A Fairytale Ending

Not quite, says MALCOLM GUNN FTII, TEP, reviewing the final outcome of the Grimm v Newman negligence case.

I HAVE IT ON good authority that an Irish jury once reported back to the judge to say that 'we are unanimously of the view that we cannot agree in this case'. Perhaps this was a brief lesson to show that there is always a positive way of putting bad news!

If the case of Grimm v Newman (reported at first instance at [2002] STC 84) had been one for a jury I am beginning to think that the outcome would have been the same as in the aforesaid Irish case. Mr Grimm was advised to carry out some fairly straightforward tax planning with remittances and the details have been closely examined by many eminent experts. But most of them have reached contradictory conclusions about the steps taken. Fortunately, the Court of Appeal has now thrown out the negligence claim by the taxpayer against his accountant, and refused leave to appeal further; so does this grim tale now have a fairytale ending? Perhaps it does in one sense, but there is so much that is unsatisfactory about the whole business that if this story had got into one of Grimm's books, children would not be slumbering peacefully afterwards, but rather suffering nightmares.

How it all began

Mr Grimm, the taxpayer, was domiciled in the United States, but resident in England. He had a dual contract arrangement with his employer, so that part of his remuneration was wholly in respect of duties performed outside the United Kingdom, and therefore taxable only on the remittance basis. Like all resident non-domiciliaries, a pot of money tends to accumulate outside the United Kingdom which they are eager to remit to this country, but less eager to pay tax on it. In the particular circumstances of Mr Grimm's case, the unremitted Schedule E income was in the form of overseas investments. Mr Grimm was getting married, and looking to buy a United Kingdom home in London for himself and his new wife. The problem was how to get the money into the country tax free.

His United Kingdom tax adviser, Mr John Newman, advised that, he should give some of his investments to his new wife, completing the transfers overseas. If she were later to dispose of those investments and bring the money to the United Kingdom, that would not be a remittance by him, but rather the use by his wife of her own money. Mr Newman gave some warnings with his advice, but none that are relevant to the points which were later at issue.

This strategy was duly put into effect. Mr Grimm transferred assets worth approximately US$685,000 to his wife on 15 November 1991 (complete with a written letter to her in formal terms!) and there was a further much smaller transfer of assets on 31 January 1992.

The purchase of a home in Hampstead, North London was completed on 20 March 1992. The purchase price was £750,000 with Mrs Grimm paying her half share including the costs. Mr Grimm funded his half share by means of a loan of £300,000 secured on the property with the balance in cash. The property was held as joint tenants.

The differing viewpoints

As mentioned, there have been almost as many viewpoints as to whether or not this strategy worked as there are advisers who have offered public comment on the arrangement. Even the Revenue disagreed with itself; more on that in a moment.

Gift Abroad

Mr Newman's view was based on the decision in Carter v Sharon 20 TC 229 which clearly established that where a gift of foreign income is completed outside the United Kingdom, there is no remittance for United Kingdom tax purposes if the donee subsequently brings the money into the United Kingdom.

Strings

After the Revenue had challenged the strategy, advice was taken of Jonathan Peacock (now QC) who considered that the Revenue's claim should be conceded. There were 'strings attached' to the gift overseas so that the decision in Carter v Sharon did not apply. Exactly what counsel had in mind has not been disclosed, but it would seem that it was based on the notion that the gift was made in the clear expectation that Mrs Grimm would use the money in accordance with the plan.

As a result of that advice, the taxpayer entered into a global settlement with the Revenue which included an element for tax on the 'remittance' made via his wife.

Joint mortgage

The case surfaced in the High Court as a negligence claim by Mr Grimm and Peter Trevett QC appeared on his behalf. Peter Trevett's point was that, as the property was jointly held, Mrs Grimm was inevitably jointly liable under the mortgage which Mr Grimm had taken out in order to finance the purchase. Although in practice, Mr Grimm was going to make the mortgage repayments, the plain fact was that he had only put in a relatively small amount of cash of his own and Mrs Grimm's joint liability under the mortgage meant that Mr Grimm had not personally financed his one half share of the property. The widely drafted rule relating to remittances of Schedule E income had therefore been breached.

Survivorship

In the High Court, Mr Justice Etherton came to his own conclusion about the matter. What seemed to worry him most was that the property was held as joint tenants and so that Mr Grimm got a much larger property than he could have bought out of his own resources, and in the event of the death of his wife, it would all pass to him by survivorship. 'That was plainly a financial benefit to him ...'

Other views

Writing in Key Haven's Personal Tax Planning Review, Volume 9, Issue 1, Robert Venables QC gave a most robust defence of Mr Newman's advice stating that the argument for the claimant was 'an impossible submission' and 'quite untenable'. 'Had there been an impartial (one could hardly expect Mr Trevett QC to argue the points against his client's interest) and legally qualified tax adviser in the Court, it would soon have been dispatched.' I am pleased to say that Peter Vaines, writing in Taxation, 10 January 2002 at pages 321 to 323, took the same view, in that the matter was conclusively decided by Carter v Sharon. In the Court of Appeal, John Ross QC and John Tallon QC, acting for Mr Grimm argued that the Schedule E remittance rule is of very broad scope, covering all amounts 'paid, used or enjoyed in, or in any manner or form transmitted or brought to, the United Kingdom ...'. That rule was wide enough to catch the money brought in by the wife in order to fund the purchase jointly with her husband. Counsel also referred to the decision in Harmel v Wright [1974] STC 88 in which it was held that any money which passes through successive 'conduit pipes' before reaching the United Kingdom is caught as a remittance for the purposes of Schedule E.

To add more grist to an already overloaded mill, the spectre of Ramsay was raised. Was there not here a pre-planned arrangement to get his income into the United Kingdom tax free in order to buy his home in Hampstead? If so, all the inserted steps can be disregarded and the matter looked at as a whole.

Last but not least, there is the view that even if the scheme did work, it should have been recognised at the outset that it was provocative and likely to lead to contentious argument with the Revenue, with all the resulting costs of that.

In the Court of Appeal

It will by now be apparent to readers that the causes of this long-running dispute can all be attributed to the woolly and sketchy nature of the remittance basis rules. The Schedule E rule, which is the same as that which applies for capital gains tax purposes, has different wording from the rule which applies for Schedule D, Cases IV and V. There is only one reported decision on the Schedule E rule: Harmel v Wright, which does not actually advance matters very much. The rule gives us no guidance as to what it means when emoluments are 'enjoyed in' the United Kingdom. Robert Venables' powerful argument in the Personal Tax Planning Review was that 'the taxpayer ends up being beneficially entitled to money situate in the United Kingdom'. This he said was a far cry from the present case where it is alleged merely that the taxpayer obtained some benefit from the application of the money in the United Kingdom. Nevertheless, this argument had to hang from what few threads there are to be found in the judgment in Harmel v Wright.

In fact, the Court of Appeal decision broadly follows the conclusions of Robert Venables, and indeed those of Peter Vaines in the Taxation article. The gift was made overseas and was unconditional, despite the express underlying intentions in making it. There were no strings attached to it. Carter v Sharon applied equally to the Schedule E rule as to the Schedule D remittance basis rule and it was nothing to the point that the gift resulted in the acquisition of a jointly owned property in the United Kingdom, nor that the husband financed his share largely by means of a mortgage. Finally, the Ramsay approach had no application in this particular case, although one of the judges, Lord Justice Carnwath, clearly thought that, looking back to 1991 when the advice was given, this aspect should have been treated as a live issue on the authorities at that time.

As a result, Mr Grimm's claim was unanimously rejected by the Court of Appeal. Lord Justice Carnwath differed from the others in finding that the advice given was negligent as it should have come with a health warning as to the likelihood of an attack by the Revenue. However he accepted that there was no alternative scheme which would have been better and so Mr Grimm's complaint had to be dismissed.

We also happen to know that Mr Grimm sold the property in 1997 for almost twice the amount which he originally paid for it. So with the benefit of this hindsight the complaint all looks a bit hollow!

Where are we now?

So has all this blown away much of the fog and mysticism which surrounds the Schedule E remittance basis rule? The answer is partly yes and partly no. The Court of Appeal applied the cases on the Schedule D remittance basis rule to the Schedule E rule without drawing any distinctions. It was firm about the point that remittance by a wife cannot be treated as a constructive remittance by a husband. It also appeared to accept the proposition that there is only a remittance of income where money or some other kind of finance is brought into the United Kingdom by the taxpayer himself; this accords with the Schedule D rule which applies only to 'sums' received in the United Kingdom.

Back-to-back loan schemes were also briefly examined in the Court of Appeal. There had been a suggestion that Mr Grimm would have been better advised to place funds with a bank overseas back to back with a loan to finance the cost of the property in the United Kingdom, or better still to give money to his wife who would carry out the back-to-back loan arrangement. Section 65(8), Taxes Act 1988 is designed to counteract this kind of planning, but it is possible to plot a path through this anti-avoidance provision if the loan can be arranged so that it has little dependence upon the deposit of funds with the bank; that may be easier said than done. Nevertheless, the Court of Appeal thought that this was highly artificial and much more open to attack than the more straightforward scheme which was recommended.

Where we are still in the dark following the Court of Appeal judgment is in relation to the application of the Ramsay principle to remittance basis planning. This case appeared to fall on the right side of the line but, if the time scale between the gift and the property purchase had been much shorter, one guesses that Ramsay might have been much more of a problem.

A stark warning was also given in one of the judgments:

You have been warned!

On that subject, it is to be noted that the Revenue's Schedule E Manual, at paragraph 40302, states:

This appears to conflict with the Court of Appeal judgment which based tax liability only on sums or finance received in the United Kingdom.

A house divided against itself?

One of the expert witnesses for Mr Newman was a Mr R E Churchill who we understand had been in the Revenue for 22 years. He had advised that the Revenue's view in 1991 would have been that emoluments are only enjoyed in the United Kingdom for the purposes of Schedule E if there is economic enjoyment of them rather than 'personal enjoyment'. The approach taken by Special Compliance Office in Mr Grimm's case in treating the occupation of the house in Hampstead as 'enjoyment' was at odds with the 'official stated view that there must be financial consideration for a remittance to take place'.

It seems highly unsatisfactory for Special Compliance Office to contend for tax liability if it knew that the official view of the Inland Revenue was that none exists. We must surely expect a certain level of integrity from the Revenue department?

I also recall the tale told by Paul Aplin in Taxation, 10 October 2002 at pages 28 and 29, where basically he was given a cock and bull story by Special Compliance Office in the hope that it would hoodwink him.

I submit that this kind of behaviour is totally unacceptable by civil servants.

... and they lived happily ever after?

So does this story of Mr Grimm have a nice fairytale ending? Certainly not. Mr Grimm paid tax to the Revenue which according to a former senior Inspector the Revenue knew was not due; so much for the claptrap about 'we only ask for the right amount of tax'. He has also wasted even more money in pursuing a claim which has not succeeded. Mr Newman has had many hours of his professional time wasted on a futile argument by a bitter client. The remittance basis has been shown once again to be the 'joke' which Mr Twiddy of the Capital Taxes Office described it to be at a seminar earlier this year. Part of the Revenue's Schedule E Manual looks to give incorrect advice, but it is a fair bet that it will not get changed, since the Revenue was not a party in this appeal. In the meantime, The Guardian newspaper continues to snipe at the whole concept of the remittance basis of taxation.

This is the stuff of nightmares and not fairytales.

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