Grimm: A Shining Light

JOHN TALLON QC enunciates his interpretation of the Court of Appeal's judgment
in Grimm v Newman.
AS ONE OF the counsel involved in the recent appeal to the Court of Appeal (its
decision now being final) of the decision of Mr Justice Etherton in Grimm v
Newman [2002] STC 1388, I read with interest the article of Malcolm Gunn, 'A
Fairytale Ending?', Taxation, 21 November 2002 at pages 177 to 180.
The article says that the Court of Appeal 'appeared to accept the proposition
that there is only a remittance of money where money or some other kind of
finance is brought into the United Kingdom by the taxpayer himself'. It is then
suggested that the Court of Appeal's decision appears to conflict with paragraph
40302 of the Revenue's Schedule E Manual (reproduced in the article). Neither
assertion is correct in my opinion.
I also think that the criticism of the Revenue's stance is a bit harsh, and I
will say why later. However, I begin with one personal moan for which Malcolm
Gunn is in no way to blame. The article, based on the wrong entitling on the
judgment approved for handing down, records that I and John Ross QC represented
Mr Grimm. We emphatically did not! We represented the successful appellant, Mr
Newman. I am pleased to say that the official judgment for publication (e.g. in
Lawtel) has the proper description of the representation of the parties to the
appeal.
Basic facts
In fairness to Mr Newman, it should be noted that he was asked to give advice in
October 1991 in relation to a very general proposal when, so far as he knew, no
new house (which was to be purchased with the remittances) had been identified.
Important background
It formed no part of Mr Grimm's case at the trial before Mr Justice Etherton
that there was a contractual condition attached to his gift (which sought to
take advantage of a one-off tax benefit in the United States for gifts of up to
$700,000 in the United States tax (calendar) year of marriage), or that the
assets transferred by way of gift were impressed with a trust to be applied in a
particular manner by Mrs Grimm. Indeed, it was recorded in the particulars of
claim that '... the gift was received by Mrs Grimm free of any legally
enforceable obligation to use it in a particular way'. Given the way the case
was run before Mr Justice Etherton, and in the light of Mr Grimm's answers to
very pertinent questions posed in cross-examination by John Ross QC, Mr Justice
Etherton, unsurprisingly, made no finding to the contrary.
Mr Grimm also did not seek to assert that his gift was not perfected in the
United States. (No doubt it would have run contrary to the United States
taxation benefits sought to be achieved.)
Significance of overseas gift
The Court of Appeal accepted our submission on behalf of Mr Newman that the
principles enshrined in Timpson's Executors v Yerbury 20 TC 155 and Carter v
Sharon 20 TC 229, as applied in the context of the Schedule D, Case V remittance
rules, applied also to the remittance rules contained in section 132(5), Taxes
Act 1988 for Schedule E, Case III.
In other words, the complete alienation abroad by Mr Grimm of his chargeable
emoluments (comprised of investments) in circumstances in which he no longer
retained any beneficial interest in them or contractual right over them, meant
that the assets transferred:
became the property of Mrs Grimm not having the quality of income in her hands
so that she could not be taxed on her receipt of the proceeds of sale of them
in the United Kingdom; and
no longer represented income of Mr Grimm which he could use or enjoy in the
United Kingdom. Consequently, as he neither transmitted the proceeds of sale
to the United Kingdom nor received them in the United Kingdom, he could not be
charged to tax.
It was accepted on behalf of Mr Newman that if Mr Grimm had retained a legal
right of control over the application of the gifted assets (whether such control
arose under a contractual obligation or by virtue of the assets being impressed
with the trust to be applied in a particular manner), he would have been
chargeable despite not having received them himself, because he would have used
and/or enjoyed them in the United Kingdom.
'Enjoyment in the United Kingdom'
It was very much part of our submissions that enjoyment in the sense described
in paragraph 40302 of the Schedule E Manual would give rise to a chargeable
remittance. However, a taxpayer can only be charged if his enjoyment in the
United Kingdom is of his taxable emoluments: if he has alienated them abroad in
the full sense described earlier, he can at best derive mere personal enjoyment
of someone else's property. That kind of enjoyment is not taxable. Lord Justice
Carnwath found the two contrasting examples I gave illustrating this narrow, but
crucial, distinction to be helpful (paragraph 100 of the judgment). It is
important to appreciate that 'enjoyment' is a concept unknown in the remittance
rules of Schedule D, Case V, where only a receipt of money either actually or
via loans to which subsections 65(6) to (9), Taxes Act 1988 apply, will do. It
is the concept of 'enjoyment' which largely gives section 132(5) its greater
width. I say 'largely' because 'used in the United Kingdom' has a rough
equivalent for the Schedule D, Case V rules in so far as chargeability under
those rules does not necessarily depend on actual receipt but can arise where
the taxpayer is '… entitled to the income' (section 59(1)). Timpson's Executors
is the classic illustration of that.
The Court of Appeal was fully conscious of the parameters of 'enjoyment' and it
is wrong to say that its decision is at odds with the manual. Nor did it hold
that there had to be a remittance of money for there to be chargeability under
section 132(5); the judges fully accepted that expenditure abroad on assets by
the taxpayer subsequently imported and enjoyed by him in the United Kingdom
would result in chargeability if the expenditure abroad was made from chargeable
emoluments.
Given the judges' decision that the principles enshrined in Timpson's Executors
and Carter v Sharon applied, so that Mr Grimm was no longer in a position to
enjoy his chargeable emoluments when they were applied in the United Kingdom by
Mrs Grimm as her property (this was the point overlooked by Mr Justice
Etherton), the Court of Appeal did not have to spend much time on the point that
had impressed Mr Justice Etherton, namely that Mr and Mrs Grimm purchased as
beneficial joint tenants thereby involving the concept of survivorship. Indeed,
that point was not maintained on the appeal on behalf of Mr Grimm and a new
point to similar effect, namely that the application by Mrs Grimm of her money
discharged the joint and severable liability of Mr Grimm in that amount on the
joint purchase, received short shrift.
'Strings attached'
The article suggests that counsel consulted before settlement by Mr Grimm, who
referred to 'strings attached', meant there was a clear expectation that Mrs
Grimm would use the money in accordance with a pre-arranged plan. Lord Justice
Carnwath agreed with me that the 'strings' counsel had in mind:
'... were some form of obligation on the wife to put the funds towards the
purchase of the house in the United Kingdom, sufficient to detract from the
quality of the transfer as an absolute gift in America. In legal terms, the
consequence would have been to move the facts across the narrow border between
Carter and Timpson (as already explained by the Vice-Chancellor). As in
Timpson, the gift would not have been complete until its English purpose had
been achieved.'
Ramsay
It is also suggested in the article that if the sequence of the events had been
shorter, Ramsay might have been a problem. I disagree that this conclusion
should be drawn. The Court of Appeal concluded that the application of Ramsay
could not ignore the fact that Mr Grimm made a gift to Mrs Grimm. That gift was
made abroad. What Ramsay could not do was to convert any understanding (from
which Mrs Grimm was free to depart at any time) into a legal obligation to apply
the gift in a particular manner. The taxation consequences then flowed from
that.
Other views
This is a case which attracted widespread comment after the adverse decision for
Mr Newman in the High Court. There is much in the article by Robert Venables QC
in Personal Tax Planning Review that I agree with, not least his conclusions.
However, in one very important respect, it is wrong. Robert quotes from
paragraph 1564 of the Inspector's Manual which sets out the Revenue's view on
the meaning of 'sums received in the United Kingdom' for the purposes of Case V
of Schedule D, and concludes that the Revenue's argument in Grimm v Newman ran
contrary to its own views and that therefore the case before Mr Justice Etherton
proceeded on an 'artificial basis'. It did not. As I have mentioned to Robert,
he overlooked paragraph 40302 of the Schedule E Manual, which does indeed
(rightly in my view) set out circumstances where chargeability can arise despite
no receipt of money in the United Kingdom, i.e. because the taxpayer enjoys his
chargeable emoluments in the United Kingdom in specie. 'Enjoyment' was and
remains a concept unknown to Case V of Schedule D.
Revenue's position
The Revenue's line was simple. It thought that the circumstances were analogous
to the conduit pipe of loans in Harmel v Wright 49 TC 149, so that in effect Mr
Grimm was in truth enjoying his own emoluments. That was a misguided view as
pointed out by the Court of Appeal, but if the analogy had been apt, it could be
reconciled with the Revenue's published views in the Schedule E Manual.
Accordingly, I think the criticism of the Revenue is too harsh.
Conclusion
This is an important case. There has been no case on remittance since Harmel v
Wright over 28 years ago. It provides welcome clarification of what I think most
tax practitioners believed to be the case, namely that the principles enshrined
in Timpson and Carter apply equally to Case III of Schedule E. Nevertheless,
until now that had not been conclusively established.
The case must be set in context. It was a negligence case in which the claimant
(Mr Grimm) was not asserting that he had any legal control over the application
of the monies gifted by him. In the context of a tax case litigated before the
Commissioners, I would expect a taxpayer in the position of, say, Mr Grimm to
receive a 'grilling' (to quote Lord Justice Carnwath) in cross-examination.
I suspect that in large measure this accounts for the understandable caveat of
the Vice-Chancellor reproduced in the article. Some, I believe, say that the
caveat means that this decision of the Court of Appeal should be approached with
extreme caution. I do not share their pessimism. This was a strong court with
considerable knowledge of tax. The decision reaffirms and, being one by an
appellate court, strengthens the validity of Carter.
I consider that this decision brings welcome clarification of the scope of the
remittance rules and shines light into what had hitherto been murky corners.

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