within the meaning of s 478(5)(a) and (d) of
the 1970 Act or s 742(2)(a) and (d) of the 1988 Act in each of the
years of assessment 1974-75 to 1989-90. Accordingly I would dismiss
the appeal. If it were necessary to reach a concluded view on the
Revenue's alternative claims for the years 1988-89 and 1989-90 I would
hold that Mr Botnar was not liable for tax on more than the amount
specified in s 742(5), namely the whole amount or value of the benefit
actually received.
JUDGMENTBY-2: ALDOUS LJ
JUDGMENT-2:
ALDOUS LJ: I am indebted to Morritt LJ who has set out in full the
facts, the relevant legislation and the relevant parts of the
documents and the submissions of the parties. I will confine my
judgment to the reasons why I believe the judge was right on
construction of the settlement. Otherwise I agree with Morritt LJ that
the appeal should be dismissed for the reasons he gives.
Clause 2 of the settlement requires the trustees to hold the trust
fund and income and to accumulate the income so as to hold it as an
accretion to the capital. Upon expiration of the trust period, the
capital is to be held for the benefit of members of the appointed
class; in default of appointment for the beneficiaries and thereafter
for charitable purposes.
Clause 3 starts with the words: 'Notwithstanding the trusts and
provisions hereinbefore declared and contained'. Thus there is a clear
separation between the objects of bounty in cl 2 from those in cl 3.
Clause 2 deals explicitly with accumulation and what happens upon
expiry; whereas cl 3 is concerned with powers of appointment of
capital during the terms of the trust. Under clauses 3(a), (b) and (d)
the objects of bounty are the appointed class. Clause 3(c) is
strikingly different. It gives to the trustees a power to pay or
transfer the whole or any part of the capital to the trustees of
another trust. That other trust can be subject to any law. The sole
restriction is that at least one of the appointed class must be
interested in the transferee trust. The words 'notwithstanding that
such other trust may also contain trust powers and provisions . . . in
favour of some other person or persons or objects' emphasise the wide
words in the previous part of the clause. There follows these
important words --
'. . . so that after such transfer the money investments and property
so transferred shall (i) cease to be regarded as held upon the terms
of this Settlement for all the purposes of this settlement and (ii)
cease to be regarded as the Trust Fund or part of the Trust Fund of
this settlement as the case may be for all the purposes of this
Settlement.'
Those words do not form part of the power given to the trustees to pay
or transfer the capital. They also have to be read together with cl
4(d). Their purpose is to make it clear that after transfer the money
is no longer to be regarded as part of 'this' settlement. It is to be
regarded as part of another settlement.
Clause 23 contains general words of exclusion and two sub-clauses
which are expressed to be 'in particular but without prejudice to the
generality of the foregoing provisions of this Clause'. The sub-
clauses are therefore particulars and should not be read as expanding
the exclusion contained in the opening words. That exclusion prevents
any excluded person from 'taking any benefit in accordance with the
terms of this Settlement'. To ascertain the width of the exclusion it
is necessary to look at the terms of 'this settlement'; not at the
terms of any other settlement. It follows that cl 23 does not prevent
an excluded person taking a benefit under the terms of another
settlement. Thus cl 23 does not prevent the trustees settling capital
under cl 3(c) so long as the restrictions imposed by cl 3(c) are
complied with. Mr Botnar, an excluded person under this settlement,
can be a potential beneficiary under another settlement to which
capital could be transferred under cl 3(c). It follows that he had the
'power to enjoy' the income of a person resident outside the United
Kingdom within the meaning of those words in s 478(5)(a) of the Income
and Corporation Taxes Act 1970 and the equivalent sections in later
acts.
I agree that the appeal should be dismissed.
JUDGMENTBY-3: MANCE LJ
JUDGMENT-3:
MANCE LJ: I have had the advantage of reading in draft the judgments
delivered by Morritt and Aldous LJJ, and I too gratefully adopt the
summary of the relevant facts, documents and legislation in the
former.
The first issue is whether the settlement contains powers which were
capable of being used for the purpose of providing a benefit for Mr
Botnar or his wife. Unless it does, it is common ground that --
whether or not the relevant income may in other respects have been
dealt with so as to be calculated to enure for their benefit -- the
absence of any power to use it for that purpose would prevent s 478(5)
(a) of the Income and Corporation Taxes Act 1970 (the 1970 Act) or, in
respect of the years 1988-89 and 1989-90, s 742(2)(a) of the Income
and Corporation Taxes Act 1988 (the 1988 Act) from applying.
This issue turns on the proper construction of the settlement. The
submissions before us did, however, raise for consideration the extent
to which the settlement must be taken at face value, or can and should
be construed in the light of other circumstances.
Two themes combined in the appellant Dr Lenz's case. One was that,
since there is no challenge to the genuineness of the document or the
transaction, the court cannot go behind the present settlement. The
other was that the true intention of the settlor 'must be ascertained
from the instrument creating [the settlement], and not otherwise' (see
36 Halsbury's Laws (4th edn) para 962).
The first theme represents 'the well-known principle of Inland Revenue
Commissioners v Duke of Westminster [1936] AC 1' (see WT Ramsay Ltd v
IRC [1981] STC 174 at 180, [1982] AC 300 at 323 per Lord Wilberforce,
referred to by Lord Steyn in IRC v McGuckian [1997] STC 908 at 916,
[1997] 1 WLR 991 at 1000). It is to be noted that Lord Wilberforce
continued ([1981] STC 174 at 180, [1982] AC 300 at 323):
'This is a cardinal principle but it must not be overstated or over-
extended. While obliging the court to accept documents or
transactions, found to be genuine, as such, it does not compel the
court to look at a document or a transaction in blinkers, isolated
from any context to which it properly belongs. If it can be seen that
a document or transaction was intended to have effect as part of a
nexus or series of transactions, or as an ingredient of a wider
transaction intended as a whole, there is nothing in the doctrine to
prevent it being so regarded; to do so is not to prefer form to
substance, or substance to form . . .'
The second theme concerns the correct approach to construction of
private documents such as the settlement. Counsel for Dr Lenz adopted
as correct the quotation from Halsbury's Laws. To my mind, even in the
limited context of powers in which it appears, it appears as too
narrowly expressed. A fuller and less absolute discussion of general
principles governing construction of deeds appears in the Current
Service (Noter-up) to 12 Halsbury's Laws (4th edn) para 1478 et seq
and para 1490 et seq. Modern authority has emphasised the need to put
any document, contractual or unilateral, in its proper context (cf
Prenn v Simmonds [1971] 1 WLR 1381, Mannai Investment Co Ltd v Eagle
Star Life Assurance Co Ltd [1997] AC 749 and Investors Compensation
Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896).
In Mannai, the House of Lords was concerned with the construction of a
unilateral notice given in the contractual context of a lease. The
lease was terminable by the tenant by serving not less than six
months' notice to expire 'on the third anniversary of the term
commencement date', which had from and including 13 January 1992. Six
months' notice had been given to determine the lease on 12 January
1995. Construing the notice as a reasonable recipient would in context
have understood it, the majority of the House upheld its validity. In
doing so they overruled a line of previous authority, culminating in
Hankey v Clavering [1942] 2 KB 326, which Lord Hoffmann described (at
777) as based on an 'extraordinary rule of construction' about
inadmissibility of extrinsic evidence to construe legal documents.
Lord Hoffmann said (at 776):
'In its pure form, the rule was said to be that if the words of the
document were capable of referring unambiguously to a person or thing,
no extrinsic evidence was admissible to show that the author was using
them to refer to something or someone else.'
Later (at 778), he said: 'Even in its natural habitat, the
construction of wills, the rule has not been (and, I think, cannot be)
applied with any consistency.' Referring to the reasoning of Earl
Loreburn in National Society for the Prevention of Cruelty to Children
v Scottish National Society for the Prevention of Cruelty to Children
[1915] AC 207, he went on:
'This demotes the rule to the common sense proposition that in a
formal document such as a will, one does not lightly accept that
people have used the wrong words. I doubt whether anyone would dissent
from this principle . . .'
He added (at 779):
'The rule as applied to wills, which restricts the use of background
in aid of construction, reflects a distrust of the use of oral
evidence to prove the background facts. The people who could give
evidence about the background to a will would in most cases be members
of the family interested in the outcome of the case and until 1843,
persons with an interest in the litigation were not even competent
witnesses. No doubt the exclusion of background makes, in a somewhat
arbitrary way, for greater certainty in the sense that there is less
room for dispute about what the background was and the effect which it
has upon the intention to be attributed to the testator. But, as the
cases mournfully show, this certainty is bought at the price of
interpretations which everyone knows to be contrary to the meaning
which he intended.'
In Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 WLR 896 at 912-913, Lord Hoffmann summarised the principles
applicable in construing contractual documents as follows:
'I do not think that the fundamental change which has overtaken this
branch of the law, particularly as a result of the speeches of Lord
Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is
always sufficiently appreciated. The result has been, subject to one
important exception, to assimilate the way in which such documents are
interpreted by judges to the common sense principles by which any
serious utterance would be interpreted in ordinary life. Almost all
the old intellectual baggage of "legal" interpretation has been
discarded. The principles may be summarised as follows. (1)
Interpretation is the ascertainment of the meaning which the document
would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in
the situation in which they were at the time of the contract. (2) The
background was famously referred to by Lord Wilberforce as the "matrix
of fact," but this phrase is, if anything, an understated description
of what the background may include. Subject to the requirement that it
should have been reasonably available to the parties and to the
exception to be mentioned next, it includes absolutely anything which
would have affected the way in which the language of the document
would have been understood by a reasonable man. (3) The law excludes
from the admissible background the previous negotiations of the
parties and their declarations of subjective intent. They are
admissible only in an action for rectification. The law makes this
distinction for reasons of practical policy and, in this respect only,
legal interpretation differs from the way we would interpret
utterances in ordinary life. The boundaries of this exception are in
some respects unclear. But this is not the occasion on which to
explore them. (4) The meaning which a document (or any other
utterance) would convey to a reasonable man is not the same thing as
the meaning of its words. The meaning of words is a matter of
dictionaries and grammars; the meaning of the document is what the
parties using those words against the relevant background would
reasonably have been understood to mean. The background may not merely
enable the reasonable man to choose between the possible meanings of
words which are ambiguous but even (as occasionally happens in
ordinary life) to conclude that the parties must, for whatever reason,
have used the wrong words or syntax: see Mannai Investments Co Ltd v
Eagle Star Life Assurance Co Ltd [1997] AC 749. (5) The "rule" that
words should be given their "natural and ordinary meaning" reflects
the common sense proposition that we do not easily accept that people
have made linguistic mistakes, particularly in formal documents. On
the other hand, if one would nevertheless conclude from the background
that something must have gone wrong with the language, the law does
not require judges to attribute to the parties an intention which they
plainly could not have had. Lord Diplock made this point more
vigorously when he said in Antaios Compania Naviera SA v Salen
Rederierna AB [1985] AC 191, 201: "if detailed semantic and
syntactical analysis of words in a commercial contract is going to
lead to a conclusion that flouts business commonsense, it must be made
to yield to business commonsense."'
In the present case, the deed of settlement which falls to be
construed, was made between the settlor Allegemeines Treuunternehmen,
which may be taken as representing Mr Botnar, and the trustees
consisting of Dr Lotz (who was a partner of Dr Lenz) and two other
associates of Dr Lenz.
The approaches of counsel to its construction maintained a certain
distance. Starting with the passage from Halsbury's Laws on which I
have already commented, Mr Ivory QC submitted that there was little if
any possibility of gaining assistance from the surrounding
circumstances in this case. In his reply,
Mr Ivory said that, in the case of unilateral documents, it was an
'interesting question' where the line between material establishing
the maker's objective aim and material going to subjective intention
lay. But, in his submission, almost any extrinsic evidence remained
inadmissible in this case because it would go to the subjective aim of
the settlor or amount to an attempt to rewrite or vary, rather than
construe, the document. On this basis, he sought to exclude any
consideration even of the fact of the waivers by the members of the
appointed class. In a submission running somewhat contrary, in my
view, to the effect of the two recent House of Lords' decisions, he
said that 'either the parties achieved their intention by the words
they used, or they did not'.
Mr Munby QC for the Revenue submitted that the surrounding
circumstances were key to the present case. He started with (1) the
fact that the evident purpose of the settlement and the entire
elaborate structure was tax avoidance; (2) the waivers by the
appointed class; (3) the complete control exercised by Dr Lenz as Mr
Botnar's trusted Swiss lawyer; and (4) the absence of any persons
(other than themselves) for whose benefit Mr and Mrs Botnar might
sensibly have intended to execute the settlement, at the time when Mr
Botnar did so. Mr Munby also submitted that the assistance as to the
objective aim and purpose of the settlement could be obtained from the
Lenz memorandum, set out in Morritt LJ's judgment, particularly paras
1, 9 and 12. Further submissions and exchanges with the court
canvassed the potential relevance of para 10 of the Lenz memorandum.
There followed a successful application by Mr Munby to amend the
Revenue's notice of appeal, by relying on that paragraph in
conjunction with para 14 of the seventh schedule to the deed.
I would view the four core circumstances identified by Mr Munby as
relevant and admissible background to the construction of the
settlement. The waivers were obtained by Dr Lenz in August 1974, in
advance of the execution of the settlement on 11 October 1974. It is
relevant that the members of the appointed class identified in the
second schedule to the settlement were Swiss lawyer friends or
associates of Dr Lenz and not of Mr Botnar. That links with the fourth
circumstance. It was and is common ground between counsel (and a
matter upon which in another context Mr Ivory sought to rely) that Mr
and Mrs Botnar had no friends, relatives or others for whom to
provide. Their only child had died in a car accident in 1972. The
Special Commissioners found not only that the actual purpose of the
settlement was not charitable (a finding, which might on its own, fall
to be viewed as one of subjective intention), but that the complicated
structure set up 'made no sense whatever' if the intention had been
charitable (see [1998] STC 38 at 77). That is in my view clearly a
finding of objective background.
All the assets put into the settlement were assets which had belonged
directly to Mr Botnar -- through his shareholding of 180,350 shares in
Datsun (United Kingdom) Ltd (the company) and his concealed
shareholding of a further 79,000 company shares held for him by Nustad
Holding AG. Mr Botnar had organised the transfer of these
shareholdings to the offshore company of O Botnar Ltd (OBL), acquiring
in turn shares in OBL. These shares he had put into the Botnar (later
Anafi) Establishment, which was set up for beneficiaries to be defined
by (in effect) himself. The assets of the Anafi Establishment were
then transferred into the present settlement.
The question which these circumstances presents is: what was this all
for? In a general sense, it was 'to preserve the income of the company
in as fiscally beneficial an environment as possible' as Morritt LJ
has indicated. But the conundrum remains why Mr Botnar created a
settlement which was not for charitable purposes and did not include
in the appointed class anyone actually intended to benefit, when there
existed no-one, apart from Mr and Mrs Botnar, for whom Mr Botnar could
or would have wished to provide.
The interpretation of the settlement put forward for Dr Lenz assumes
that Mr Botnar was prepared to part irrevocably with his company
assets without any way of recovering them but without any specific
object, save tax avoidance in general for the benefit of some
unidentifiable beneficiary who he hoped might in future come to his or
his wife's attention. The alternative possibility suggests itself that
this tax-oriented document was intended to enable Mr Botnar and his
wife to retain a potential interest, so that the settlement, instead
of amounting to an outright disposal, would constitute to that extent
a warehousing and retention of the assets, hopefully in a tax-free
environment. Of course, a court should take care not to impose upon a
particular document its own pre-conceptions about aims which the
parties may have had in mind or found sensible. But, here, there is a
conundrum, presented by the circumstances and terms of the document
itself. Those drafting and executing the document must have known the
answer. But, it is said, the court is not allowed itself to know their
answer, because that would involve looking at matters of subjective
intention and/or negotiation, falling within the exception identified
in Prenn v Simmonds [1971] 1 WLR 1381 by Lord Wilberforce and in
Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 WLR 896 by Lord Hoffmann -- who, however, added (at 913) the
caveat that: 'The boundaries of this exception are in some respects
unclear'. Rabin v Gerson Berger Association Ltd [1986] 1 WLR 526 in
this court provides an example of the application of that exception to
exclude counsel's opinions, which were in that case relied on
initially to show that one of the objects or aims of the transaction
was to minimize the incidence of capital gains tax, and latterly to
seek to infer the settlor's state of knowledge from counsel's state of
knowledge about the legal and tax situation.
The answer to the conundrum, and confirmation of the actual object of
the settlement, are contained in the Lenz memorandum, particularly
para 10, if it is admissible to look at it. Paragraph 10 shows that,
prior to establishing the settlement, legal advice was received from
counsel which was accepted by the trustees when entering into the
settlement and was 'of course absolutely vital to the course of
action' -- that is to the setting up of the whole settlement. The
fundamental advice, so given and accepted, was that cl 3(c) of the
settlement enabled the assets of the settlement to be appointed to
another settlement under which Mr and Mrs Botnar (despite their being
'Excluded Persons' under this settlement) would benefit. The purpose
of the settlement was not, therefore, to dispose of assets outright or
finally, but to shelter them, hopefully in a tax-free environment, and
to be able to recover them at some date in the future if so wished.
In agreement with Morritt LJ, I consider that regard can on any view
be had to this legal advice in the context of para 14 of the seventh
schedule, and that the legal advice so recorded would have enabled the
trustees to exercise their powers under cl 3(c) to transfer the assets
to another settlement, notwithstanding that the Botnars would be and
were intended to be beneficiaries under that other settlement. That is
sufficient to decide in the Revenue's favour the major point of
principle arising under s 478(5)(a) of the 1970 Act and s 742(2)(a) of
the 1988 Act.
In argument, I raised the possibility that account might fall to be
taken of para 10 in another way. It is clear that both the settlor,
acting in effect for Mr Botnar, and the trustees accepting the
appointment and the assets from the settlor, entered into the
settlement upon the basis of an express common understanding and
acceptance as to the scope of cl 3(c). This was -- to quote para 10 of
the Lenz memorandum -- 'of course absolutely vital to the course of
action'. One may add that Dr Lenz, Mr Botnar's lawyer, must (as the
commissioners found (see [1998] STC 38 at 67, para 209)) also have
been well aware of the 'vital basis' of the settlement before its
execution, and his consent as protector was required by the trustees
for the exercise of their most important powers including those under
cl 2(3), (4) and (5) and cl 3 (cf cl 21 and the sixth schedule).
In a simple contractual context, courts are not unfamiliar with
situations where parties attach to words used a private 'dictionary'
meaning (cf eg De Tchihatchef v Salerni Coupling Ltd [1932] 1 Ch 330;
Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd, The Karen
Oltmann [1976] 2 Lloyd's Rep 708 and Atlantic Lines and Navigation Co
Inc v Hallam Ltd, The Lucy [1983] 1 Lloyd's Rep 188. In The Karen
Oltmann Kerr J held that the admission of extrinsic evidence to
establish an agreed basis or meaning of this nature does not conflict
with the principle in Prenn v Simmonds [1971] 1 WLR 1381.
It seemed to me at least possible that there might be some scope for
such a principle in the context of a deed such as the present,
different in character though it is from the more commonplace
contractual situations with which those cases were concerned. It is
not, perhaps, easy to see why a settlor and trustees who enter into a
deed on a particular agreed basis should be free to ignore it, when it
later suits them to do so. If courts refuse to enforce an express
understanding or side agreement that parties to a settlement have
committed themselves to before entering into it, that might be thought
to detract from, rather than add to, the certainty aimed at by a
settlement of this nature. At least in the absence of a saving
provision such as para 14 of the seventh schedule, this might add to
cases where supposed legal certainty has been, as Lord Hoffmann said
in Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 WLR 896 at 779, 'bought at the price of interpretations which
everyone knows to be contrary to the meaning which he intended'. Of
course, as Lord Hoffmann also said (at 778), courts will not lightly
infer that parties to a formal document like the settlement have used
'the wrong words'. But, in contexts where courts recognised that
parties have attached their own meaning to particular words (cf
Investors Compensation Scheme (at 914), the parties have -- by
definition -- used the right words. Whether and how far there could be
any scope at all for such a principle in the context of a settlement
such as the present was not argued out before us, and would require
careful attention as a matter of principle and in the light of
previous authority (cf the Halsbury title on deeds and Rabin v Gerson
Berger Association Ltd [1986] 1 WLR 526, both mentioned above). I need
say no more about this therefore.
Leaving aside para 10 of the Lenz memorandum, the nicely-balanced
argument remains whether cl 3(c) of the present settlement contains
power to transfer capital of the trust to another trust for the
purpose of benefiting Mr and/or Mrs Botnar as beneficiary/ies under
that other trust. I would see force in the submissions made by Mr
Ivory for Dr Lenz, if the circumstances were such that Mr Botnar could
realistically be taken to have intended to benefit charity or members
of the appointed class or others (apart from himself and his wife) who
he might from time to time favour. But the four core surrounding
circumstances identified by Mr Munby point in a wholly different
direction. In their light, my tentative view would be that,
independently of para 10, the settlement can and should be read as the
judge read it. It has been very carefully worded, and the standard
precedent has been subject to some amendment of a potentially
restrictive nature. Clause 2 establishes the trusts on which the trust
fund is held. Clause 3(c) allows payment or transfer of the capital to
the trustees of another trust --
'. . . under which any one or more of the members of the Appointed
Class are interested notwithstanding that such other trust may also
contain trusts powers and provisions (discretionary or otherwise) in
favour of some other person or persons or objects'.
Clause 3(c) also provides that after such transfer the capital so
transferred shall cease to be regarded as held on the terms of this
settlement and cease to be regarded as part of the trust fund 'for all
the purposes of this Settlement'. Nothing in cl 3(c) expressly
requires the payment or transfer under cl 3(c) to be made for or for
the benefit of any member of the appointed class, or expressly takes
the 'Excluded Persons' outside the scope of the 'other person(s)' who
may benefit under the other trust. The only condition is that any one
or more of the appointed class should be interested under the other
trust, and by cl 4(a) a person is --
'. . . deemed to be interested under a trust if any capital or income
comprised in the trust is or may become liable to be transferred paid
applied or appointed to him or her or for his or her benefit either
pursuant to the terms of the trust or in consequence of the exercise
of any discretion thereby conferred on any person.'
These provisions can be read as distinguishing between on the one hand
a payment or transfer between trusts (under cl 3(c)), and on the other
a payment, application or appointment under a trust (whether under cl
2 of the present settlement or under any other trust to which capital
may have been transferred under cl 3(c) of this trust). Clause 4(d) is
not inconsistent with this, since it does not, I think, follow from
the use of the word 'further' that a payment or transfer under cl 3(c)
was viewed as itself being an 'application' of capital. Clause 23 can
be read as reflecting the same distinction. Its subject-matter is the
benefits which may be conferred and the payments, loans or
applications of capital or income which may be made 'in accordance
with the terms of this Settlement'. It does not address or limit the
payments or transfers which may be made from this trust to another
under cl 3(c). So read, the settlement would not restrict the use of
cl 3(c) to confer benefits on Mr or Mrs Botnar, and it would follow on
this basis also that each would have 'power to enjoy' the income
within s 478(5)(a) of the 1970 Act and s 742(2)(a) of the 1988 Act.
The other question under s 478(5)(a) is whether the income of OBL, EMV
and EMVC was 'in fact so dealt with . . . as to be calculated . . . to
enure for the benefit of the individual', that is Mr Botnar or his
wife. For the reasons given by Morritt LJ, I agree that Dr Lenz's
appeal on this question also fails.
It follows that the appeal fails under s 478(5)(a) of the 1970 Act and
s 742(2)(a) of the 1988 Act.
By their cross-appeal the Revenue contend that Mr and Mrs Botnar also
had power to enjoy the income of OBL within the meaning of s 478(5)(d)
of the 1970 Act and s 742(2)(d) of the 1988 Act. Having successfully
resisted the appeal, the Revenue do not need to succeed on the cross-
appeal. But I shall something about it, since the Revenue submitted
that they could succeed on the cross-appeal regardless whether the
appeal succeeded.
The issue is, in the language of s 478(5)(d) of the 1970 Act prior to
1981, whether the settlement created a situation where --
'. . . the individual [that is, Mr and/or Mrs Botnar] has power, by
means of the exercise of any power of appointment or power of
revocation or otherwise, to obtain for himself, whether with or
without the consent of any other person, the beneficial enjoyment of
the income, or may, in the event of the exercise of any power vested
in any other person, become entitled to the beneficial enjoyment of
the income . . .'
or, in the language of the later legislation (as inserted by s 46(5)
of the Finance Act 1981), whether --
'. . . the individual may, in the event of the exercise or successive
exercise of one or more powers, by whomsoever exercisable and whether
with or without the consent of any other person, become entitled to
the beneficial enjoyment of the income . . .'
The Revenue's broad case is that the trustees of the present
settlement could have exercised the power under cl 3(c) to transfer
capital to another trust under which the Botnars were or could later
be made beneficiaries, or that they could have exercised their power
under other provisions such as cl 3(d) to settle capital upon trust
for members of the appointed trust, in circumstances where the Botnars
might be or later become ancillary beneficiaries in accordance with
the principle in Pilkington v IRC [1964] AC 612, 40 TC 416.
The first question is whether there was any such power. The second
question is whether any capital which Mr and Mrs Botnar might, by
virtue of its exercise, have become entitled to enjoy beneficially
could properly have been regarded as 'income' of OBL.
On the interpretation adopted above of cl 3(c) -- read, if necessary,
with para 14 of the seventh schedule to the settlement -- the first
question answers itself in the Revenue's favour. The trustees would
have had power to transfer trust capital under cl 3(c) for the purpose
of benefiting the Botnars and/or notwithstanding that they were named
as other potential beneficiaries under the other trust. If that is
wrong, the question becomes whether, assuming that cl 3(c) (read with
cl 23) could not have been used to transfer capital for that purpose
or in such a case: did it or any other clause give the trustees a
power which could still have been exercised with that result? 'Power'
is a term of art, referring to authority vested in a 'donee' to deal
with or dispose of property which is not his own. Mr Ivory did not
submit that s 478(5)(d) of the 1970 Act and s 742(2)(d) of the 1988
Act were limited to circumstances where powers existed exercisable for
the purpose of benefiting the taxpayer. But he submitted that any
circumstances in which benefit to Mr or Mrs Botnar might arise,
without being intended, would involve matters other than the mere
exercise of powers or too remote a chain of causation. In particular,
if steps such as the setting up of some other trust were a necessary
part of whatever chain of event was postulated, that did not suffice.
Further, the court should eschew remote hypotheses of unlikely fact.
The difference in wording before and after 1981 might even be of some
relevance in this connection. The pre-1981 wording would seem to be
satisfied only if the single exercise of power by either the
individual or some other person could entitle the individual to the
beneficial enjoyment of the income. The later wording specifically
requires consideration of the possibility of 'successive exercise of
one or more powers, by whomsoever exercisable'.
If one postulates, as the Revenue did, another trust in favour of a
member of the appointed class, under which the Botnars were not at the
time of transfer but might subsequently become named beneficiaries,
any entitlement on their part to beneficial enjoyment of any sum would
derive not just from the transfer, but from the later, independent
exercise by the other trustees of their power under the other trust to
add the Botnars as beneficiaries under that other trust. There must be
a multitude of trusts worldwide whose trustees would have power to add
a member of the appointed class and the Botnars. On the Revenue's
interpretation, a clause such as cl 3(c) would have to preclude
transfer to any trust under which Mr or Mrs Botnar might later be
named a beneficiary. Unless it did, s 478(5)(d) of the 1970 Act -- at
least in the form it took from 1981 onwards, and s 742(2)(d) of the
1988 Act would automatically apply. It may be that these somewhat
broad consequences are correct. But I prefer not to express a definite
view. The point only arises on an inapplicable hypothesis (that cl
3(c) does not allow a transfer for the Botnars' benefit or to a trust
under which they are potential beneficiaries). Further, the course of
events which the Revenue postulate to invoke these statutory
provisions on that hypothesis would never in fact have occurred, since
it was always intended to use cl 3(c) for the specific purpose of
benefiting the Botnars.
On the second question arising in relation to s 478(5)(d) of the 1970
Act and s 742(2)(d) of the 1988 Act, I agree with Morritt LJ for the
reasons he gives that, if any benefit which could have been provided
to Mr or Mrs Botnar in one of the ways postulated by the Revenue, it
would have entitled them to 'the beneficial enjoyment of income' of
OBL, EMV and EMVC within the scope of the statutory provisions, even
though it would have had nominally to be distributed as capital of the
settlement. The mere interposition, as here, of a company between the
settlement and the income cannot affect this conclusion.
On the other aspect of the cross-appeal, that is the extent of
liability under s 742(2)(c) of the 1988 Act in respect of Mr Botnar's
receipt, without entitlement, of the benefit of the use of a London
flat, which was acquired on the commissioners' findings as a result of
a mistake by the present trustees, I also agree with Morritt LJ's
reasoning and conclusion.
DISPOSITION:
Appeal dismissed with costs. Leave to appeal to the House of Lords
refused.
SOLICITORS:
Jeffrey Green Russell; Solicitor of Inland Revenue.