Who Pays The Piper? -- III

REG NOCK, barrister, concludes his discussions of the new stamp duty compliance régime [see previous] and looks at the rules of evidence.

The pressures to stamp an instrument are indirect, such as the need to be stamped in order to obtain registration of title. Section 17, Stamp Act 1891 provides that a registrar such as the Land Registry or Companies House or a company secretary should not give effect to a document that is unstamped or insufficiently stamped. Where they are doubtful as to the stamping, they have rights to insist that any document should be adjudicated and penalties are imposed on them if they fail to carry out their duty properly.

Another of these pressures is section 14(4), Stamp Act 1891 which provides that an unstamped or insufficiently stamped document cannot be produced in evidence. This is linked to the best evidence rule which requires that the party must produce the original document duly stamped; copies of originals whether stamped or unstamped are not admissible (but note Regulation 28 of the VAT Tribunal Rules 1986 (SI 590).

The courts have never really understood the problems in this area particularly where the documentation is in the possession and control of a third party out of the jurisdiction and who cannot be required by subpoena duces tecum or otherwise to attend the court and produce the instrument. For many years, this has been a minor problem because of a rule of etiquette that a stamp duty objection would not be taken other than in taxation cases, and certain limited circumstances where the litigant is not party to the instrument but would be prejudiced after the trial if the instrument remains unstamped (see, for example, Maynard v Consolidated Kent [1903] 2 KB 121). It is, of course, open to the judge to raise the point, but their track record in this area has not been particularly impressive, as in Stokes v Costain Property Investments Ltd [1984] STC 204 where the judge made a considerable point about stamp duty, apparently not being aware that the charge in question had been abolished two years before the transaction in question.

Coping with the point

Obviously, the inability to produce documents in evidence unless stamped is a serious practical problem since it could affect how the case is presented. The point in practice was not too difficult, although it could be expensive, since if a stamp duty point emerged then, in general, the document could be admitted upon the relevant party's solicitor giving an undertaking to the court to present the document to the Inland Revenue Stamp Taxes Office and to pay the stamp duty and penalties, if any, levied upon the document. This enables the case to proceed without delay and enables the party to produce the relevant evidence (Re Coolgardie Goldfields Ltd [1900] 1 Ch 475, but note the comments in Lloyds and Scottish v Prentice [1977] 121 SJ 847).

Bar Council ruling

However, the Bar Council with the sanction of the Chancery judges (an odd choice since many of the problems of unstamped documentation will arise in commercial cases) have removed that restriction. They stated:

Litigation

It will now be the duty of counsel and solicitor advocates as well as the judge to raise stamp duty points and have documents adjudicated where necessary. Parties who execute documents offshore would be required to bring them onshore and stamp them (as in John Lewis v Commissioners of Inland Revenue SpC 255) provided that they pay the stamp duty and interest.

The ruling is a two-edged weapon since there is an opportunity to one party and a risk to the other. Counsel may be exposed to a claim for negligence from his client if, when advising on evidence or the prospects of success, he misses the opportunity to pressurise the other side by taking the point and requiring them to incur additional stamp duty costs. This is important in practice since, according to traditional theory, stamp duty paid in these circumstances appears not to be recoverable as costs of the action itself even if the party is successful. This may be modified, perhaps, in actions between vendor and purchaser pursuant to a contract dutiable pursuant to paragraph 7 of Schedule 13 to the Finance Act 1999. Moreover, he would appear to be open to attack if he does not identify the stamp duty risks now faced by his client in relation to the client's evidence.

Transactions

Moreover, it would appear to be necessary for counsel advising on a proposed transaction to identify the stamp duty issues so that the party can seek mitigation opportunities or, in the writer's experience, deciding not to proceed with the transaction because the stamp duty costs make the proposal commercially non-viable.

Professional advisers

Additionally, it would appear to be essential or at least prudent as a matter of self-protection now for solicitors and accountants instructing counsel to raise the stamp duty and evidence issue in all cases, even where these are not instructions for advice on evidence but for general advice on possible litigation or even the start of a transaction. The client must now be advised from the outset of a transaction as to his potential exposure because the matter may end in litigation. He may be entitled to look for comfort for having entered into the transaction without proper investigation of the documentation, even where he was not a party to the documentation, since it is currently not unusual for transfer not on sale to abort because of these risks.

Retrospective effect

This revocation of the rule raises many interesting problems since there is no transitional provision in the notice. It would appear, therefore, that the obligation to take stamp objections pursuant to the Stamp Act applies not merely to future litigation or to documentation executed after the date of the revocation notice; it also applies to current cases even where relying upon documentation executed years ago in reliance upon the rules being observed. There is a question of whether the legitimate expectations of the parties of being able to present their case in full without stamp duty and penalties have been denied. Parties may well have decided to take a chance as regards the risk of litigation and section 14 applying, upon the basis that the rules precluded any person from taking the stamp objection. That expectation has been retrospectively denied by the Bar Council.

There are obviously questions as to human rights, such as:

• whether the notice of revocation by the Bar Council on this rule of etiquette is itself totally consistent with the human rights because it removes the protection of the rule with retrospective effect; and
• whether the current stamp duty administration is generally consistent with the right to a fair trial and/or the protection of property. There are basic questions as to whether section 17, prohibiting registration unless tax is paid, is contrary to rights to protection of interest in property.

It is difficult to see that these rights are properly protected by the new compliance régime that prevents registration of title and excludes evidence of title. Obviously the relevant party can pay the stamp duty, late stamping penalties and the late payment interest charge so that the case can proceed, although two factors highlight the possible unfairness of requiring a litigant to pay tax in order to defend himself in private litigation. These are:

• The rule is one of evidence or procedure and so will be ignored by a foreign tribunal. United Kingdom stamp duty does not affect the validity of the instrument so that, as foreign tribunals have their own rules of evidence and procedure and do not collect other countries' tax, the document is admissible. The fairness of the trial should not depend upon accidents of taxation.
• The person who is required to pay the tax may not be a party to the document.

The question for human rights is whether the non-payment of a tax is a denial of a right to a fair trial, particularly where the person who is seeking to rely on the document was not a party to the transaction and who should, under any reasonable system, not be a person who is responsible for the tax on that transaction and its related documentation. The new compliance régime of Finance Act 1999 by exposing additional people to interest and penalties has, of course, highlighted the antiquated and unfair nature of this provision.

The argument is strengthened even more by the principle that the absence of a stamp under the modern stamp duties does not invalidate the transaction.

This problem of human rights and stamp duty legislation is highlighted by the bizarre decision in Parinv Investments Ltd v Commissioners of Inland Revenue [1998] STC 305, where the Stamp Taxes Office was allowed to refer to an unstamped document to support its claim for stamp duty on another document. However, the taxpayer was not allowed to refer to it in order to refute the claim and to deal with the case in accordance with the correct long-standing principles, which were ignored by the court. This extremely asymmetrical treatment accorded to the documentation appears to have been beyond the comprehension of the Court of Appeal, which is surprising at a time when human rights issues should be very much in the judicial consciousness.

Solutions

Three routes seem to be available:

• The obvious solution to the problem is rigorous stamp duty due diligence to identify the problem. A purchaser or any other party is entitled to insist that the stamp duty be paid before acting and this is backed up by section 117, Stamp Act 1891 which strikes down any attempt to prevent enquiries as to stamp duty.
• Litigate and arbitrate abroad. Since stamp duty is a matter of evidence and not substance, the provisions of section 14(4), Stamp Act 1891 do not apply to foreign tribunals which will ignore the inadequacy of the stamp.
• Seek to mitigate stamp duty as far as possible, but for previous documentation that may be too late should that matter result in litigation or a dispute with the Inspector arise. Although the Revenue was not bound by the rule of etiquette, in the writer's experience the point was only raised in cases where there was a suspicion of artificial or aggressive tax planning, such as within the Ramsay principle. However, recently this position has changed and, although an Inspector is not a person within section 14(4), if he objects to the documentation the claim can be litigated only at the cost of stamping up the paperwork. At current rates and on current computational principles, the stamp duty plus late stamping penalties and the late payment interest charge can easily exceed other taxes being 'saved'.

Reg Nock is a member of chambers at 24 Old Buildings, Lincoln's Inn.

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