[2009] UKFTT 61 (TC)

TC00028

CAPITAL GAINS TAX – Disposal of shares for loan notes – whether the exchange formed part of a scheme or arrangements of which the main purpose or one of the main purposes, is avoidance of liability to capital gains tax– Yes – section 137 Taxation of Capital Gains Act 1992 – Appeal dismissed 

PENALTY ASSESSMENT – Whether 1997/98 return containing incorrect statement about the status of clearance application was made fraudulently or negligently – made negligently – quantum of penalty reduced from 85 per cent of tax due to 30 per cent – Appeal allowed in part.

Appeal Number: SC/3165-6/2007 

FIRST TIER TRIBUNAL TAX

	JOHN P COLL and MARIAN COLL   	Appellants

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 

Sitting in public in London on 24, 25, 26, 27, 28 November 2008, 5 January 2009,  final submissions on section 36 Taxes Management Act 1970 received 10 February 2009

David Southern, counsel instructed by Gelberg & Co solicitors appeared for the Appellants

Sam Grodzinski counsel instructed by the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellants were appealing against assessments to capital gains tax issued on 18 and 19 September 2006 in the sum of £497,400 each, plus interest, and against associated penalty determinations in the sum of £425,000 each issued under section 95(1) of the Taxes Management Act (TMA) 1970 on 13 December 2007.
2.	 Notice of appeal against the tax assessments was given on 21 September 2006, with an election for the appeals to be heard by the Special Commissioners. 
3.	Notice of appeal against the penalty determinations was given on 3 January 2008. 
4.	By letter of 17 September 2008 the Highbury General Commissioners consented to the transfer of the appeals against the penalty determinations to the Special Commissioners.
5.	The Special Commissioners directed on 7 October 2008 that all the appeals should be heard together.
The Structure of the Decision
6.	The Appeal took six days to hear which involved the hearing of witnesses and consideration of voluminous documentary evidence. The proceedings were complicated by the Appellants’ submissions on the burden of proof which did not fully come to light until final submissions. It was necessary to call for written submissions which extended the end of proceedings until 10 February 2009.  
7.	The decision is lengthy because of the wide number of factual disputes. In those circumstances I have provided a summary of my decision immediately after the dispute section. It is necessary, however, to refer to the body of the decision to understand my reasoning and the facts found supporting my decision.
The Dispute
8.	The capital gain in question was made by the Appellants on the sale of the shares in their employment business, Grosvenor Nursing Agency Ltd (“Grosvenor”) on 20 November 1997.   On that day, Grosvenor was sold to Nestor Healthcare Group plc (“Nestor”) for £2,500,000.00.  The consideration provided by Nestor was in the form of guaranteed unsecured variable loan notes.  
9.	The first dispute (section 137 issue) concerned whether the exchange of shares in Grosvenor for the loan notes in Nestor was a chargeable disposal by the Appellants for tax purposes at the time of the exchange (in November 1997) when they were UK tax resident, or whether there was no disposal for tax purposes until the subsequent redemption of the loan notes by the Appellants on 30 September 1998 and 31 March 1999, by which time the Appellants had taken steps to become tax resident in Belgium. The determination of the first dispute depended upon whether the exchange of shares for loan notes formed part of a scheme or arrangements of which the main purpose or one of the main purposes, was avoidance of liability to capital gains tax. If the exchange was part of a scheme or arrangements, of which the main purpose or one of the main purposes was to avoid liability to tax, then section 137 of Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) applied so that the gain was taxable at the time of the share sale in November 1997 and not at the time that the loan notes were subsequently redeemed.
10.	The purported scheme in this Appeal comprised two elements, namely, the structuring of the Grosvenor sale in loan notes coupled with an intention on the part of the Appellants to become non-resident, and to redeem the loan notes whilst non-resident.
11.	The Appellants contended that there was no scheme or arrangement with a main purpose of avoiding capital gains tax. Their argument was that as at the 20 November 1997 when the exchange took place the Appellants had no intention of redeeming the loan notes whilst non-resident. Prior to the 20 November 1997  Mr Coll had abandoned his plan to move the Republic of Ireland because of the reconciliation with Mrs Coll. The Appellants’ relocation to Belgium in September 1998 where they redeemed the loan notes free of capital gains tax was as a result of a loophole in the Finance Act 1998 which was not known on the 20 November 1997. 
12.	The Appellants contention relied on the following propositions of fact, namely:
(1)	The initiative for the use of loan notes came from Nestor.
(2)	The original arrangement which involved the transfer of shares to Mr Coll with him emigrating to the Republic of Ireland was not motivated by tax avoidance but reflected the perilous state of their marriage. 
(3)	Prior to the sale of Grosvenor on 20 November 1997 the Appellants decided to give their marriage another go with Mr Coll abandoning his plans to move to the Republic of Ireland.
(4)	Their decision to become non-resident in Belgium was solely attributable to later tax advice received from PwC, and had no connection with the disposition of Grosvenor shares.
13.	  The Respondents countered that the Appellants were the prime movers in structuring the Grosvenor sale with the use of loan notes. They chose this arrangement after receiving advice on the tax implications of the sale which showed that they could avoid capital gains tax if the loan notes were redeemed whilst they were not resident in the UK.  According to the Respondents, the Appellants’ original plan was for Mr Coll to take up residency in the Republic of Ireland which was thwarted by the refusal of the clearance application under section 138 TCGA 1992, not by their purported reconciliation. Further, the Appellants maintained their intention to become non-resident during the period of deferral offered by the loan note arrangement, which they realised by moving to Belgium before the first redemption date for the loan notes.
14.	The second dispute concerned the penalty determinations which were imposed in respect of the Appellants’ self-assessment tax returns for the year ended 5 April 1998, which had been drafted by Price Waterhouse Coopers (PwC).   The returns incorrectly stated that the disposal of the shares in Grosvenor Nursing Agency Limited was made as an approved ‘paper for paper’ transaction under section 138 TCGA 1992, which received Inland Revenue clearance during November 1997. The Revenue inspector examining the returns accepted the statement and no assessment to capital gains tax was made at the time. The Special Civil Investigations (“SCI”) department of Inland Revenue uncovered the error during its investigation of the Appellants’ tax affairs in 2005. The Appellants contended that PwC was responsible for the erroneous statement, and that as PwC owed them a duty of care the Appellants were not negligent in completing the tax returns ended 5 April 1998. The Respondents, on the other hand, argued that the Appellants knew that the statements were false or in the alternative they were negligent. The penalties were assessed at 85 per cent of the capital gains tax in issue which reflected the Respondents’ assessment of the gravity of the Appellants’ conduct, their lack of co-operation with the SCI investigations and their failure to make disclosure of the true position during those investigations.
15.	The third dispute concerned the burden of proof. The Appellants argued that as the Respondents were seeking to uphold the assessments on the basis of their  fraudulent conduct, the onus of proof was on the Respondents to prove the fraudulent conduct on which the assessments were based. The onus was to establish a prime facie case on the evidence.   The standard was the ordinary civil standard of proof, but given the seriousness of allegations of fraud and its inherent improbability, the evidence required to discharge this burden and reach this standard must be substantial and must be more than would be sufficent merely to raise a suspicion. The Respondents submitted that the burden of establishing  the assessments for capital gains tax were wrongly made fell on the Appellants. There was no obligation upon the Respondents under the capital gains tax assessments to allege or prove any fraud or dishonesty on the Appellants’ part. The mere fact that the Respondents robustly attacked the Appellants’ credibility under cross-examination did not shift the burden of proof from the Appellants to them. The Respondents, however, accepted that they had the burden of proving fraud or negligence on the part of the Appellants in respect of the penalty Appeals. In this regard the Respondents identified in writing in advance of the hearing the false statements relied upon them to support the penalty determinations. 
Summary of the Decision
Burden of Proof
16.	I am not persuaded by the arguments advanced for the Appellants. Having conceded that the Respondents had discharged the sections 29 and 36 burdens, the Appellants’ arguments flew in the face of established authorities. The Court of Appeal in Taylor approved the legal proposition of Park J that once the section 36 burden has been satisfied the burden rested upon the taxpayer to establish that the assessment was wrong. Equally the Court of Appeal decisions in Brady and Khan decided that allegations of fraud and dishonesty against a tax payer in assessment Appeals did not shift the burden of proof back to the Appellants. Thus I decide that in respect of the section 137 Appeal the burden of proving the assessment was wrong rested on the Appellant. In respect of the penalty Appeal the burden was on the Respondents to show that the Appellants fraudulently or negligently made an incorrect return for 1997/98. The standard of proof for the penalty Appeal was on the balance of probabilities not the criminal standard as suggested by the Appellants.
Section 137 Dispute 
17.	In respect of this Appeal I find that the Appellants after receiving advice on reducing substantially their tax liability on the proposed sale of Grosvenor shares decided upon a scheme where they required that the consideration for the shares should be in loan notes with the intention of redeeming most of the loan notes during a period of non-residency. The purpose of those arrangements was to avoid capital gains tax altogether on most of the loan notes. The original plan involved the transfer of majority shareholding to Mr Coll with him taking up residence in the Republic of Ireland. This specific plan was abandoned immediately before completion of the share sale because the Special Commissioners upheld Inland Revenue’s refusal of the clearance application. The Appellants, however, as at the date of completion of sale on 20 November 1997 retained their intention to redeem the loan notes when they were non-resident. Despite the refusal of clearance, they knew that section 135 TCGA 1992 applied to the transaction so they did not have to pay capital gains tax immediately on the disposal of the shares. They bought themselves time to consider alternative non-resident routes by deferring the first redemption date of the loan notes. They took immediate steps after the sale of their business to break their ties with the United Kingdom by putting their family home up for sale with no intention of establishing straightaway a replacement family home in the UK. They sought advice from another firm of tax advisers who identified the Belgian route. They realised their intention of redeeming the loan notes when they were non- resident by moving to Belgium before the first redemption date. They redeemed the loan notes when they were resident in Belgium and did not account for capital gains tax on the disposal. 
18.	I am satisfied that the above findings constituted a scheme or arrangement within the meaning of section 137 and that the main purpose of the arrangements was to avoid liability to capital gains tax. The fact that the Appellants had not finalised the details of the alternative non-resident routes as at 20 November 1997 did not affect my analysis that section 137 TCGA 1992 applied to the transaction. The critical finding was that they had a substantive intention to become non resident which was demonstrated by their subsequent actions.  
The Penalty Dispute
19.	I conclude that the evidence adduced by the Respondents in support of its allegation of fraud was insufficient to displace the evidence relied upon by the Appellants of having no fraudulent intention when they completed the 1997/98 returns.   Mr Coll’s act of sharing details of the clearance application and its refusal with PwC before it prepared the 1997/98 tax returns was not an act normally associated with a fraudulent intention to deceive the professional advisers. Thus I hold that the Respondents have not satisfied me on the balance of probabilities that the Appellants fraudulently made incorrect returns for the 1997/98 tax year.
20.	I am satisfied on the evidence that the Appellants were negligent in completing the 1997/98 returns, and that a penalty was merited, which I fix at 30 per cent of the tax due under the disposal of Grosvenor shares for each Appellant. 
The Statutory Provisions
Capital Gains Tax
21.	Unless otherwise stated, all statutory references below are to the TCGA 1992 as amended as it stood in the year ended 5 April 1998.  
22.	Section 126(1) defines a “reorganisation” of a company’s share capital for the purposes of section 127 and gives the meaning of the terms “original shares” and “new holding of shares” as follows:
Section 126: Application of sections 127 to 131
     (1)  For the purposes of this section and sections 127 to 131 “reorganisation” means a reorganisation or reduction of a company's share capital and in relation to a reorganisation – 
(a) “original shares” means shares held before and concerned in the reorganisation,
(b)“new holding” means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain).
23.	Where a company’s share capital is reorganised, the no-disposal rule or “single continuing asset” treatment in section 127 operates: 
Section 127: Equation of original shares and new holding 
Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.
24.	Section 135 extends the “no disposal” treatment of reorganisations to exchanges of shares in one company for debentures in another company.  By virtue of section 135, sections 127 to 131 apply with any necessary adaptations in relation to the exchanges of shares for debentures as they apply in relation to a reorganisation to which section 126 applies. 
 Section 135: Exchange of Securities for those in another company
(1)  Subsection (3) below has effect where a company (“company A”) issues shares or debentures to a person in exchange for shares in or debentures of another company (“company B”) and –
(a) company A holds, or in consequence of the exchange will hold, more than one-quarter of the ordinary share capital (as defined in section 832(1) of the Taxes Act) of company B, or
(b) company A issues the shares or debentures in exchange for shares as the result of a general offer – 
(i) which is made to members of company B or any class of them (with or without exceptions for persons connected with company A), and
(ii) which is made in the first instance on a condition such that if it were satisfied company A would have control of company B, or
(c) company A holds, or in consequence of the exchange, will hold the greater part of the voting power in company B.
(2)  …
(3) Subject to sections 137 and 138, sections 127 to 131 shall apply with any necessary adaptations as if the 2 companies mentioned in subsection (1) above or, as the case may be, in section 136 were the same company and the exchange were a reorganisation of its share capital.
25.	Thus where section 135 has effect, transactions are not treated as giving rise to a disposal of the original shares in company B. Instead, the new shares or debentures are treated for capital gains tax purposes as having been acquired at the same time, and for the same price, as the original shares so that any gain latent in the original shares at the time of the exchange will be brought into charge as part of the overall computation on the eventual disposal of the new holding.   
26.	Thus in the present case, if section 135 has effect, the share sale in November 1997 would not be treated as having given rise to a disposal of the Appellants’ original shares in Grosvenor.  Instead, the loan notes issued by Nestor to the Appellants in exchange for their Grosvenor shares would be treated as having been acquired by the Appellants at the same time and for the same price as their original Grosvenor shares and any capital gain would only have become taxable when the Appellants redeemed their loan notes.
27.	Section 137 limits the application of section 135. Sub-section 137(1) TCGA 1992 provides (emphasis added): 
Section 137: Restriction on application of sections 135 and 136
(1) Subject to subsection (2) below, and section 138, neither section 135 nor section 136 shall apply to any issue by a company of shares in or debentures of that company in exchange for or in respect of shares in or debentures of another company unless the exchange, reconstruction or amalgamation in question is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax. 
28.	Clearance that section 137 shall not apply to restrict the operation of 135 can be obtained from Her Majesty’s Revenue and Customs under a procedure set out in section 138.  Section 138 provides:
Section 138:  Procedure for clearance in advance
(1) Section 137 shall not affect the operation of section 135 or 136 in any case where, before the issue is made, the Board have, on the application of either company mentioned in section 137(1), notified the company that the Board are satisfied that the exchange or scheme of reconstruction will be effected for bona fide commercial reasons and will not form part of any such scheme or arrangements as are mentioned in section 137(1).
(2) Any application under subsection (1) above shall be in writing and shall contain particulars of the operations that are to be effected and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
(3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.
(4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.
5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (1) above shall be void.
29.	The scope of the capital gains tax charge was extended by the Finance Act 1998, which introduced Section 10A of the TCGA 1992.  Section 10A (which affected all disposals in which the year of departure was after 5 April 1998) applied a capital gains tax charge on assets disposed of during a period of temporary non-residence where the taxpayer becomes resident again within a period of 5 years. However, following the introduction of Section 10A TCGA 1992, it was still possible to dispose of an asset during a period of temporary non-residence without incurring a charge to capital gains tax, if the taxpayer became resident in a country with both a favourable tax regime and a favourable Double Taxation Agreement.  Belgium was such a country, but the Republic of Ireland was not.
Penalties
30.	Section 95(1) of the Taxes Management Act (TMA) 1970 provides that where a person fraudulently or negligently delivers or makes an incorrect return or statement in connection with capital gains tax he shall be liable to a penalty not exceeding the amount of undeclared tax.
31.	 Under section 100B of TMA 1970 the Special or General Commissioners on Appeal may in respect of a penalty imposed under section 95(1):
b(i) if it appears to them that no penalty has been incurred, set the determination aside,
ii) if the amount determined appears to them appropriate, confirm the determination,
iii) if the amount determined appears to them to be excessive, reduce it to such other amount (including nil) as they consider appropriate, or
iv) if the amount determined appears to them insufficient, increase it to such amount not exceeding the permitted maximum as they consider appropriate. 
Assessments
32.	The assessments to capital gains tax of 19 September 2006 in the sum of £497,400 each, plus interest were discovery assessments issued under section 29 TMA 1970, which provides so far as is relevant:
 (1) If an officer of the Board or the Board discover, as regards to any person (the taxpayer) and a year of assessment:
(a) that any chargeable gains which ought to have been assessed  to capital gains tax have not been assessed’
the officer ……. may subject to sections (2) and (3) below make an         assessment in the amount, or the further amount which ought in his or their opinion to be charged in order to make good to the Crown to the loss of tax.
(2)	………..
(3)	Where the taxpayer has made and not delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection 1 above –
(a)	in respect of the year of assessment mentioned in that subsection and
(b)	….. in the same capacity as that in which he made and delivered the return
unless one of the two conditions mentioned below is fulfilled.
(4)	The first condition is that the situation mentioned in subsection(1) above is attributable to the fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5)	The second condition is that at the time when an Officer of the Board –
(a)	ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b)	informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected on the basis of the  information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
33.	The assessments were not made within five years after the 31 January next following the year of assessment which was 1997/98. In those circumstances the Respondents relied upon the jurisdiction of the extended time limit of 20 years in section 36 of TMA 1970 to issue the assessments. Section 36(1) provides:
(1) An assessment on any person (in this section referred to as “the person in default”) for the purpose of making good to the Crown a loss of income tax or capital gains tax attributable to his fraudulent or negligent conduct or the negligent or fraudulent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates.
The Evidence
34.	 I heard evidence upon oath from the following persons:
(1)	Marion Coll, the first Appellant;
(2)	John Coll, the second Appellant;
(3)	Lynne Pearson, Chartered Tax Adviser with BDO Stoy Hayward LLP (BDO). Ms Pearson gave evidence of the various meetings with the Appellants and the tax advice given to them in respect of the proposed sale of Grosvenor.
(4)	Walter Wood, an Inspector of Taxes and a member of the SCI department, who made the assessments and penalty determinations against the Appellants.
(5)	David Collison FCA, Group Financial Controller and Company Secretary of Nestor Healthcare Group PLC. Mr Collison was not employed by Nestor in 1997 and had no personal knowledge of the negotiations leading to the acquisition of Grosvenor by Nestor. His evidence consisted of a review of Nestor’s published accounts and supporting documents for the relevant period, and details of acquisitions made by Nestor from 1988 to 2007.
35.	I received in evidence three lever arch files of correspondence (1,584 pages), three lever arch files of witness statements and exhibits, a file containing sale documentation and third party statements, a file containing the published accounts for Nestor, and a file of the Appeal documentation.
36.	During the hearing I determined Applications for disclosure of  documents from PwC and BDO.  The Appellants opposed the admission of Mr Collison’s evidence on the grounds that he was giving expert evidence, and that the Respondents had not complied with the procedural requirements for calling expert evidence. The Respondents disagreed with the Appellants, arguing that Mr Collison was giving evidence of the factual history from the documents in possession of Nestor. I decided that I would admit Mr Collison’s evidence but reserved my position on relevance and weight until after hearing his evidence.
Dispute Three: Burden of Proof
37.	I consider it necessary to determine first the dispute on burden of proof because it would decide my approach to the finding of facts and ultimately my decision on the two substantive issues. The Appeal concerned an assessment for capital gains tax, and a penalty assessment which have separate regimes so far as the burden of proof and the applicability of the Human Rights Act 1998.
38.	It was common ground between the parties that the assessments for capital gains tax dated 19 September 2006 were discovery assessments issued outside the six year time limit, in which case the provisions of sections 29 and 36 of TMA 1970 applied. Essentially these two sections required the Respondents to establish that the loss of capital gains tax was attributable to the fraudulent or negligent conduct of the taxpayer or the negligent or fraudulent conduct of a person acting on his behalf. Once that is established the burden of proving on the balance of probabilities that the assessment is wrong passes to the taxpayer (Taylor (Inspector of Taxes v Hurley [1999] STC 1).
39.	The Appeal proceeded on the basis that the Respondents had met the requirements of sections 29 and 36 TMA 1970, and that the burden of proof  rested on the Appellants to displace the capital gains tax assessment. Paragraph 2.1 of the Appellants’ Chronology and Summary Argument acknowledged on issue 1 (the section 137 question) that the burden of proof was on the Appellants, the standard of proof being the civil standard. The shared understanding was challenged by Appellants’ counsel’s final submissions on 5 January 2009 when he suggested that the Respondents bore the burden of proof on the assessment because their case alleged fraud and dishonesty on the part of the Appellants. I requested the parties to supply written representations on this point which they did with the final submission lodged with the Special Commissioners’ Office on 10 February 2009. The written submissions were predicated on the basis that the requirements for extended time limits had been satisfied. 
40.	The Respondents considered that they had discharged the sections 29 and 36 burdens because:
(1)	  The Appellants stated incorrectly that clearance had been granted for the Grosvenor transaction in their 1997/98 tax returns. The incorrect statement was:
“The disposal of shares in Grosvenor Nursing Agency Limited was made as an approved paper for paper transaction under section 138 TCGA 1992 which received Inland Revenue clearance during November 1997 (ref no: CGT248/2193/97)”.
(2)	The incorrect statements were attributable either to their own fraud or negligence or to the negligence of person acting on their behalf.
41.	The Appellants as part of their case acknowledged that the incorrect statements were attributable to the negligence of PwC, a person acting on their behalf.  The Appellants, therefore, conceded that the Respondents had met their obligations under sections 29 and 36 TMA 1970.
42.	Counsel for the Appellants, however, argued in the written representations that the Respondents having used negligence as the latchkey to unlock the door of section 36 TMA 1970 and having heard the Appellants’ evidence were not entitled to challenge the Appellants’ case on the grounds that they were dishonest and fraudulent unless they pleaded those allegations in advance.
43.	Counsel for the Appellants stated that it was a general principle of law that dishonesty must be pleaded with full particulars and put to the person alleged to be dishonest (see George Wimpey UK Ltd v VI Construction Limited 103 ConLR 67 at [31]). This principle was incorporated in the Bar Council Code of Conduct, paragraph 704; Chancery Guide, paragraph 2.6 and Queens Bench Guide, paragraph 5.6.3. Further section 36 TMA 1970 should be construed in accordance with Article 6 of the European Convention of Human Rights which required the communication of  the nature of accusations against the Appellants and the facts supporting the accusations before the hearing.
44.	In counsel’s view the Respondents constructed a hypothesis after the evidence had been heard, and then made allegations of fraud to support it. The particular allegations included the marriage breakdown and reconciliation were fictitious; reason for change of plan; PwC and BDO were deceived; and forged entries in Mrs Coll’s diaries.
45.	Counsel concluded that when the threshold for the issue of the extended time limit assessments has been met, the burden of proof for establishing that the assessments were correct remained on the Respondents, if they were seeking to uphold the assessments on the basis that the Appellants have been guilty of serious wrong-doing.
46.	Counsel for the Respondents declared that it was simply wrong for the Appellants to submit that the Respondents were seeking to uphold the assessments on the basis of the Appellants’ fraudulent conduct. Rather the Respondents were seeking to uphold the assessments on the ground that the exchange of Grosvenor shares for loan notes constituted a scheme or arrangements of which the main purpose was to enable the Appellants to avoid liability to capital gains tax. Whether or not such a scheme existed did not require the Special Commissioners to be satisfied that the Appellants acted fraudulently.
47.	The fact that the Respondents suggested that the Appellants have lied in the past to HMRC or to the Appellants’ advisers  as part of their case on the section 137 dispute did not transfer the burden of proof back to the Respondents. The Respondents in putting forward their case were required to challenge the Appellant’s version of events which may involve a robust challenge.  The evidentiary burden may shift in the course of the evidence between the parties but not the burden of proof. Counsel cited in support of the Respondents’ arguments the judgment of Mustill LJ in Brady (Inspector of Taxes) v Group Lotus Car Companies plc [1987] STC 636 at pages 643 – 644)
“It is, however, submitted that the concept of a shifting burden has another meaning, relative to what is called the 'evidentiary burden of proof'.  Although this term is widely used, it has often been pointed out that it simply expresses a notion of practical common sense and is not a principle of substantive or procedural law.  It means no more than this, that during the trial of an issue of fact there will often arrive one or more occasions when, if the judge were to take stock of the evidence so far adduced, he would conclude that, if there were to be no more evidence, a particular party would win.  It would follow that, if the other party wished to escape defeat, he would have to call sufficient evidence to turn the scale.  The identity of the party to whom this applies may change and change again during the hearing and it is often convenient to speak of one party or the other as having the evidentiary burden at a given time.  This is, however, no more than shorthand, which should not be allowed to disguise the fact that the burden of proof in the strict sense will remain on the same party throughout--which will almost always mean that the party who relies on a particular fact in support of his case must prove it.  I do not see how this fact of forensic life bears on the present case.  It is a commonplace that, if there is a disputed question of fact admitting of only two possible solutions, X and Y, with party A having the burden of proving X in order to establish his case, if A produces credible evidence in favour of X and B produces none in favour of Y, it is very likely that A will win.  B must therefore exert himself if he wishes to avoid defeat.  But this does not mean that B ever has the burden of proof.  So also here.  It may well be that, if the taxpayer companies' version does not correspond with the true facts, it must follow that someone was guilty of fraud.  This does not mean that, by traversing the taxpayer companies' case the Revenue have taken on the burden of proving fraud.  Naturally, if they produce no cogent evidence or argument to cast doubt on the taxpayer companies' case, the taxpayer companies will have a greater prospect of success.  But this has nothing to do with the burden of proof, which remains on the taxpayer companies because it is they who, on the law as it has stood for many years, are charged with the task of falsifying the assessment.  The contention that, by traversing the taxpayer companies' version, the Revenue are implicitly setting out to prove a loss by fraud, overlooks the fact that, in order to make good their case, the Revenue need only produce a situation where the commissioners are left in doubt.  In the world of fact there may be only two possibilities: innocence or fraud.  In the world of proof there are three: proof of one or other possibility, and a verdict of not proven.  The latter will suffice, so far as the Revenue are concerned”.
48.	Carnwath LJ in Khan v Customs and Excise Commissioners 2006 STC 636 affirmed the decision in Brady that the burden of proof did not change merely because allegations of fraud may be involved.
49.	Counsel for the Respondents pointed out that it was well established that appeal proceedings concerning whether or not tax is due (pure tax appeals)  did not engage article 6 of  the European Convention on Human Rights.  Such appeals did not involve the determination of a person’s civil rights nor constitute a criminal charge within the meaning of the Convention (see Ferrazzini v Italy [2001] STC 1314). 
50.	Counsel for the Respondents concluded that in this Appeal the requirement under sections 29 and 36 TMA 1970 that the loss of tax was attributable to the negligence or fraud by the Appellants or by a person acting on their behalf had been incontrovertibly met by virtue of the Appellants’ concession that PwC was responsible for the incorrect entry in the 1997/98 tax returns. Thus the burden of proving the assessment was wrong shifted to the Appellants. The fact that in the course of testing the truth of the Appellants’ evidence the Respondents suggested that the Appellants have lied did not shift the burden of proof onto the Respondents.
51.	 In respect of the penalty appeals the Respondents accepted that it had the burden of proving that the Appellants fraudulently or negligently made an incorrect return. The standard of proof, however, was on the balance of probabilities, not beyond reasonable doubt as suggested by the Appellants (see Revenue and Customs Commissioners v Khawaja [2008] STC 2880).
52.	Further the Respondents agreed that the European Convention on Human Rights applied to penalty proceedings (see King v Walden [2001] STC 822). In this respect the Respondents provided the Appellants with advance notice of their allegations of fraud which in summary was that the Appellants knew that the  statements about clearance in their 1997/98 returns  were false.
53.	The Respondents, however, pointed out that the mere fact that this Appeal involved hearing appeals against an assessment and a penalty together did not result in the engagement of  Convention rights in respect of the assessment appeal (see Morris v HMRC [2007] EWHC 1181 (Ch) ).
Decision on Burden of Proof
54.	I am not persuaded by the arguments advanced for the Appellants. Having conceded that the Respondents had discharged the sections 29 and 36 burdens, the Appellants’ arguments flew in the face of established authorities. The Court of Appeal in Taylor approved the legal proposition of Park J that once the section 36 burden has been satisfied the burden rested upon the taxpayer to establish that the assessment was wrong. Equally the Court of Appeal decisions in Brady and Khan decided that allegations of fraud and dishonesty against a tax payer in assessment Appeals did not shift the burden of proof back to the Appellants. Thus I decide that in respect of the section 137 Appeal the burden of proving the assessment was wrong rested on the Appellant. In respect of the penalty Appeal the burden was on the Respondents to show that the Appellants fraudulently or negligently made an incorrect return for 1997/98. The standard of proof for the penalty Appeal was on the balance of probabilities not the criminal standard as suggested by the Appellants. 
55.	 The hearing together of assessment and penalty Appeals posed particular challenges in ensuring that the findings of fact in each Appeal were taken separately and in accordance with the burden of proof applicable to the specific Appeal. 
   The Facts
Agreed Facts and Chronology
56.	Grosvenor was incorporated by Mrs Coll on 22 November 1985 to trade as a supplier of nursing and auxiliary staff to National Health Service and private hospitals. At all material times, the authorised and issued share capital was £100 divided into 100 ordinary shares of £1 each. The original shareholder was Mrs Coll to whom all 100 shares were issued. In July 1986 Grosvenor employed Mr Coll to provide computer and financial support. On 9 August 1987 Mr and Mrs Coll married. Mrs Coll transferred 50 of the 100 issued shares to Mr Coll in 1986. The Appellants were the sole directors of Grosvenor at all material times.  
57.	The business of Grosvenor grew very rapidly in a controlled way. By the end of 1980’s Grosvenor tendered for contracts with major hospitals. Grosvenor won the contracts with the Guy’s and St Thomas NHS Trust, Maudsley and Royal Bethlem hospitals. Grosvenor also secured the contract with Charter Nightingale private hospital group which included the Priory Hospitals. In 1993 the Appellants attempted to expand their business in the United States of America (USA) which involved a relocation of their family to Florida. The obstacles to establishing a USA business proved more difficult than anticipated resulting in the Appellants giving up their USA plans. The business in the United Kingdom (UK), however, continued to flourish.
58.	In October 1996, the Appellant went to a tender meeting for the Newham group of hospitals where they were approached by Mr Jewitt, the joint managing director of Nestor. inviting them to a lunch. On 30 January 1997 the Appellants met with Mr Jewitt at the Institute of Directors. In March 1997 Mr Jewitt telephoned Mrs Coll to discuss the possible purchase of Grosvenor.
59.	On 14 April 1997, the Appellants instructed Alan Perriam of Perriam and Everett, a recruitment industry broker to act on their behalf in negotiations on the sale of Grosvenor.   
60.	On 4 June 1997 Mr Perriam advised the Appellants that Corporate Services Group was also interested in making an offer to buy Grosvenor. 
61.	On 18 June 1997, the Appellants met Howard Scott and Lynne Pearson of BDO to discuss the possible sale of Grosvenor.
62.	On 25 June 1997 the Appellants met John Rayman of Clyde & Co (solicitors), and appointed him to act as their legal adviser in the proposed sale of Grosvenor. 
63.	On 13 August 1997 Mr Perriam wrote to Mr Chapman of Nestor thanking him for an indication of an offer by Nestor to purchase Grosvenor.  
64.	On 15 August 1997 the Appellants met with Howard Scott and Lynne Pearson of BDO and appointed them to provide tax advice in connection with the proposed sale of Grosvenor. The Appellants told Mr Scott and Ms Pearson they had received two offers for Grosvenor: £2.9 million from Nestor made up of loan notes and cash; and £3.6 million from Corporate Services Group made up of cash, shares and loan notes. The Appellants indicated that they preferred the offer of Nestor.
65.	On 21 August 1997 the Appellants met Mr Jewitt to discuss the Nestor office.
66.	On 22 August 1997 Mr Chapman of Nestor sent the Appellants a draft Heads of Terms concerning the offer made by Nestor. The proposed  consideration for the purchase was £2.5 million  payable by loan notes  which were to be redeemed in five equal six monthly instalments, namely March 1998, September 1998, March 1999, September 1999 and March 2000. In addition the Appellant would receive dividends from Grosvenor in cash amounting to £500,000.
67.	On 26 August 1997, BDO provided the Appellants with a report on tax planning relating to the sale of Grosvenor.  This report explained the tax consequences of a sale using loan note arrangements and how capital gains tax might be avoided if loan notes were redeemed by someone who was not UK tax resident.  It referred to an arrangement whereby as part of the putative forthcoming divorce of the Appellants, Mrs Coll was to transfer 30 of her 50 shares in Grosvenor to Mr Coll, in return for Mr Coll transferring his share of other property to Mrs Coll. It also referred to Mr Coll’s putative forthcoming relocation to Eire following the divorce.  BDO advised the Appellants to make an application to Inland Revenue for clearance under section 138 TCGA 1992. 
68.	On 29 August 1997 BDO wrote to Clive Chapman at Nestor to renegotiate and vary the redemption dates of the loan notes so that all of the instalments would be payable in 1998/99. 
69.	On 1 September 1997, Clive Chapman of Nestor wrote to the Appellants’ solicitor, John Rayman of Clyde & Co concerning the sale.
70.	On 16 September 1997, the Appellants met with David Clancy and James Skehan of BDO Dublin in London, concerning the tax implications of Mr Coll taking up residence in the Republic of Ireland.
71.	On 19 September 1997, BDO wrote to the Appellants advising on the tax implications of Mr Coll taking up residence in the Republic of Ireland.  
72.	On 29 September 1997, BDO made an application to the Revenue on behalf of the Appellants for clearance under section 138 TCGA 1992. In summary, the application stated that the Appellants’ marriage had broken down irretrievably and that they were to divorce and that in consequence of the divorce, the Appellants had decided to sell the company.  The application stated that as part of the purported divorce settlement, Mrs Coll was to transfer 30 of her 50 shares to her husband increasing his holding in the company to 80 shares; that their shares were then to be exchanged for Nestor loan notes in the sum of £2.5m redeemable in October 1998 and March 1999; that as a result of the marriage breakdown Mr Coll was to move to Republic of Ireland; and that the loan notes were being issued at the instigation and insistence of Nestor due to cash flow problems.
73.	Also on 29 September 1997 an application was made for advance clearance under section 707 ICTA 1988 that section 703(3) ICTA 1988 (concerning corporation tax) would not apply in relation to the proposal that a £500,000 dividend would be payable by Grosvenor to the Appellants prior to completion.   
74.	On 10 October 1997, the section 707 ICTA 1988 application was approved by the Board of the Inland Revenue. 
75.	On 27 October 1997, the Appellants’ application for capital gains tax clearance under section 138 TCGA 1992 was refused by the Board. 
76.	On 30 October 1997 BDO faxed to Mr Coll:
(1)	A copy of the Inland Revenue letter of 27 October 1997 stating that the Board was not satisfied that section 137(1) TCGA 1992 would not prevent section 135 TCGA 1992 from applying to the proposed disposal of Grosvenor and related transactions.
(2)	A draft reply to Inland Revenue requesting that the application for clearance made under section 138(1) be referred to the Special Commissioners pursuant to section 138(4) TCGA 1992.
(3)	A copy of the Inland Revnue letter dated 10 October 1997 granting the clearance sought that section 703(3) ICTA 1988 would not apply.
77.	On 30 October 1997 Mr Coll sent a fax authorising BDO to refer the Respondents’ refusal of section 138 clearance to the Special Commissioners.
78.	On 12 November 1997, the Clerk to the Special Commissioners informed BDO that the Special Commissioners were not satisfied that the proposed transactions would satisfy the conditions of section 137(1) TCGA 1992.
79.	  On 19 November 1997, the £500,000 dividend was paid by Grosvenor to the Appellants.  
80.	On 20 November 1997, the Appellants and Nestor executed a Sale Agreement under which the Appellants sold their shares in Grosvenor to Nestor in consideration for £2.5million to be satisfied by the issue and allotment of  loan notes. The Appellants both disposed of 50 shares each.  The pre-sale transfer of assets between them and the transfer of shares as set out in the clearance application did not take place. Mr Coll did not subsequently take up residence in the Republic of Ireland. The parties did not divorce.
81.	The proceeds of sale of £2.5 million were paid in bank guaranteed loan notes, which constituted non-qualifying corporate bonds. The Appellants received 1.25 million loan notes each, which were to be redeemed in the sums of £500,000 on 31 October 1998 and £750,000 on 31 March 2009. 
82.	In January 1998, the Appellants instructed estate agents to place their home in London N8 on the market.  The house was advertised for sale in January 1998 and contracts were exchanged the following month.  The sale was subsequently completed on 1 May 1998 when the Appellants moved into rented temporary accommodation.
83.	In April 1998 the Appellants met Sue Leonard of Coopers & Lybrand (which subsequently became PwC) to discuss their USA tax returns. Ms Leonard suggested that they seek further advice of capital gains tax planning.
84.	On 15 June 1998, the Appellants met Mike Curran and William Renehan of PwC regarding capital gains tax planning.  One of the matters discussed was the possibility of the Appellants moving to Belgium. Written advice on “the Belgian Route” was given in general terms on 18 June 1998 and in more detail on 21 July 1998.  
85.	On 14 August 1998, William Renehan of PwC sent the Appellants draft Instructions to Counsel seeking advice on the capital gains tax planning issues involved in “the Belgian route”.   The draft instructions stated mistakenly that Inland Revenue had given section 138 clearance for the disposal of Grosvenor in loan notes. 
86.	The Appellants became resident in Belgium on 17 September 1998. The loan notes were redeemed on 31 October 1998 and 31 March 1999 in accordance with their terms.
87.	On 16 October 1998 Messrs Curran and Renehan held a conference with Queens Counsel on “the Belgian Route”.  Mr Renehan indicated that section 138 clearance had been obtained for the paper to paper exchange when acquiring the loan notes from Nestor.
88.	PwC drafted the personal tax returns for the Appellants. In January 1999 the Appellants signed their respective self-assessment tax returns for the year ended 5 April 1998. The returns disclosed the disposal of Grosvenor to Nestor, on the basis that no gain arose in 1997/98. 
89.	The Appellants stated incorrectly on  page eight of their respective returns that
“The disposal of the shares in Grosvenor Nursing Agency Limited was made as an approved ‘paper for paper’ transaction under s138 TCGA 1992, which received Inland Revenue clearance during November 1997 (ref no:- CGT248/2193/97).”
90.	The Revenue inspector examining the returns accepted these statements and no assessment to the capital gains tax was made at the time.
91.	In April 2000, the Appellants returned to the United Kingdom, and ceased to be resident in Belgium.
92.	In December 2003 the Special Civil Investigations (“SCI”) department of the Inland Revenue commenced an investigation into the Appellants’ tax affairs.  The investigation was conducted by Inspector, Mr Walter Wood.  The investigation initially related to matters separate from the sale of Grosvenor, and involved the Appellants’ failure to disclose details of income arising in offshore trusts and offshore bank accounts.  These issues were eventually settled, following payment of £219,400 by the Appellants to the Inland Revenue. 
93.	During the course of the investigation and prior to the settlement referred to above, a “Hansard” meeting took place under caution in February 2004 at which the Appellants were given the opportunity to make full disclosure of all matters relevant to their liabilities to tax.  The Appellants referred to the sale of their shares in Grosvenor. At the meeting both Appellants insisted that all income from property and any capital gains arising from sales have been properly returned in previous tax returns. Mrs Coll said about the foreign investments they were under the impression because she was Irish the income from offshore investments was not taxable. Mrs Coll realised that the advice given may not be correct and as a result some tax on the interest on the investments was payable. The Appellants agreed to co-operate fully with the SCI investigation, quantify any income assessable and pay any resulting tax.  The Appellants commissioned a report on their tax affairs from Mr Lavery. 
94.	Mr Lavery’s report referred to the sale of the Grosvenor shares as an approved paper for paper transaction under section 138 TCGA 1992. The report disclosed that it became clear that interest earned on some accounts had not been included on the Appellants’ personal tax returns. The Appellants regretted the omissions from the tax returns but consider they were relatively minor in the context of the properly returned items in the years covered by the report. Their intentions were to settle the properly calculated amount of tax due.   
95.	On 29 June 2005 Mr Wood and his colleagues met with the Appellants at the offices of PwC.  The Appellants were again informed of their rights and formally cautioned.  The Appellants declined Mr Wood’s request for the meeting to be tape recorded.  Mr Wood prepared notes of the meeting which were not approved as correct by the Appellants.  
96.	Following this meeting that Mr Wood decided to check the terms on which the section 138 approval by the Board had purportedly been given for the Grosvenor transaction, and discovered for the first time that no such approval had in fact ever been given. 
97.	On 14 December 2005, PwC submitted a report to Mr Wood setting out the Appellants’ position regarding their liability to capital gains tax on the sale of the Grosvenor shares.
98.	The Appellants’ position was not accepted and by cover of a letter dated 18 September 2006 the Respondents issued discovery assessments pursuant to section 36 TMA 1970 to the Appellants in respect of the year 1997/98 in relation to the capital gain made on the disposal of their shares in Grosvenor  
99.	On 13 December 2007, HMRC issued penalty determinations under section 95(1) TMA 1970 in the sum of £425,000 against each Appellant.  The penalties were set at 85 per cent of the capital gains tax in issue.
The Disputed Facts 
100.	The Appellants’ case on the section 137 dispute was based on the following propositions of fact namely:
(1)	The initiative for the use of loan notes came from Nestor.
(2)	The original arrangement which involved the transfer of shares to Mr Coll with him emigrating to the Republic of Ireland was not motivated by tax avoidance but reflected the perilous state of their marriage culminating in their divorce.
(3)	Prior to the sale of Grosvenor on 20 November 1997 the Appellants decided to give their marriage another go with Mr Coll abandoning his plans to move to the Republic of Ireland.
(4)	Their decision to become non-resident in Belgium was solely attributable to later tax advice received from PwC, and had no connection with the disposition of Grosvenor shares.
The Loan Notes
101.	  Mr Coll testified that the possibility of selling their business in Grosvenor never occurred to them until they were approached by Mr Jewitt of Nestor, who at their meeting on 30 January 1997 enquired of the Appellants whether they had ever considered selling their business. According to Mrs Coll, she followed up the meeting with a telephone call where she said that they would not consider less than £3 million in cash for the business to which Mr Jewitt did not respond. After the telephone conversation they had a series of meetings at which they shared details of their business with Nestor, which the Appellants considered was a risky strategy since Nestor was one of their main competitors.
102.	  Mr Coll was very keen to sell because he saw it as a way of getting his life back. He considered that the business had destroyed their relationship as a married couple. The business had infiltrated every aspect of their lives, and by the end of 1996 had decided that he could no longer remain married to Mrs Coll. 
103.	The Appellants approached Mr Perriam of Perriam and Everitt to find a suitable buyer for their business. They met on 14 April 1997, when according to Mrs Coll they stated that they were only interested in cash sale. On 6 May 1997 Mr Perriam wrote a letter to Mrs Coll in which he stated so far as is relevant:
“I will obviously do my very best to ensure a smooth and successful sale of your business. With this in mind I would suggest another meeting to discuss strategy and tactics.
Before and not after, reaching agreement with a potential buyer you should have the advice of a specialist accountant on the avoidance of capital gains tax. To this end I would suggest Howard Scott of BDO Stoy Hayward in Baker Street W1 …..”
Additionally you may care to take pre-negotiation advice from a firm of solicitors who specialise in this type of transaction and here I would suggest John Rayman of Clyde & Co in EastCheap”.
104.	On 4 June 1997 the Appellants met Mr Perriam. The entry in Mrs Coll’s diary for 4 June recorded  2pm Alan Perriam 21 Coolhurst Road; Corporate Services £3.6 million – shares – some cash – 3 year commitment – risky – All cash – Alan Check. Mrs Coll was adamant in her testimony that Corporate Services Group made an oral offer on 4 June 1997. She relied on her memory and the entry in her diary for her recollection of the 4 June offer from Corporate Services Group.
105.	The Respondents contested that Corporate Services Group made an offer on 4 June 1997. The Respondents believed that Mrs Coll inserted the entry of the offer in her diary some point after that date to give support to her version of events. Mr Perriam’s letter of 5 June 1997 thanking the Appellants for their hospitality on 4 June made no mention of the offer. In fact Mr Perriam referred only to negotiations with British Nursing Agencies (Nestor) and that they should wait for another year to achieve a better price on the sale. However, if the Appellants wished to proceed with Nestor, the starting purchase price should be around £4,237,711. In addition Mr Perriam proposed an alternative method of transferring the business and apply roll-over relief to the sale proceeds which would reduce the starting price to £3,728.209. Mr Perriam added that the alternative method would be of advantage to the Appellants in avoiding some capital gains tax. Mr Perriam concluded that it was much better to deal with just one prospective purchaser at a time, and although he had at least two substantial clients who wished to talk with the Appellants, he would not approach them until after discussions with Nestor.
106.	On 15 June 1997 Mr Perriam confirmed in writing a meeting with Mr Scott of BDO on 18 June 1997. Mr Perriam expressed the view that he hoped that Mr Scott would give the Appellants an indication on how he could help them to reduce their capital gains tax on the sale of their business. Mr Perriam indicated that he expected the business to be sold for cash about £3.2 million.
107.	The Appellants omitted the meeting with BDO on 18 June 1997 from their Appendix 7 Hansard report prepared by PwC. Mrs Coll explained that the omission was an oversight. She had forgotten about the meeting until Ms Pearson of BDO reminded her about the meeting in a telephone conversation in connection with the Appeal proceedings.
108.	Mrs Coll’s diary for the 18 June 1997 referred to a meeting with Mr Perriam not BDO. The diary also recorded BNA (Nestor) 2.8 loan notes; Alan = book Clyde & Co; ask Clive for cash. The Respondents disputed that a separate meeting with Mr Perriam took place. In their view it did not make sense for Mr Perriam to travel across London to the Appellants’ address and then return to Baker Street for the meeting with BDO.
109.	Mrs Coll in her evidence denied that they received substantive tax advice at the meeting with BDO. In her view it was simply an introductory meeting. Ms Pearson acknowledged that she and Mr Scott were trying to impress the Appellants with their knowledge and experience. Ms Pearson’s notes of the meeting revealed that the complete spectrum of options to reduce the capital gains liability on any proposed sale was discussed. The entry in respect of loan notes stated that deferral current purchaser, cash deal but possibly loan notes – interest – bank guarantee (? pay for) – but subject to future tax rates – could become non-resident in future or reinvest. The notes also referred to the tax advantages of a pre-sale dividend. Ms Pearson explained that this was what we tell all clients.
110.	Ms Pearson accepted that the reference to the price of settling for £3.3 million cash; asking price £4.2 million in her meeting notes had no connection with an offer from Nestor. Ms Pearson re-iterated that they were advising the Appellants on their exposure to capital gains tax on a sale price of £3.3 million.
111.	On 25 June 1997 the Appellants held a meeting with their solicitors, John Rayman of Clyde & Co. where they told him that there were two substantive offers on the table. In turn Mr Rayman explained to the Appellants how loan notes worked and the need to have them guaranteed. Mr Rayman also added that company purchases were normally made by way of loan notes. The Respondents pointed out that there was no contemporaneous support for the meeting.
112.	  A BDO file note recorded a telephone conversation with Ms Pearson and Mr Perriam on 16 July 1997. Mr Perriam advised that the Appellants would instruct BDO in respect of capital gains tax planning advice for the sale of their shares in Grosvenor. Mr Perriam told Ms Pearson that Corporate Services Group was proposing that part of the consideration would be loan notes secured on their business. Mr Perriam advised that the Appellants would be prepared to take loan notes on the basis that they wished to remain in the United Kingdom until their children completed their schooling and would then consider emigrating. Mr Perriam considered that the loan notes would have to have a 12-14 year term to accomplish the Appellants’ aims. Ms Pearson suggested that Mr Perriam contact Mr Hemmington of the Corporate Finance Department of BDO. There were two other file notes of 16 July 1997 confirming that Mr Hemmington had a conversation with Mr Abrahahamson of Corporate Services Group.
113.	On 16 July 1997 Mr Abrahamson sent a letter to Mr Hemmington of BDO marked subject to contract, which stated that
“I write following our telephone conversation earlier today, and my meeting yesterday with the Appellants ………… I understand that they (the Appellants) are looking for a significant proportion of the consideration to be satisfied by loan notes and we have discussed how the interests of the vendors can be protected. My proposal is that these be semi-secured which means that they would have the benefit of a charge, ranking behind the bank over the assets or share capital of a substantially wholly owned subsidiary of Corporate Services Group ……….
I also understand that the vendors are looking for at least a proportion of the loan notes for a period of as long as twelve years and at the meeting I indicated that it would be appropriate after perhaps two years for the semi-secured status to be replaced by bank guarantees. We are in general happy to co-operate with any tax planning arrangements that the vendors may wish to put in place, and I would like to be as flexible as possible regarding how the consideration is satisfied. Perhaps there should be a package which comprises cash, loan notes and possibly shares in Corporate Services Group”.
114.	The Respondents placed reliance on the contents of Mr Abrahamson’s letter of 16 July 1997. First they considered the letter supported their contention that Corporate Services Group did not make an offer for the business on 4 June 1997 as alleged by the Appellants. Second the letter clearly indicated that it was the Appellants who wanted loan notes for tax reasons. 
115.	The Appellants omitted the meeting with Corporate Services Group on 15 July 1997 from Appendix 7 of the PWC report. Mrs Coll stated that they forgot about the 15 July meeting because they did not keep a record of the dates of their meetings with Corporate Services Group. Mrs Coll’s diary simply recorded a meeting at 4pm at Stafford Place without mentioning the names of the persons attending or the purpose of the meeting. 
116.	Mrs Coll challenged the accuracy of Mr Abrahamson’s letter. She considered that Mr Abrahamson was very shifty with her. She could not understand why he would write to Mr Hemmington. The Appellants were unaware of the letter until they received the hearing bundle of correspondence. Mrs Coll disagreed with Mr Perriam’s statement in his letter of 16 July that the Appellants would consider emigrating after their children left school. Mrs Coll was insistent that she intended to remain in the United Kingdom.
117.	On the 22 July 1997 the Appellants stated that they attended a meeting with Nestor at Clifton Ford Hotel, at which they rejected the £2.8 million offer, and told Nestor that they preferred cash. The Respondents doubted that this meeting took place. There was no independent contemporaneous record of the meeting other than an entry in Mrs Coll’s diary.  The Respondents considered that the account of this meeting was inconsistent with the correspondence on 13 and 14 August 1997 between Mr Perriam and Mr Chapman.
118.	On 11 August 1997 Mrs Coll telephoned Ms Pearson to advise that she and Mr Coll were divorcing with Mr Coll moving to Dublin.  Mrs Coll informed Ms Pearson that as a result of the divorce Mr Coll was transferring his interest in jointly owned properties to her, and in return she would give him some of her shares in Grosvenor. Ms Pearson advised Mrs Coll that she would contact the BDO office in Dublin to establish the tax position, should Mr Coll take loan notes on the sale of Grosvenor, and redeem them while resident in the Republic of Ireland.
119.	On 13 August 1997 Mr Perriam wrote to Clive Chapman of Nestor thanking him for Nestor’s indication of an offer on 12 August 1997.  According to Mr Perriam, the Appellants would accept Nestor’s offer of £2.8 million after the distribution of a £400,000 dividend. Mr Chapman responded on 14 August 1997 stating that Nestor wished to purchase Grosvenor including the assets which generated the profits. Mr Chapman queried the Appellants’ sale price for Grosvenor, in particular the suggestion of dividend distributions. Mr Chapman   ended  his letter with
“I would also be interested to learn about the preferred form and timing of the consideration. Once we have that, perhaps we can discuss the total picture and all the outstanding issues”.
120.	The Respondents contended that it was at the meeting of the 12 August 1997 when the Appellants first raised with Nestor the possibility of loan notes forming the consideration for the purchase of Grosvenor shares. In the Respondents’ view Mr Chapman’s comments in his letter of 14 August 1997 about the preferred form and timing of the consideration was very damaging to the Appellants’ case undermining their assertion that it was Nestor which was insisting on loan notes. The Appellants were dismissive of the Respondents’ contention arguing that there was no evidence that such a meeting took place.
121.	On 15 August 1997 a meeting took place between the Appellants and Mr Scott and Ms Pearson of BDO. At that meeting the Appellants informed Mr Scott and Ms Pearson that they had received two offers for Grosvenor: £2.9 million from Nestor made up of loan notes and cash; £3.6 million from Corporate Services Group made up of cash, loan notes and shares. The loan notes from Corporate Services Group, however, were not bank guaranteed but secured on one of its subsidiaries which raised problems about the security of the notes. The Appellants preferred the offer from Nestor because of the security of the loan notes. Further Corporate Services Group required Mrs Coll to sign a two year employment contract. Mr Scott advised Mr Coll that by moving to Republic of Ireland it may be possible to avoid paying both UK and Irish Tax on the loan note redemption but it would be necessary to check the tax position with BDO in Dublin and obtain clearance for the transaction from UK Inland Revenue. Mr Scott also considered that loan notes would be of benefit to Mrs Coll, particularly if there was a lower rate of capital gains tax for long term gains following the capital gains tax review which was announced in the July 1997 budget. Mr Scott did not believe that rollover relief  for the capital gains was a viable option because the Appellants did not intend to start up a new business instead they wished to invest the sale proceeds in property.  Mr Scott undertook to prepare a tax report detailing the options for capital gains tax planning most appropriate to the Appellants’ circumstances.
122.	  On 21 August 1997 Mr Coll advised BDO that the Appellants had a meeting with Nestor at which Nestor  had revised their offer to £3 million to be made up of  a pre-sale dividend of £500,000 to be paid immediately  and £2.5 million to be paid in five instalments  over two and half years. The deferred consideration would be in the form of loan notes on which interest below 1 per cent would be payable. Mr Coll confirmed that it was Nestor which proposed that loan notes formed part of the consideration. 
123.	On 22 August 1997 Mr Chapman sent draft heads of terms for the proposed purchase of Grosvenor. Mr Chapman indicated in the letter that Nestor appreciated that the Appellants may wish to take into account tax planning considerations.
124.	On 26 August 1997 Mr Scott of  BDO  sent the Appellants two copies of his report  on possible methods of mitigating capital gains tax on the sale of shares in Grosvenor. Mr Scott pointed out that the capital gains tax payable on the sale without planning would be in the region of £1.2million. Further if the proposed planning of Mr Coll taking up residence in the Republic of Ireland was adopted the capital gains tax avoided by Mr Coll would be £800,000. The tax saved on the pre-sale dividend would be around £75,000. Mrs Coll’s saving on capital gains tax would depend on her decisions. Mr Scott identified that the bulk of the tax planning related to Mr Coll taking loan notes and deferring UK capital gains tax at the time of the sale and having the loan notes redeemed when he became resident in the Republic of Ireland. Mr Scott, however, added the rider that Mr Coll would have to pay capital gains tax at the time of the sale unless Inland Revenue gave clearance that it would treat the receipt of loan notes as not giving rise to a taxable disposal. Mr Scott considered that the proposed terms of the loan notes required changing. They should be guaranteed and redeemable at the Appellants’ request, rather than over a period of two and half years.
125.	BDO’s tax report emphasised the advantages of loan notes for tax planning:
5.2.3: However receipt of the proceeds in the form of bank guaranteed loan notes provides an opportunity to crystalise the gain in a later year when the vendor may be non-UK resident. Non UK residents do not currently pay UK capital gains tax, even on the redemption of loan notes issued by a UK company.
5.5.1: By taking loan notes the gain on the shares in Grosvenor is deferred until the loan notes are redeemed (assuming clearance is given).
5.5.2: As a result it is possible to redeem the loan notes over a number of years to utilise the capital gains tax annual exemption, currently £6,500.
7.1: Breaking UK residence and ordinary residence is the most well known tried and tested method of avoiding capital gains tax absolutely, but it does involve a certain disruption of the vendor’s domestic life.
9: In view of Mr Coll’s intention to emigrate to Eire, which would hopefully avoid capital gains tax on 80 per cent of the sale proceeds, we have not considered in detail some of the other tax planning options which are currently available. In addition at present there is a great deal of uncertainty about the application of capital gains tax in the future as the Government is currently carrying out a detailed review of the tax and results are expected to be announced in time for legislation to be introduced in the Budget in Spring of 1998. Therefore loan notes have been recommended which provide a means of deferring the capital gain, which would enable the position to be reviewed following the Budget to establish whether any planning could be implemented at that time. 
9.8: Reinvestment relief: ………… Mrs Coll mentioned that she may be interested in investing in property but unfortunately does not qualify as a trade for the purposes of reinvestment relief (but property development does). However, if loan notes are taken rather than cash then this relief would still be available on the disposal of loan the loan notes and could be considered at that time. 
126.	On 29 August 1997 Mr Scott of BDO wrote to Mr Chapman of Nestor regarding the planned purchase of Grosvenor. Mr Scott wished to discuss specific matters which were vital for the proposed tax planning for the Appellants. Mr Scott proposed that clearance from Inland Revenue for the loan note arrangement should be a condition precedent to the planned purchase. Further it would be beneficial for Mr Coll if he would be able to call for redemption of the whole of his loan notes in March 1999 which would involve deferring the March 1998 instalment until September 1998 and the acceleration of the two instalments in September 1999 and March 2000. Mr Coll in his evidence at first denied that he had instructed Mr Scott to write the letter to Mr Chapman suggesting that clearance be a condition precedent. Mr Coll changed his evidence when he was presented with his letter of 29 August 1997 approving the sending of Mr Scott’s letter to Mr Chapman.
127.	On 1 September 1997 Mr Chapman responded to Mr Rayman, the Appellants’ solicitors, on the timing of the loan note repayments. Mr Chapman stated that
“I agree completely that the redemption of the loan notes should be tax efficient but I have some problems with a possible shortening of the timescale, unless necessary for tax purposes, and also some difficulty with them being capable of being called early on demand again unless necessary for tax purposes”.
128.	On 3 September 1997 Ms Pearson of BDO phoned Mr Perriam to discuss the proposed sale to Nestor. Mr Perriam advised that the sale was still in the air and that it was possible that Corporate Services Group may make an improved offer.
129.	On 8 September 1997 Ms Pearson held another phone conversation with Mr Perriam who indicated that he was expecting a revised offer from Corporate Services Group tomorrow. The offer would be in bank guaranteed loan notes because Corporate Services Group have a cash flow problem due to a large acquisition in France.  Ms Pearson explained that the Appellants would have a stronger case for the clearance application if they could show that it was the purchaser’s decision to offer loan notes and not the Appellants who requested the loan notes. The Respondents considered that the Appellants formed the idea from this conversation to allege in the subsequent clearance application that it was Nestor which offered loan notes because of cash flow difficulties. 
130.	On 10 September 1997 Mr Chapman indicated in a letter to Mr Rayman that Nestor was prepared to agree to the request to reschedule the dates of the loan repayments provided that the Appellants would agree to the proposals regarding the interest rate and guarantee for the loan notes.
131.	On 12 September 1997 Mr Scott sent Mr Coll details of the tax consequences of five scenarios of different redemption dates for loan notes coupled with resident or non resident status for Mr Coll. The scenarios with  redemption dates starting in September 1998 and resident in Republic of Ireland produced the largest savings on capital gains tax. The Respondents considered that this was yet further evidence of the Appellants’ pre-occupation with the avoidance of capital gains tax.
132.	On 15 September 1997 Ms Pearson supplied Mr Coll with a copy of the draft clearance application to the Inland Revenue for his consideration. Ms Pearson requested Mr Coll for his comments on the reasons for the sale and emigration to Ireland. Ms Pearson ended by emphasising that the main aim for the clearance was to show that Mr Coll’s proposed move to Dublin was for purely personal reasons. The draft clearance application contained the statement that the purchaser (Nestor) has stipulated that the consideration be in the form of loan notes due to their cash flow position.
133.	On 16 September 1997 the Appellants had a meeting with BDO tax advisers from Dublin to discuss the Irish tax implications of Mr Coll taking up residence in Republic of Ireland. The Respondents placed weight on the fact that Mrs Coll in her evidence was unable to give an explanation for her attendance if as she alleged that they were separated, and uninterested in Mr Coll’s tax affairs. 
134.	On 18 September 1997 Wedlake Bell, solicitors for Nestor, wrote to Mr Rayman indicating that Nestor had no objection to the Appellants seeking tax clearance in respect of the transaction but that Nestor was not willing to incur additional costs if the purchase did not proceed as a result of the tax clearance not being granted. Also on the same day Wedlake Bell advised Mr Chapman that Nestor would fund the bank guarantee for the loan notes. 
135.	On 19 September 1997 Ms Pearson wrote to Mr Rayman regarding the communication from Wedlake Bell.  Ms Pearson advised that the tax clearance application had been drafted and approved by the Appellants. Ms Pearson was of the view that the chances of obtaining clearance were more than evens. Ms Pearson suspected that the Appellants would still proceed with the sale if clearance was not given. Ms Pearson pointed out that it was important for tax reasons that the redemption dates for the loan notes were the same for both Mr and Mrs Coll.
136.	On 30 September 1997 Nestor sent the Appellants their formal offer for their shares in Grosvenor subject to contract. The offer incorporated the Appellants’ request regarding the redemption dates for the loan notes which would be in the case of Mr Coll, £800,000 on 31 October 1998, and £1.2 million on 31 March 1999. Further Nestor would be prepared for similar proportions of Mrs Coll’s loan notes to be repayable on the same dates. 
137.	On 29 September 1997 BDO submitted clearance applications under section 138 TCGA 1992 and section 707 ICTA 1988 for the Grosvenor transactions. On 10 October 1997 Inland Revenue granted clearance under section 707 ICTA 1988 but made it clear that it related to the treatment of the pre-sale dividend, and not the section 138 clearance application.
138.	On 27 October 1997 Inland Revenue refused clearance under section 138 TCGA 1992.  It appeared to the Board of Inland Revenue that Mr Coll would not be resident in the United Kingdom at the time the loan notes were redeemed, in which case he would not be chargeable to capital gains tax in respect of disposals of the loan notes. In the Board’s view one of the main purposes of the loan notes arrangements was to enable Mr Coll to avoid an immediate charge to capital gains tax.
139.	On 30 October 1997 Mr Scott informed Mr Coll that the capital gains tax clearance application had been turned down by Inland Revenue. Mr Scott advised that BDO was proposing to refer the refusal to the Special Commissioners but could not guarantee that the Special Commissioners would overturn the refusal. During the conversation Mr Coll confirmed that Nestor had not offered cash as part of the deal, and that if clearance was not given the Appellants would still proceed with the sale. Further Mr Coll indicated that he wished to proceed with the clearance application even though this might affect the timing of the sale. Mr Scott emphasised that it was important that all statements in the letters to the Special Commissioners were correct. In response Mr Coll stated that his clear recollection was that Nestor was not prepared to offer cash or shares, and that it was not the Appellants who chose to take loan notes. The letter of 31 October 1997 to Inland Revenue requesting referral to the Special Commissioners incorporated the above points and approved by Mr Coll. The Respondents considered that Mr Scott and Ms Pearson were suspicious of the accuracy of the information given by Mr Coll, which was demonstrated by them both seeking confirmation it was Nestor which initiated the loan notes. 
140.	On 5 November 1997 the Appellants’ solicitors commented on the draft loan note instrument to Wedlake Bell stating that the set off right under the loan notes should only apply in respect of established claims against the Appellants. Next that the loan notes should constitute non-qualifying corporate bonds with the Appellants’ solicitors adding a provision allowing redemption of the loan notes in US dollars. 
141.	On 7 November 1997 Mr Scott wrote to Mr Rayman with a copy to the Appellants which stated that 
“This is to confirm that even if the application to the Inland Revenue for clearance under section 138 TCGA 1992 is rejected, it remains our opinion that the provisions of section 135 TCGA 1992 will apply to the transaction.
This would mean that John and Marion Coll would, for capital gains tax purposes, not be treated as disposing of their shares in Grosvenor Nursing Agency Ltd and the loan notes received from Nestor would be treated for CGT purposes as having been acquired on the same day and for the same consideration as the shares in Grosvenor Nursing Agency Limited.
In other words, the capital gain on selling GNA would not arise until the Nestor Loan notes were redeemed and this would hopefully be in a year of assessment when capital gains tax rates are lower than they are now.
The aspect of the original clearance to which the Inland Revenue took exception was John’s stated intention to move to Southern Ireland thus potentially avoiding UK tax and it is solely on the basis of this that the clearance application was rejected.
If John and Marion remain in the UK, it is our opinion that the provisions of section 135 will apply …….” 
142.	On 11 November 1997 Wedlake Bell faxed Mr Rayman with a list of outstanding matters which needed to be resolved before completion of the sale on 14 November 1997.  Two of the matters which required the Appellants’ agreement were that the maximum liabilities under the Warranties must remain at £3 million being the total consideration and that there was to be no set off  of any of the amounts which were referred to as sales ledger provisions against any claims that Nestor may have under the Warranties.
143.	On 18 November 1997 Mr Scott advised Mr Coll by telephone that the Special Commissioners had upheld the decision by Inland Revenue not to give capital gains tax clearance for the transaction.
144.	On 19 November 1997 the Appellants’ solicitors advised Wedlake  Bell that the leases would be granted by the Appellants as  they were not exchanging shares and property between themselves prior to completion. On 20 November 1997 the sale of Grosvenor to Nestor was completed. 
The Evidence of David Collison
145.	Mr Collison was the Group Financial Director and Company Secretary of Nestor Healthcare Group PLC. He joined Nestor in July 2004 and had no personal knowledge of the discussions or negotiations that took place at the time of Nestor’s acquisition of Grosvenor. 
146.	In August or September 2005 he received a telephone call from Mrs Coll during which she stated that she needed a letter from Nestor for tax purposes to the effect that it was Nestor which had insisted in using loan notes in the purchase of Grosvenor. After examining the documents relating to the acquisition Mr Collison informed Mrs Coll that he was unable to issue such a letter as it was not clear from the evidence that it was Nestor which required loan notes. Mr Collison confirmed that none of the documents held by Nestor predated the first heads of terms drawn up in August 1997. Further he could find no document which indicated who initiated the method of payment.
147.	Mr Collison’s examined Nestor’s financial accounts for the two years ended 31 December 1997 and 1998. He considered that Nestor was in a nicely profitable position with increasing post tax profits: £4.09 million (1996), £7.138  million (1997) and £9.004 million (1998). 
148.	Mr Collison found no evidence that Nestor had a cash flow problem at the time of the Grosvenor purchase. At the end of 1997 total net borrowings, including the £2.5 million loan notes for Grosvenor were £4 million which in his view was not large when compared with shareholders’ funds of £9.1 million. Mr Collison also noted the level of dividend declared for 1997 which was £3 million, 11.5 per cent higher than in 1996.
149.	The Appellants formed a different view of Nestor’s cash flow at the end of December 1997. Nestor’s consolidated cash flow statement for 1997 showed cash inflows from operating activities in 1997 at 43 per cent of the level of cash inflows for 1996. Further at the 1997 end cash outgoings exceeded cash inflows by £2.097 million. Mr Collison did not consider the negative cash flow a problem because of the high profit levels. The negative cash position arose from increased working capital demands which enabled Nestor to finance growth.
150.	Mr Collison accepted that Nestor would have had to use an overdraft facility if it had been required to pay for Grosvenor shares in cash rather than in loan notes. Mr Collison was unable to give evidence of the limit of Nestor’s overdraft facility as at November 1997. Mr Collison, however, pointed out that Nestor’s overdraft facility increased from £1.8 million at 1997 end to £9.1 million at 1998 end without apparent difficulty.
151.	Mr Collison accepted that the loan notes issued in connection with the Grosvenor purchase held commercial advantages, in that the interest rate attached to them were lower than the bank lending rate, and they gave Nestor security for recovery of payments under the sale warranties. Mr Collison agreed that in 1998 the Grosvenor acquisition was generating profits of £500,000 for Nestor which according to Appellants’ counsel enabled to Nestor to fund the loan notes from those profits.
152.	Mr Collison collated details of all the acquisitions made by Nestor from 1998 to 2007 which showed that Nestor made 90 acquisitions at a total cost of £280 million. Mr Collison pointed out that the Grosvenor acquisition was the only acquisition out of the 90 that was satisfied wholly in loan notes. 
153.	Appellant’s counsel, however, considered that the schedule should be split into three time periods: 1988 -1997; 1998 – 2000; and 2001 onwards. Counsel justified the division on the grounds that in 1998 there was fundamental change in Nestor’s development linked to its Stock Exchange listing from December 1998, and the change in accounting treatment of goodwill. The third period from 2001 marked a change in the funding of acquisitions linking them to disposals. According to counsel in the 1988 -1997 there were only nine acquisitions of which four including Grosvenor used loan notes.
154.	Mr Collison disagreed with the division of the schedule in three time eras. Further he rejected counsel’s suggestion that the new accounting treatment for goodwill would have had an impact upon how Nestor financed acquisitions. 
155.	Mr Collison indicated that Nestor’s bankers would have regarded the issue of loan notes as equivalent to the use of company’s overdraft facility, and would have been reflected in the balance sheet in exactly the same way as cash.  
The Separation
156.	Mr Coll considered that the business of running Grosvenor had destroyed his marriage because it infiltrated every part of their lives. Mr Coll resented the time spent on the business. The work was unpredictable and demanding.  Mr Coll felt that he was always playing second fiddle to Mrs Coll in the business. She had built up Grosvenor from scratch. It was her baby and very possessive of it.
157.	In 1996 the Appellants sought counselling in respect of their marital difficulties. The counsellor in a third party statement indicated that their difficulties would be placed nearer the “impending divorce” on a scale between “a lovers tiff” at one end and “impending divorce” at the other. Mr Coll found the counselling of limited help.
158.	Mr Taylor, a partner with Gelberg & Co, solicitors, was a friend to the Appellants, and had acted as their solicitor from at least 1984. In his third party statement he referred to a meeting with them in 1996 in a wine bar where he learnt that the Appellants were going through a bad patch in their marriage. At a subsequent meeting he read the riot act to them, telling them to sort themselves out. According to Mr Taylor this meeting appeared to have the desired effect and they reconciled their differences. Mr Taylor confirmed that he did not offer any legal advice at the meeting and was not involved in a proposed division of assets.
159.	When the prospect of selling business arose Mr Coll was very keen to dispose of it. He saw it as an opportunity of getting his life back. He intended  to move to Dublin, away from everybody.  Mr Coll decided to go to Dublin because he knew it well and had many happy memories there. Mr Coll asserted that his reasons for moving to Ireland had nothing to do with tax. Mr Coll accepted that he had taken no practical steps to further a move to Dublin.
160.	On 11 August 1997 Mrs Coll phoned Ms Pearson to advise her that the Appellants were planning to divorce with Mr Coll moving to Dublin. Mrs Coll further advised that she had agreed to give some of her shares in Grosvenor to Mr Coll in return for Mr Coll transferring his interest in their properties in Islington and Camberwell. Mrs Coll accepted in evidence that they had taken no advice on the proposed split of their assets.  Mrs Coll informed Ms Pearson that Mr Coll was planning to move out of the family home tomorrow. Finally Mrs Coll asked Ms Pearson whether it would be possible to meet to discuss the transfer of assets between them and Mr Coll’s tax position should he move to the Republic of Ireland. If Ireland was not a suitable location Mr Coll would be happy to work in Jersey.
161.	The Appellants were not confident that the sale of Grosvenor to Nestor would proceed. In mid October 1997 they had a meeting with Mr Rayman who advised them that the sale of Grosvenor was going ahead, which eased the tensions between Appellants resulting in their decision on Mr Coll’s birthday on 7 November 1997 to give their marriage another go. Mr Coll stated that he phoned Mr Scott of BDO the following day to advise him that they were reconciled and he was not now moving to Republic of Ireland. BDO had no record of the phone conversation.
162.	Ms Pearson of BDO was surprised to learn that the Appellants were still together when Mrs Coll contacted her about the Tribunal proceedings. 
163.	The notes of progress meeting with Mr Wood on 29 June 2005 recorded Mrs Coll’s statement that their marriage had not broken down and that Mr Coll had not moved from their family home. Mr Wood accused the Appellants of contriving their separation to evade capital gains tax, to which Mrs Coll allegedly responded that she could not recall the advice given but there was no separation.
164.	Mrs Coll challenged the accuracy of the progress meeting notes. She pointed out that they were not a verbatim record of the meeting and that they had not agreed with Mr Wood the accuracy of the notes. Mr Wood pointed out that the Appellants on advice had refused to have the interview tape-recorded. Mrs Coll stated that Mr Wood did not ask her about the state of their marriage. The question he posed was whether the marriage had irretrievably broken down. The contemporaneous notes of the meeting contained a question about the irretrievable marriage breakdown. 
165.	On 15 September 2005 PwC in a letter to Mr Wood stated that
“The Appellants cannot agree with your view that inaccurate facts regarding their marriage difficulties had been presented to the Revenue, in the clearance application made by BDO. At our meeting on 29 June, Mrs Coll did not feel  comfortable with discussing matters of such personal nature in front of so may people. Having discussed this matter further with the Appellants, we are advised at the time of the application there were in fact difficulties in their marriage, although we understand that these were subsequently resolved after receiving professional counselling from Ms Duthie ……. Mrs Coll also obtained legal advice in this matter from Mr Taylor of Gelberg & Co.
166.	The Respondents were very sceptical of the Appellants evidence regarding their possible divorce. In their view their accounts were inconsistent, for example, Mr Coll never moved out of the matrimonial home despite Mrs Coll telling Ms Pearson that he was due to move out the following day. In the Respondents’ view their separation was a prime example of how the Appellants were prepared to mislead their own advisers in an attempt to secure a tax advantage. Further the Respondents considered that the evidence and sequence of events supported the conclusion that the alleged separation decision to divorce and reconciliation were a sham not driven by genuine personal considerations but rather by tax considerations. This was demonstrated by Mr Coll being prepared to live in Jersey if Republic of Ireland was not a feasible proposition Their real reason for abandoning Mr Coll’s plan to move to Republic of Ireland was the refusal of the clearance application.
The Sale of the Family Home
167.	In January 1998 the Appellants put up for sale their family home on Coolhurst Road. Mrs Coll indicated in evidence that she wished to make a fresh start. She also wished to run a nursing home, and with this in mind exchanged contracts for the purchase of 7 View Road in February 1998. The sale of Coolhurst Road was completed in May 1998, whilst the completion of the View Road purchase took longer and did not happen until 15 October 1998. Mrs Coll asserted that the nursing home project did not go ahead because the conversion of 7 View Road to a nursing home was not a viable proposition. The property did not have fire escapes and a central lift. In the end the Appellants rented out View Road as flats.
168.	According to the Respondents, the Appellants’ evidence about running a nursing home was inconsistent with the information given to their tax advisers. At the meeting with BDO on 18 June 1997 the Appellants indicated that their intention was to set up a property development company.  At the meeting with PwC on 2 July 1998 Mrs Coll explained that the View Road property was currently divided into four flats which were being let at the moment. After completion of the purchase the Appellants intended to ask the tenants to leave so that they would be in a position to sub let the property again. Mrs Coll explained to PwC that they had a portfolio of rented accommodation, and that she had been letting property for about 12 years. Accordingly the rental of View Road would be in keeping with the property portfolio. 
169.	The Respondents placed weight on the Appellants putting their home on the market so soon after the completion of the sale of Grosvenor.  They argued that it was indicative of a continuing intention to leave the UK for tax reasons.
170.	Mrs Coll in her evidence did not consider starting up a nursing home to be a demanding business. She was a qualified nurse and it would be less stressful than running Grosvenor. PWC notes of their meeting with the Appellants on 15 June 1998 contained a reference to Mrs Coll’s interest ideally in a nursing home and rental properties.
The Belgian Route
171.	In April 1998 the Appellants held a meeting with Ms Leonard of PwC who had been dealing with the Appellants tax returns for the United States. The Appellants told her that they had sold their company. Ms Leonard suggested that they had a meeting with Mr Curran of PwC about their tax position for 1997/98.
172.	They met Mr Curran with Mr Renehan on 15 June 1998.  At that meeting Mr Curran reviewed the Appellants’ tax position and advised them that they had a potential tax liability of 40 per cent on the loan notes received on the sale of Grosvenor.  Mr Coll supplied Mr Curran with the Compendium of Documents relating to the sale of Grosvenor. The Compendium contained the formal documents connected with the sale, which did not include correspondence on the tax advice received by the Appellants. The outcomes of the meeting were that
“ It was agreed by all present that the Appellants would review all planning options available at the moment and may decide on a mixed portfolio of planning options. The Appellants stated that that while they were normally conservative, they would be prepared to stagger their attitude towards risk, and some of ideas which may be risky.
In addition the Appellants were particularly interested in the Belgian route”.
173.	On 18 June 1998 Mr Curran sent a letter to the Appellants outlining the Belgian route.  Mr Curran considered it advisable to obtain Counsel’s opinion about the route if they chose it.  He also promised to send them a brief summary of various planning options once the Finance Act was passed last month. 
174.	Essentially the Belgian route provided a mechanism for reducing exposure to UK capital gains tax by moving to Belgium for a short period of time, which was achieved by the Appellants becoming resident in Belgium and taking advantage of the UK/Belgium Double Taxation Treaty. Under the route the Appellants would be subject to Belgium capital gains tax rules which specified that UK loan notes would not be subject to Belgium capital gains tax.  The disadvantages of the route  to the Appellants were that the planning was aggressive, any UK private residence should be sold, and for their children to be educated in Belgium.
175.	On 26 June 1998 a telephone conversation took place between Mrs Coll and Mr Renehan. The notes of the conversation recorded Mrs Coll’s request for a list of English schools in Belgium, and Mr Renehan’s enquiry with Mr Rayman about the possibility of amending the redemption dates on the loan notes. The note ended with:
“ Mr Renehan stated that he and Mr Rayman had agreed that Mr Rayman would approach BDO to discuss their tax planning ideas. Mrs Coll stated that she should have dealt with PwC from day one. Mrs Coll got involved with BDO as one partner at Clyde & Co had recommended BDO. However, subsequently Mr Rayman had recommended PwC to Mrs Coll.
176.	On 2 July 1998 another meeting took place between the Appellants and Messrs Curran and Renehan of PwC. Mr Curran pointed out that the Appellants would need to be resident in Belgium on both 31 October 1998 and 31 March 1999 when the loan notes were due to be redeemed.
177.	On 6 July 1998 Mr Coll sent Mr Curran copies of the correspondence between BDO and Inland Revenue regarding the clearance application, of the tax advice received from BDO (Dublin) and of the capital gains tax planning for the sale of Grosvenor shares. The correspondence included a copy of Inland Revenue’s refusal of the clearance application under section 138 TCGA 1992, reference number CGT 248/2193/97.
178.	On 21 July 1998 PwC sent a detailed report to the Appellants on  capital gains tax planning, in particular the mechanics of planning to avoid UK capital gains tax on the disposal of loan notes following taking up residence in Belgium. Mr Curran identified that there was a risk that this tax planning may not be acceptable to UK revenue and would carrying the following risks:
(1)	The UK tax returns reporting the gain would be incorrect.
(2)	Payments of tax would not be made by due dates.
(3)	Interest could be chargeable.
179.	On 14 August 1998 Mr Renehan sent the Appellants a draft copy of instructions to Counsel seeking advice on the capital gains tax planning issues of the Belgian route. The covering letter to the Appellants stated that
“The instructions should provide comprehensive background information pertinent to the planning issues being considered. I should be grateful if you would review the instructions insert any details that require confirmation  or further explanation from yourselves and suggest any further information that should be included. Please note that none of the documents referred to in the instructions have been attached except appendix 1.
There  are a number of points contained within the instructions which specifically require further detail from yourselves in particular, paragraphs 16 – 18 and 21 -23. However, you do also need to review the document as a whole, in order to ascertain whether there are any other matters that need to be addressed.
The instructions have been prepared for counsel’s information and therefore some of the terminology is rather technical with regard to references to tax legislation etc. However, the main points that need to be reviewed by you are the factual details relating to your personal circumstances”.
180.	The Appellants made alterations to the draft instructions particularly to paragraphs 16 – 18 and 21 – 23 which were incorporated in the final instructions to counsel. The instructions at paragraph 14 stated that
“Clearance has been obtained from Inland Revenue under section 135 TCGA 1992 and section 707 ICTA 1988 regarding the exchange of the shares in Grosvenor for the above mentioned loan notes. The clearance application under these sections was submitted by BDO Stoy Hayward who acted for the Appellants at that time. As a result of the clearance no CGT liability will crystallise until redemption of the loan notes. A copy of the clearance is attached (attachment 3).
181.	PwC in response to directions released 24 November 2008 could not categorically state whether enclosures were sent with the instructions to counsel. PwC was able to confirm that the instructions sent to counsel as retained in their files did not include any enclosures, other than the enclosed appendix 1(timetable of events for the Belgian route).
182.	A conference took place between Messrs Curran and Renehan and counsel on 16 October 1998. The Appellants did not attend. Mr Curran explained that the Appellants had spent periods in the United States, Spain, Canada, Australia and Ireland. The Appellants’ normal practice had been to travel to countries outside United Kingdom for significant period of time every few years. 
183.	Counsel queried whether the Appellants had contemplated the Belgian route when applying for Revenue clearance in respect of the Grosvenor transaction. Mr Renehan pointed out that clearance had been received prior to November 1997. Further Mr Renehan added that he held copies of BDO correspondence dealing with tax planning opportunities for the Appellants. None of these related to the Belgian planning route. It appeared that BDO was unaware of the Belgian route at the time of the clearance application. Counsel stated that had the Appellants contemplated emigrating to Belgium during the clearance application,  Inland Revenue might be in a position to review the basis of the clearance, and subsequently deny the relief given in October/November 1997. 
184.	Counsel concluded that the Belgian route for the Appellants had a reasonable opportunity of success and that the circumstances were more favourable than other cases which he had reviewed.
185.	On 30 October 1998 PwC sent the Appellants a copy of the finalised note of consultation as approved by counsel. PwC advised the Appellants that this was a tax planning exercise which may be open to challenge by Inland Revenue.  PwC indicated they would put together a file to back up the steps taken and if required would be used to argue their case with Revenue.
186.	The letter of engagement between the Appellants and PwC required the Appellants to pay a fixed fee for putting the Belgian package together plus a success fee. The terms of the engagement did not require PwC to contact previous tax advisers for the Appellants. Further the Appellants were obliged to disclose all information necessary or relevant in a timely manner for the assignment. The information supplied must be accurate and true, and not misleading.
187.	On 16 September 1998 Mr Renehan provided the Appellants with a schedule outlining capital gains tax planning ideas as an alternative to the Belgian route.  Mr Renehan expressed the view that these ideas were only relevant if Inland Revenue challenged the Belgian route.  
188.	On 17 September 1998 the Appellants moved to Belgium returning to the United Kingdom in the spring of 2000.
189.	On 18 January 1999 the Brussels’ Office of   PwC hand delivered the 1997/98 UK tax returns to the Appellants at their address in Brussels.  The covering letter asked the Appellants to review their returns and if satisfied with the accuracy of the forms to sign them for onward transmission to UK Inland Revenue.  The returns contained a schedule to capital gains pages which disclosed that each Appellant disposed 50 ordinary shares in Grosvenor on 20 November 1997 for £1,250,000. The capital gains declared on the disposal was nil with reference made to additional notes page 8 on the form which stated that
“The disposal of the shares in Grosvenor Nursing Agency Limited was made as an approved paper for paper transaction under section 138 TCGA 1992, which received Inland Revenue clearance during November 1997 (ref no: CGT248/2193/97)”. 
190.	According to the Appellants when they met with Messrs Curran and Renehan they were informed that they were facing a large tax bill. The Appellants’ initial stance was that they were not interested in aggressive planning but more interested in reducing their capital gains liability from 40 per cent to 23 per cent. The Belgian route was a new tax planning scheme only available through PwC. They were attracted to the scheme because of the potential amount of tax saved, and that PwC was offering a full package including advice moving to Belgium. Their move to Belgium was relatively straightforward as at the time they were living in rented accommodation in UK. Their children went to the British International School in Brussels.
191.	The Appellants understood that Mr Curran would contact BDO about the sale of Grosvenor. Mr Coll told Messrs Curran and Renehan about the clearance application and handed over the documents relating to the tax advice received from BDO including   refusal of the clearance. As part of the package PwC agreed to compile their United Kingdom 1997/98 tax returns.  According to the Appellants, they carefully checked their returns which reported the acquisition of loan notes. They noticed the specific reference to having obtained clearance in respect of the share sale. The Appellants believed the statement to be correct. They disclosed to PwC the full information about the clearance application. The Appellants paid PwC handsomely for their tax expertise.  The Appellants did not understand the technicalities associated with clearance applications. They had no previous experience of selling a business. Grosvenor was their first business sale. The Appellants believed that the PwC had checked the accuracy of the statement regarding the clearance application. PwC made the same statement in instructions to counsel. The Appellants considered they were entitled to rely on PwC expertise in completing their returns accurately.  
192.	Mrs Coll stated that it came as a complete surprise to PwC when Mr Wood informed them that no clearance had been granted. PwC assured them that it did not matter as the transaction proceeded on a different basis. Mrs Coll only realised that PwC had never contacted BDO in 1998 when she spoke to Ms Pearson in February 2008. On learning this Mrs Coll decided immediately to terminate the services of PwC.
193.	The Respondents relied on the evidence of the Belgian route as a continuing intention on the part of the Appellants to take advantage of non-resident status to avoid capital gains tax.  
194.	The Respondents contended that the Appellants either told PwC that clearance had been granted or deliberately allowed them to labour under the mistaken belief that it had been granted.  The Respondents justified their contention by reference to the Appellants’ actions in misleading BDO about their divorce and intentions to live apart, and their evidence about Nestor insisting upon loan notes.
195.	The Respondents challenged the Appellants’ evidence that they told PwC specifically that clearance had been refused. They made no mention of this in their witness statements. Their counsel in opening said that it had been an unspoken assumption on the part of PwC. Mr Coll’s evidence on disclosure of relevant documents was contradictory. In his oral evidence he suggested that he handed PwC the documents at their first meeting which conflicted with his subsequent letter to PwC on 6 July 1998 enclosing the documents on the clearance application. Also Mr Coll did not appear to include in the enclosures the Special Commissioners’ refusal of clearance dated 12 November 1997. Finally the Appellants gave no written instructions to PwC to obtain from BDO the Appellants’ tax file.  The Respondents pointed out that PwC was under no professional obligation to contact BDO to discover what advice had been given, and what action had been taken prior to PwC’s involvement.
196.	The Respondents were surprised that employees of PwC had not been called by the Appellants to give evidence. The Respondents considered that PwC would have agreed to give evidence to assist their former clients to avoid a finding of fraud against them. Appellants’ contention that PwC had prevented relevant witnesses from attending was not supported by documentary evidence to that effect.
Special Civil Investigation 
197.	In December 2003 the Respondents received third party information that the Appellants had placed substantial funds in an offshore trust in Jersey.
198.	On 27 February 2004 Mr Wood interviewed the Appellants in the presence of their accountant, Mr Lavery. The interview was conducted under PACE in accordance with the Respondents’ Code of Practice 9 and tape recorded.  The meeting was principally concerned with the Appellants’ disclosures regarding the monies held in a trust fund which had been set up following advice from their bank. Essentially the Appellants believed that the  Bank of Ireland had misled them on the correct tax treatment of the funds. 
199.	During the interview the Appellants disclosed that they received loan notes from the sale of Grosvenor. The Appellants in response to a question about Belgium said:
“Well we really had planned initially to go to Europe we thought the children as well it would be better for them”. (Mrs Coll)
“We thought it would be good actually to (do) we had a three year restriction after the sale of the business and we couldn’t operate in business in the United Kingdom. So we thought we would maybe try and possibly use our any skills we had outside the United Kingdom. We liked the idea of Belgium because it has a very similar climate not that far away, good access for Europe and an opportunity for the kids to learn languages and perhaps help them with University” (Mr Coll). 
200.	The Appellants commissioned Mr Lavery to prepare a disclosure report which was provided on 28 October 2004. Mr Lavery noted that the Appellants believed that the reason for Inland Revenue’s enquiry into their affairs was their investments into the TSA Trust operated by the Bank of Ireland in Jersey, although this had not been confirmed positively  by  Inland Revenue. Mr Lavery disclosed that Grosvenor shares had been exchanged for £1.25 million each of guaranteed unsecured variable loan notes issued by Nestor. Further the loan notes were issued as an approved paper for paper transaction under section 138 TCGA 1992. The loan notes were disposed of on two separate occasions, the first on 31 October 1998 for £500,000 each and the second on 31 March 1999 for £750,000 each.
201.	Following submission of the disclosure report, correspondence ensued between Mr Wood and the Appellants. In a letter dated 22 April 2005 Mr Wood indicated that he wanted to discuss the Belgian residency in detail. A meeting was held on 21 June 2005 between Mr Wood and the Appellants and Mr Lavery to discuss matters not connected with the Grosvenor sale.
202.	On 29 June 2005 Mr Wood met with the Appellants, Messrs Walker and Curran of PwC, and Mr Lavery. The Appellants disagreed with Mr Wood’s assessment that they had not been forthcoming about the sale of Grosvenor shares. During the meeting the Appellant purportedly denied that she had received earlier tax advice on the Grosvenor sale. When Mr Wood mentioned  BDO Mrs Coll recalled that she had taken advice from them but could not remember what advice she had received.  When Mr Wood asked about the advice from PwC, Mrs Coll again could not remember the advice but said that the Appellants had been considering leaving the United Kingdom to live in Europe and had already sold their house before approaching PwC. Mr Wood found it strange that the Appellants chose Belgium to live. Mrs Coll pointed out that she had lived all over the world, including Ireland, Australia and the USA. She had no particular affinity to the UK. Mr Wood asked various questions about the properties owned by the Appellants.
203.	On 24 August 2005 Mr Wood wrote two letters to PwC. In his first letter Mr Wood indicated his intention not to pursue the capital gains tax issue in respect of the sale of Grosvenor shares. He considered that there were still unanswered questions but with the passage of time the gathering of necessary evidence was impossible.  In his second letter Mr Wood explained that he subsequently discovered that the information on the Appellants’ 1997/98 tax returns regarding the disposal of the Grosvenor shares was incorrect, in that clearance had been refused. In those circumstances Mr Wood intended to withdraw his earlier letter, and include the capital gains tax, interest and penalty on the Grosvenor disposal in his final computation on the tax due from the Appellants.
204.	On 15 September 2005 Mr Walker of PWC responded to Mr Wood indicating that the Appellants required further time to consider whether they were entitled to relief under section 137. 
205.	On 14 December 2005 PwC supplied Mr Wood with the Appellants’ report regarding the sale of Grosvenor.  Appendix 7 to the report was the Appellants’ written statement on the chronology of the sale.  The Appellants did not mention their 18 June 1997 meeting with BDO in Appendix 7.  Their record of the conversation with Mr Rayman on 25 June 1997 in Appendix 7 stated that they had not sought financial advice. The Appendix 7 statement disclosed  that their meeting with BDO on 15 August 1997 was the first time that they received financial or tax advice on the proposed sale of Grosvenor.
206.	On 18 September 2006 Mr Wood issued Mr and Mrs Coll with separate assessments in the sum of £497,400 for capital gains tax on the disposal of Grosvenor shares.
207.	On 19 November 2007 Mr Walker of PwC stated in a letter to Mr Hart of the HMRC solicitors office that he was not aware of any correspondence from 1 January 1997 to 20 January 1999 between BDO and PwC concerning the Grosvenor disposal or the section 138 application.
208.	On 13 December 2007 penalty assessments in the sum of £425,000 each were raised against Mr and Mrs Coll. The penalties were issued under section 95(1) TMA 1970 with an 85 per cent loading on the tax difference. 
Findings of Fact
Section 137 Dispute
Loan Notes
209.	The Appellants asserted that Nestor insisted upon the use of loan notes for the purchase of Grosvenor shares. The Appellants had the burden of establishing this fact on the balance of probabilities. The Appellants’ evidence consisted of their oral testimony, entries in Mrs Coll’s diary, records kept by BDO of various statements made by Mr Coll, and an assessment of Nestor’s financial position. 
210.	The Appellants did not call evidence from Mr Perriam their broker or Nestor’s representatives who conducted the negotiations with them on the Grosvenor sale. Mr Perriam supplied two statements. The first dated 3 November 2005 to PwC when he said that Nestor and Corporate Services Group made an offer in loan notes. The second to Mr Wood dated 15 June 2007 when he could not recall the finer details of the deal except that he had no memory of cash offer from Nestor. Mr Chapman and Mr Jewitt supplied third party statements to Mr Wood. Mr Chapman could not recall who initiated the use of loan notes. Mr Jewitt stated that he did not initiate any discussions regarding loan notes. In short the Appellants adduced no persuasive evidence from a third party to corroborate their assertion that Nestor initiated the use of loan notes. 
211.	The Appellants relied on BDO records of conversations with Mr Coll in which he confirmed that Nestor was insisting upon consideration in loan notes.  BDO carried out no independent verification of the correctness of what they were being told by Mr Coll. Further Ms Pearson and Mr Scott on 8 September 1997 (Pearson and Perriam), and 30 October 1997 (Scott and Coll) sought assurances from Mr Coll that Nestor initiated loan notes. I consider the seeking of assurances from Mr Coll suggested a degree of uneasiness on the part of Ms Pearson and Mr Scott about the accuracy of the information conveyed by Mr Coll.  I conclude that the probative value of Mr Coll’s statements to Ms Pearson and Mr Scott was greatly diminished by the findings of unease and absence of independent verification of the accuracy of the information conveyed.  
212.	The reliability of the Appellants’ account regarding loan notes depended to a large extent upon its fit with the reasons for the sale, and the chronology of the events surrounding the sale.  I formed the view from the evidence that the Appellants were the prime movers and dictating the terms of the Grosvenor sale. They had returned to the United Kingdom in Spring 1995 from a three year spell in the United States following their failed attempt to expand the business, their marriage was encountering difficulties in 1996, and one of their major competitors was expressing an interest in their business.  The demands of their nursing agency were being met at huge personal cost, working long hours and having no time for each other. They wanted a way out which involved a slower pace of life. They had no intentions of starting up a new demanding business but looking to derive income from property lettings and development. 
213.	The Appellants’ personal strategy depended upon maximising the income potential from the sale of their business.  In this respect they instructed Mr Perriam in April 1997 to value their business and conduct negotiations on their behalf.  At an early stage in May 1997 Mr Perriam advised the Appellants to obtain specialist advice on the avoidance of capital gains tax, which they did on 15 June 1997 from BDO, and legal advice from Mr Rayman of Clyde & Co which took place most probably on 25 June 1997.
214.	Critical to the Appellants’ case was that before they met BDO and Clyde & Co they had two substantive offers on the table for their company where the proposed consideration was principally in the form of loan notes. The Appellants’ evidence of two offers consisted of  Mrs Coll’s diary entries for the 4 and 18 June 1997 recording respectively supposed offers of £3.6 million mostly in loan notes from Corporate Services Group, £2.8 million from Nestor in loan notes, and a recollection of their conversation with Mr Rayman where they stated that Nestor wished to pay loan notes. 
215.	I am satisfied there was no substantive offer on the table from either Corporate Services Group or Nestor before they met BDO and Clyde & Co in June 1997. There was no record of the offers in either Mr Perriam’s letter dated 5 June 1997 and in the notes of the BDO meeting on 18 June 1997. The figures mentioned in these two documents referred to Mr Perriam’s valuation of the business and what the Appellants expected to receive from the sale of Grosvenor. If substantive offers have been made, I would have expected them to have been recorded in the documents which were drafted close to the supposed date of the offers. The purported conversation with Mr Rayman about Nestor offering just loan notes was not corroborated by a contemporaneous record of the meeting. Mr Rayman supplied a witness statement to the Tribunal, the contents of which were not accepted by the Respondents. The Appellants chose not to call Mr Rayman to call evidence. In those circumstances I disregarded Mr Rayman’s witness statement. I considered Mrs Coll’s diary a flawed document.  Many entries in the diary were rudimentary and conveyed no sense on their own. Mrs Coll acknowledged that she used the diary as a jotter with some entries having no connection with the date under which they were recorded. I was not satisfied that the entries recorded on the 4 and 18 June 1997 represented offers from Corporate Services Group and Nestor.
216.	My interpretation of the various meetings with their advisers in June 1997 was that the Appellants were developing their negotiation strategy for the sale of their business and setting the scene for subsequent events. They obtained a valuation of the business and formed a view that there was more than one purchaser for the business. The tax advice from BDO identified that a pre-sale dividend was a real possibility with potential tax savings. They faced a large tax bill on the balance of the proceeds with the scope for reducing the tax liability limited by their desire not to start another business. A sale requiring loan notes as consideration emerged from the meeting with BDO as a viable option for reducing tax on the gains. Further they were advised about the tax benefits of non-residency, particularly in relation to capital gains. At their first meeting with BDO they were reluctant to emigrate because of their young family. The Appellants’ conversation with Mr Rayman improved their understanding of loan notes.  
217.	I am satisfied that Corporate Services Group made their first offer to purchase Grosvenor on 15 July 1997 which was supported by documentary evidence of a telephone conversation between Ms Pearson and Mr Perriam, and the correspondence between Mr Hemmington  of BDO and  Mr Abrahamson of Corporate Services Group. I place weight on the contents of Mr Abrahamson’s letter which clearly indicated that it was the Appellants who  were dictating the terms of the sale by asking for a substantial part of the consideration in loan notes and linking  the redemption date of some loan notes to when their  children finished schooling.
218.	Likewise I find that Nestor made its first offer for the business on 12 August 1997, and not on 18 June 1997 as alleged by the Appellants. I am satisfied that this was the case because it conformed with Mr Perriam’s preferred strategy of dealing with one purchaser at a time. The offer from Corporate Services Group on 15 July 1997 cleared the way for discussions with Nestor. Also the offer on 12 August 1997 was documented by correspondence between the parties, whereas the alleged offer on 18 June 1997 was not. The Appellants stated a meeting took place on 22 July 1997 with Nestor when they refused their alleged offer of 18 June 1997. The Respondents were sceptical about the existence of this meeting. In my view it was not critical to the case whether a meeting was held on this day. I am, however, not convinced by the Appellants’ evidence that at the meeting they refused Nestor’s offer and instead insisted on a cash offer. The Appellants’ account of the 22 July meeting  was based on an entry in Mrs Coll’s diary which simply recorded 8am = Clifton; BNA some in cash. The entry was capable of several interpretations.  The reference to cash may have referred to a pre-sale dividend.  What was clear from the correspondence dealing with Nestor’s offer on 12 August 1997 was that the Appellants were driving the bargain in terms of the level and form of the consideration. This was confirmed by Mr Chapman’s response of 14 August 1997 when he expressed his interest in learning from the Appellants of their preferred form and timing of the consideration, and his dismay of the dividend distributions which would dilute the assets of the business.
219.	This pattern of the Appellants initiating the form and timing of the consideration persisted throughout the negotiations. They secured a higher price from Nestor, bank guarantees for the loan notes, and changes to their redemption dates. The Appellants also planned to alter the respective proportions of the loan notes between themselves but changed their minds for reasons outlined later.
220.	Loan notes were an integral part of the Appellants’ strategy to reduce the large tax liability on the gain arising from the sale of Grosvenor shares. As already noted Mr Perriam urged them to take specialist advice to avoid capital gains tax. Mr Chapman indicated in his letter of 22 August 1997 that Nestor appreciated that the Appellants may wish to take into account tax planning considerations. The Appellants were alerted to the tax saving potential of loan notes and their fit with their personal objectives for the sale at their first meeting with BDO on 18 June 1997. 
221.	The Appellants understood the advice given to them by BDO. The Appellants’ purported separation agreement under which Mr Coll acquired the majority shareholding in Grosvenor coupled with his intended non-resident status embraced the tax saving features of loan notes and non-resident status. Mrs Coll’s evidence that they alone determined the terms of their purported separation agreement reinforced the view that the Appellants had weighed up the significance of the advice given to them by BDO on 18 June 1997 and came to their own conclusions about the best way to avoid tax.    
222.	From 15 August 1997 the bulk of the Appellants’ tax planning related to Mr Coll taking loan notes and deferring United Kingdom capital gains tax at the time of the sale and having the loan notes redeemed when he became resident in the Republic of Ireland.  The BDO report of 26 August 1997 highlighted that breaking United Kingdom residence was the most well known tried and tested method of avoiding capital gains tax absolutely. The report concluded that the most appropriate action for the Appellants was for them to take loan notes on the sale of Grosvenor enabling Mr Coll to avoid tax altogether by emigrating, and for Mrs Coll to defer tax liability until loan notes were redeemed.  The importance placed by the Appellants on the tax saving element of the deal was demonstrated by their intention to make Inland Revenue clearance from capital gains tax a condition precedent of the contract for sale. 
  
223.	Mr Scott of BDO made the Appellants aware of the review of capital gains tax undertaken by the Government which in Mr Scott’s opinion could result in a lower capital gains tax rate for long term gains in the March 1998 budget. The Appellants negotiated a change to the proposed redemption dates for the loan notes which reduced the overall period over which the loan notes would be redeemed but put back the first redemption date from 30 March 1998 to 30 September 1998. The delay in the first redemption date gave the Appellants further time to consider their options before incurring a capital gains tax liability on the cashing in of loan notes, and also to take advantage of changes to capital gains tax introduced by the March 1998 budget. 
224.	I found Mr Collison’s evidence on the financial position of Nestor at the time it acquired Grosvenor persuasive. He found no evidence from the examination of Nestor’s accounts that it was experiencing cash flow problems at the time of the Grosvenor acquisition. Mr Collison considered that Nestor in 1997 was a highly profitable business. Mr Collision agreed with the Appellants that Nestor would require funding from its overdraft if it had paid cash for the purchase of Grosvenor shares. I did not consider Mr Collison’s admission supported the Appellants’ submission that Nestor could not have funded the Grosvenor acquisition with cash.  Although Mr Collison did not know the limit of Nestor’s overdraft facility in 1997, he pointed out that Nestor’s overdraft increased from £1.8 million at the end of 1997 to £9.1 million at the end of 1998 without apparent difficulty. This suggested that a facility would have been available to Nestor to purchase Grosvenor by  means of cash. Also Mr Collison made the related point that when Nestor issued loan notes, these would have been regarded by their bankers as equivalent to the use of its overdraft facility.
225.	Mr Collison’s analysis of the 90 acquisitions made by Nestor from 1998 to 2007 which showed that Grosvenor was the only acquisition out of the 90 satisfied wholly in loan notes was compelling evidence undermining the Appellants’ submission that loan notes were the norm.  I consider Appellants’ counsel’s attempt to minimise the impact of Mr Collison’s analysis by dividing the acquisitions into three separate time periods was not persuasive. Equally his argument that Nestor derived specific benefits from loan notes, namely lower interest rates and providing a guarantee for sale warranties, did not explain why Nestor would insist on loan notes in the Grosvenor acquisition when its other acquisitions were settled in cash or a mixture of cash, shares and loan notes. 
226.	I conclude from the above findings that the Appellants’ evidence of Nestor initiating the consideration for Grosvenor in the form of loan notes unreliable, and that it was the Appellants who required loan notes.  Their assertion of Nestor insisting upon loan notes was not corroborated by third party evidence. In contrast the picture painted by the documentary evidence was one of the Appellants dictating the form and timing of the consideration, including loan notes. At an early stage they received advice on the tax implications of the  sale of their business which identified a potentially large tax liability and the options to avoid that liability. Many of the options were ruled out by their desire not to start another business, which left loan notes and non-residency as the only viable options. The Appellants clearly understood this as it was reflected in the terms of their separation agreement upon which they decided without outside assistance.   The offers from Corporate Services Group and Nestor happened after the Appellants had received tax advice, and the terms of those offers particularly Nestor reflected the tax advice given: pre-sale dividend and loan notes.  Mr Collison’s evidence of the strong financial position of Nestor and of its established strategy of paying cash for acquisitions was the final piece of the jigsaw which undermined the Appellants’ assertion of Nestor’s cash flow difficulties.
Change of Plan       
227.	My finding that the Appellants initiated the use of loan notes was not the end of the matter. According to the Appellants the transaction was still not caught by section 137 because they held no purpose of becoming non-resident on 20 November 1997. By then the Appellants abandoned their plan to transfer the majority of the shareholding to Mr Coll, and for him to live in the Republic of Ireland because they had reconciled their marital differences. The Respondents contested the validity of the Appellants’ submissions. They considered that the Appellants came up with the idea of a divorce to secure a favourable response from the Inland Revenue in respect of their clearance application. Their reason for abandoning the plan for Mr Coll to become non-resident had nothing to do with a reconciliation but the refusal of the clearance application. Finally the evidence demonstrated that they held a continuing intention to become non-resident on 20 November 1997.
228.	I will deal with the evidence on the issue of divorce and reconciliation first.  I am satisfied that the Appellants were experiencing difficulties with their marriage in 1996 and 1997. Ms Duthie provided a third party statement that the Appellants had received marriage counselling from her in 1996. The Appellants’ solicitor, Mr Taylor, supplied several letters indicating that he discussed with the Appellants their marital difficulties. I also found the Appellants’ explanation for the cause of their difficulties plausible. They explained that the demands of their business meant they had no time for each other generating tensions in the relationship. Finally I consider that the state of their marriage was one of the reasons for wanting a sale of their business. They rejected Mr Perriam’s advice to delay the sale for one year in the expectation they may get a better price.
229.	I am not convinced, however, about the firmness of their plans to separate. The Appellants adduced no evidence that they had taken positive steps to transfer their interests in real property. Mr Coll had conducted no research on his proposed move to the Republic of Ireland. Equally their evidence of reconciliation on the 7 November 1997 was problematical. Mrs Coll was clear about the events of that day, whereas Mr Coll could not recall the name of the restaurant attended. Mr Coll asserted that he told Mr Scott on 8 November 1997 of the reconciliation and that he was not now going ahead with his move to the Republic of Ireland. Ms Pearson confirmed that BDO held no record of the conversation. 
230.	The Respondents placed weight on  inconsistencies in the Appellants’ evidence to back up their submission that the Appellants’ alleged separation, decision to divorce and reconciliation were a sham, driven not by genuine personal issues but rather by tax considerations. The inconsistencies included Mrs Coll’s statement to Ms Pearson on 11 August 1997 that Mr Coll was moving out of the family home the following day, Mrs Coll’s answers to Mr Wood’s questions about the state of her marriage, and the Appellants’ statement in the PwC Hansard report that they reconciled their differences after receiving counselling from Ms Duthie. 
231.	I find that the Appellants’ plans to separate were at a preliminary stage, and there may have been a reconciliation of their differences on the 7 November 1997. However, I concluded that the relevance of the acts of separation and reconciliation to the section 137 dispute minimal. The key feature of the separation was not the act of separation but the terms of the proposed separation which was dominated by tax considerations and demonstrated the Appellants tax avoidance purpose for the loan notes. 
232.	The key issue in respect of the reconciliation was not whether it happened but whether it was the principal reason for abandoning the plan transferring the majority shareholding in Grosvenor to Mr Coll. The Appellant held the burden on the balance of probabilities of establishing this fact. The Appellants’ case was weakened by the absence of a record held by BDO of Mr Coll’s purported telephone call with Mr Scott advising about the reconciliation.
233.	 The Respondents relied on the close temporal connection between the Special Commissioners upholding of the refusal of the clearance application which was communicated to Mr Coll on the 18 November 1997, and the decision to complete the sale on the 20 November 1997. The Respondents pointed out that the very next day after 18 November 1997 the Appellants’ solicitors wrote to Wedlake Bell stating that “The vendors are not exchanging shares and property between themselves prior to completion”. If the Appellants had abandoned their plan following their reconciliation, why wait until the 19 November 1997. Also Wedlake Bell’s fax of 11 November 1997 indicated that completion was due on 14 November 1997, which would have presented no problem if the Appellants had in fact abandoned their plans on 7 November 1997. 
234.	The Appellants adduced no evidence to displace the close temporal connection between refusal of clearance and the sale completion. The reliable evidence suggested that they were waiting for the outcome of the clearance application before deciding. On balance I find that the Appellants altered their original plan giving majority shareholding  to Mr Coll and residence in Republic of Ireland because clearance was refused.
235.	I make no decision under the section 137 dispute about whether the  divorce and reconciliation were a sham. I consider this issue was relevant to the penalty dispute. If I made findings of fact on the sham nature under the section 137 dispute it would unfairly displace the burden of proof which was on the Respondents in the penalty dispute.
Intention as at 20 November 1997
236.	The final aspect of the factual matrix for this Appeal was whether the Appellants had an intention as at 20 November 1997 to redeem the loan notes whilst non-resident so as to avoid capital gains tax. According to the Appellants they abandoned their plan of Mr Coll living in the Republic of Ireland on 19 November 1997. The Appellants then reverted to the original position of each exchanging 50 shares for loan notes to the value of £1.25 million. The fact that they took up Belgian residency on 17 September 1998 and, thereby, redeeming the loan notes whilst non-resident was not relevant to the issue of their intentions at 20 November 1997. The Appellants asserted that it was impossible for them to have held an intention to reside in Belgium as the Belgian route only became available from 17 March 1998 as a result of changes made by the Finance Act 1998. Appellants’ counsel pointed out that treaty non-residence was neither a conceptual nor a practical possibility on 20 November 1997.
237.	I consider the fact that the Appellants adopted the Belgian route cannot be disregarded entirely as suggested by the Appellants. They took up residency in Belgium as part of a tax planning scheme to avoid capital gains tax, which was only possible because the Appellants received loan notes in consideration for the sale of their shares in Grosvenor. The relevance of the Belgian route took on more significance when viewed in the context of the abandoned plan in which Mr Coll was prepared to become non-resident so as to enable him to cash in the loan notes free of UK capital gains tax. Thus prior to the 20 November 1997 the Appellants were aware that non-residency was an established form of tax planning in respect of capital gains, which they achieved when they moved to Belgium.  
238.	The adoption of the Belgian route may have been coincidental, a chance occurrence of events as stated by the Appellants but its similarity to the abandoned plan in respect of the mechanics of avoiding capital gains and its execution prior to the first redemption date for the loan notes demanded an explanation from the Appellants.
239.	The Appellants asserted that the abandoned plan and the Belgian route were unconnected. As at 20 November 1997 they had reconciled their marital differences and looking forward to a life together with their family. Their initial contact with PWC did not happen until April 1998 when they held   a meeting with Ms Leonard of PwC to sort out their USA tax returns. The Appellants told her that they had sold their company giving rise to Ms Leonard’s suggestion of a meeting with Mr Curran of PWC about the potential capital gains tax liability. 
240.	The impression given by the Appellants about their meeting with PwC was that they were not actively seeking advice regarding the tax position of their gains from the Grosvenor sale. They also pointed out that at the meeting with Mr Curran on 15 June 1998 they indicated their preference for reducing the tax liability from 40 per cent to 23 per cent rather than aggressive tax planning. In their view these facts militated against them holding a continuing intention to become non-resident.
241.	The Appellants’ explanation of a chance meeting with PwC was brought into question by the notes of a telephone conversation between Mrs Coll and Mr Renehan on 26 June 1998 which recorded that Mrs Coll should have dealt with PwC from day one. Mrs Coll explained that they got involved with BDO following a recommendation from one of the partners at Clyde & Co. However, Mr Rayman, subsequently suggested that the Appellants went to PWC for advice. 
242.	Mr Rayman acted as the Appellants’ solicitors in the Grosvenor sale and was aware of the tax advice given by BDO. On 7 November 1997 Mr Scott wrote to Mr Rayman with a copy to the Appellants stating that even if the clearance application was rejected it remained Mr Scott’s opinion that section 135 TCGA 1992 still applied to the transaction and that the Appellants would not be treated as disposing of their shares for capital gains tax purposes until they redeemed the loan notes. Mr Scott qualified his advice in the last paragraph stating that section 135 would apply if the Appellants remained in the United Kingdom.
243.	The reference to Mr Rayman recommending PwC in Mrs Coll’s conversation with Mr Renehan casted doubt on the Appellants’ evidence that their meeting with Mr Curran of PwC was a chance event. The 7 November 1997 letter was significant in two respects. First, it confirmed that the Appellants would not be prejudiced immediately by a huge tax bill if they abandoned the original plan of Mr Coll becoming resident in Republic of Ireland. The Appellants had already secured deferment of the first redemption date of the loan notes. In short they bought time to consider their options. Second, the reason why Mr Rayman elicited the 7 November letter from Mr Scott was not documented. The most plausible explanation was that the Appellants instructed him to obtain this information from Mr Scott which suggested that they were not confident with BDO’s tax advice. This explanation would fit with Mr Rayman advice to use PwC as their tax advisers, which if correct would indicate that the Appellants were considering alternative tax advice before completion of Grosvenor sale.
244.	The evidence of the Appellants’ appetite for aggressive tax planning was contradictory. They initiated the original plan of Mr Coll holding a majority shareholding and non-residency despite advice that it would come under close scrutiny of Inland Revenue. The notes of the 15 June 1998 meeting with PwC also stated that they were prepared to take risky routes, and that at the end of the meeting it would appear that the Appellants had decided upon the risky strategy of the Belgian route.
245.	The Appellants’ action of putting their family home on the market in January 1998 soon after the sale of their business and moving into rented accommodation was indicative of an intention of preparing for a move abroad. The Appellants’ reasons for purchasing the View Road property included a nursing home and renting it out as four flats. I find that the Appellants were not seriously considering setting up a nursing home. Mrs Coll accepted that the View Road property was not suitable, requiring considerable investment to bring it up to standards required for a nursing home. Further, the prospect of starting up a new business which would involve 24 hour care of the residents went against the Appellants’ stated desire to ease down after the Grosvenor sale. I consider the most likely scenario was that the Appellants purchased View Road  with the immediate intention  of letting the four flats in the property and then at  some time in the future of converting it to a family home which is what happened. The family home project, however, was long term requiring planning permission and then extensive building work which meant that they were not tied down to a fixed residence following the Grosvenor sale, which paved the way for a move overseas. 
246.	The prospect of the Appellants uprooting their family and living outside UK did not hold any particular fears for them. The Appellants had worked abroad, most recently in the USA where they also lived with their young family from   Autumn 1992 to Spring 1995.
247.	I found the Appellants’ admissions to Mr Wood in interview about their plans to go to Europe telling in respect of a continuing intention of living abroad. In the first interview of 27 February 2004 which was tape recorded Mrs Coll stated that they originally planned to go to Europe and that it would be better for the children. Mr Coll saw a move outside UK as an opportunity to use their skills which they were prevented from exercising in the UK by a covenant in the Grosvenor sale agreement restricting them from operating a business in the UK for three years. Mrs Coll in the interview on 29 June 2005 stated that they had been considering leaving UK to live in Europe and that they had already sold their house before approaching PwC for tax advice.  The Appellants offered no satisfactory explanation for their admissions about Europe other than they were inaccurate, and that they only intended to move to Europe when their children were older.  The Appellants were in difficulty in challenging the accuracy of the first interview, as it was a transcript of a tape recorded interview. Mrs Coll’s statement in the 29 June 2005 interview bore close similarities to what she said on 27 February 2004. 
248.	I find the Appellants’ adoption of the Belgian route was not a chance occurrence but a fulfilment of their intention as at 20 November to redeem the loan notes at a time when they were not resident in the UK. I accept that as at 20 November 1997 the Appellants did not have an intention of residing specifically in Belgium. They did, however, have as at 20 November 1997 an intention of living outside UK so as to avoid capital gains tax on the redemption of loan notes. My conclusion was supported by the following  findings:
(1)	 They knew of the benefits of non-residency as a tax planning tool.
(2)	They were prepared to execute tax planning based on the non-residency of Mr Coll.
(3)	They were aware before 20 November 1997 that their liability to capital gains tax on the sale proceeds would be deferred until they redeemed the loan notes. They suffered no disadvantage in abandoning their original plan and looking at more suitable options. 
(4)	They bought themselves time to consider alternative non-resident routes by deferring the first date of redemption for the loan notes. 
(5)	 They were dissatisfied with BDO’s tax advice, and decided after consulting their solicitors to seek advice from PwC probably around the time of the Grosvenor sale.
(6)	The marketing of their family home soon after the sale of the business was a manifestation of  their intention to reside abroad.
(7)	 The prospect of living abroad held no fears for them. 
(8)	Their admissions to Mr Wood  about living in Europe.
Summary of Findings
249.	I have approached the section 137 dispute on the footing that the Appellants were required to prove on the balance of probabilities that on the 20 November 1997 the exchange of shares for loan notes did not involve a scheme or arrangement which had as its main object or one of its main objects the avoidance of capital gains tax. It was not necessary under the section 137 dispute for me to determine whether the Appellants acted fraudulently or dishonestly.
250.	The central events in this dispute occurred about 11 years prior to the hearing.  The passage of time would undoubtedly have had an effect on witnesses’ recollection of events. The Appellants’ chronology depended largely upon the entries in Mrs Coll’s diaries. The inherent weaknesses of relying upon human memory to recall events of such age were compensated by the bundles of documents which covered in detail the critical milestones in the case. The quality of the documentary evidence and the answers given in cross-examination enabled me to test the plausibility of the Appellants’ case against the required standard.
251.	The Appellants’ case was based upon the occurrence of known events from which propositions were derived to demonstrate that the exchange of shares for loan notes did not fall foul of the requirements of section 137 TCGA 1992. The principal propositions critical to the Appellants’ case were that they had no choice but to accept the loan notes, their original plan to avoid capital gains tax was aborted prior to the completion of the sale of Grosvenor shares and that their subsequent adoption of the Belgian route was coincidental and had no connection with what went on before 20 November 1997. The Appellants relied principally on their  testimonies to back up the propositions. They called one witness, Ms Pearson from BDO.
252.	Counsel for the Appellants summed up their evidence “that in the course of robust and probing cross-examination not a single inconsistency between their evidence and the documentation, let alone a significant inconsistency has been demonstrated”.  I disagree with counsel’s assessment of the reliability of the Appellant’s evidence which was found wanting in key areas, and identified in my findings on the facts.
253.	In summary I found the following facts:
(1)	 The Appellants’ evidence of Nestor initiating the consideration for Grosvenor in the form of loan notes was unreliable. On balance it was the Appellants who required the consideration for the sale of Grosvenor to be structured in loan notes.  They chose loan notes because of their potential to reduce the significant tax liability on the gains arising from the sale of the shares. 
(2)	The Appellants’ original plan of Mr Coll holding majority shareholding and residence in the Republic of Ireland was abandoned because Inland Revenue clearance was refused.
(3)	As at 20 November 1997 the Appellants held an intention of residing outside the UK with a view to redeeming the loan notes when non-resident so as to avoid capital gains tax on the disposal of  shares in Grosvenor. 
The Application of Section 137 TCGA 1992 to the Facts
254.	The construction of section 137 TCGA 1992 was considered in the High Court decision of  Snell v The Commissioners for HM Revenue and Customs [2007] STC 1279. The facts of this case were that the appellant taxpayer sold his shares in a company and the bulk of the consideration was paid in loan stock.  He subsequently left the UK.  He redeemed the loan stock while resident in the Cayman Islands.  He claimed the benefit of section 135 TCGA 1992 which was rejected by the Special Commissioners and their rejection was upheld on Appeal to the High Court.
255.	The purpose of the legislation was summed up in the headnote to  Snell:
“Although the purpose of the legislation was not to tax non-residents, it was one thing for a person to enter into an exchange of shares knowing that the consequence might be that no tax would ultimately de paid, but it was another for a person to enter into the exchange of shares with the main purpose that no tax should be paid as a result of obtaining a particular relief in a later year.  If, at the date of the exchange of shares, one of the taxpayer’s main purposes was that capital gains tax should not be paid because the loan stocks would be redeemed while he was non-resident, that was avoidance of liability to capital gains tax within s 137”. 
256.	Under section 137 TCGA 1992 a share exchange did not constitute a disposal for capital gains provided two conditions were met, namely the exchange was effected for bona fide commercial reasons and did not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, [was] the avoidance of liability to capital gains tax. In this Appeal it was common ground between the parties that the share exchange was effected for bona fide commercial reasons.
257.	The dispute in this case was that the share exchange for loan notes formed  part of a scheme or arrangement of which the main purpose, or one of the main purposes, [was] the avoidance of liability to capital gains tax. 
258.	Sir Andrew Morritt, C stated at paragraph 13  that the statutory test  involved two findings of fact:
(1) was the exchange part of a scheme or arrangements and if so what were they?
(2) did the purposes of such scheme or arrangements include the purpose of avoiding a liability to capital gains tax and if so was it a main purpose?
259.	At paragraph 28 Sir Andrew Morritt C decided upon the meaning of a scheme or arrangement:
“The ordinary meaning of the word “scheme” is “a plan of action devised in order to attain some end”.   Similarly an arrangement is “a structure or combination of things for a purpose” … Accordingly, unless Mr Snell had the purpose of becoming non-resident as at 21 December 1996 so as to link the acceptance of loan notes on that day with their redemption when non-resident after 5 April 1997, there cannot be a relevant scheme or arrangement for the purpose of s 137”.
260.	Sir Andrew Morritt C approved the submissions for Revenue on the role of the tax payer’s purpose in determining the statutory test:
“Counsel for Revenue observes that the purpose of Mr Snell is relevant to the identification of the elements of the scheme or arrangements. Once the scheme or arrangements have been identified then it must be ascertained whether their main purpose is the avoidance of liability to capital gains tax. The purpose of Mr Snell may be relevant to the latter question if it is not self evident from the nature of the scheme or arrangements themselves. In neither case ….. is it necessary that the purpose of Mr Snell should be final and unalterable”. 
261.	In respect of main purpose to avoid capital gains tax Sir Andrew Morritt observed at paragraph 36:
“ Section 137 is concerned with the terms on which a liability to capital gains tax may be deferred. It provides for a right of deferral to be lost if it is to be used for the purpose not of deferral but of avoidance altogether. If that is a main purpose of the scheme or arrangements it matters not whether the scheme etc was formed for purposes of tax mitigation, avoidance or indeed evasion”.
262.	In respect of this Appeal I find that the Appellants after receiving advice on reducing substantially their tax liability on the proposed sale of Grosvenor shares decided upon a scheme where they required that the consideration for the shares should be in loan notes with the intention of redeeming most of the loan notes during a period of non-residency. The purpose of those arrangements was to avoid capital gains tax altogether on most of the loan notes. The original plan involved the transfer of majority shareholding to Mr Coll with him taking up residence in the Republic of Ireland. This specific plan was abandoned immediately before completion of the share sale because the Special Commissioners upheld Inland Revenue’s refusal of the clearance application. The Appellants, however, as at the date of completion of sale on 20 November 1997 retained their intention to redeem the loan notes when they were non-resident. Despite the refusal of clearance, they knew that section 135 TCGA 1992 applied to the transaction so they did not have to pay capital gains tax immediately on the disposal of the shares. They bought themselves time to consider alternative non-resident routes by deferring the first redemption date of the loan notes. They took immediate steps after the sale of their business to break their ties with the United Kingdom by putting their family home up for sale with no intention of establishing straightaway a replacement family home in the UK. They sought advice from another firm of tax advisers who identified the Belgian route. They realised their intention of redeeming the loan notes when they were non- resident by moving to Belgium before the first redemption date. They redeemed the loan notes when they were resident in Belgium and did not account for capital gains tax on the disposal. 
263.	I am satisfied that the above findings constituted a scheme or arrangement within the meaning of section 137 and that the main purpose of the arrangements was to avoid liability to capital gains tax. The fact that the Appellants had not finalised the details of the alternative non-resident routes as at 20 November 1997 did not affect my analysis that section 137 TCGA 1992 applied to the transaction. The critical finding was that they had a substantive intention to become non resident which was demonstrated by their subsequent actions.  A requirement that the Appellants had crossed the t’s and dotted the i’s   on the non-residency arrangements as at the date of exchange would defeat the anti-avoidance purpose of section 137. In this respect I adopt Respondents’ counsel’s  construction of taxing statutes based on Lord Nicholls’ dictum in Barclays Mercantile v Mawson [2005] 1 AC 684 paragraph 36:
“The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”.
264.	I, therefore, dismiss the Appellants’ appeal on section 137 dispute.  I make no decision on the quantum of the assessment which was not aired before me. I give leave to the parties to refer the issue of quantum back to the Tribunal if the quantum cannot be agreed between the parties.
265.	I make no decision on the alternative arguments put forward by Respondents counsel which considered different factual scenarios: Appellants temporarily giving up the idea of moving abroad; and Appellants taking advantage of additional years annual exemptions or future lower tax rates.
The Penalty Dispute
266.	The penalty determinations in the sum of £425,000 against each Appellant issued on 13 December 2007 related to the 1997/98 tax returns. 
The Respondents’ Initial Case
267.	The Respondents case as revealed in their “Statement Regarding Allegations of Fraud”:
“The Appellants acted fraudulently when they delivered their personal tax returns for 1997/98, in particular:
a)	Both returns disclosed the disposal of Grosvenor to Nestor, on the basis that no gain arose in 1997/98.
b)	The notes on page 8 of the tax returns the Appellants stated incorrectly that the disposal of the shares in Grosvenor Nursing Agency Limited was made as an approved paper for paper transaction under section 138 TCGA 1992 which received Inland Revenue clearance during November 1997 (ref no CGT248/2193/97)”.
268.	The Respondents also relied on a statement made by Mr Lavery in the Hansard report dated 13 October 2004 which said:
“The loan notes were issued as an approved paper for paper transaction under section 138 TCGA 1992. These loan notes were disposed of on two separate occasions, the first on 31 October 1998 for £500,000 each and the second on 31 March 1999 for £750,000 each.”
269.	Mr Lavery’s report was accompanied by statements from each Appellant, as follows:
“I have also read and understood the report dated 13 October 2004 prepared on my instructions by P Lavery and adopt it as my full disclosure in accordance with the practice outlined in the Chancellor’s reply (Hansard Statement)”.
270.	The Respondents further alleged that the Appellants knew that the section 138 clearance application had been refused and that their subsequent Appeal against clearance had been rejected by the Special Commissioners. Thus the Respondents’ position was that the Appellants knew these statements to be false and were made with the intention of evading the capital gains tax properly due from them. In the alternative the Respondents contended that the Appellants were negligent when they delivered the returns.
Development of the Respondents’ Case on the Evidence
271.	The Respondents contended that the Appellants misled PwC into believing that clearance had been granted when PwC completed the 1997/98 returns on the Appellants’ behalf.  The Respondents backed up their allegation by referring first to untruths that they said the Appellants made during the course of the SCI investigation and at the hearing which were:
(1)	Misleading BDO and Inland Revenue in the clearance application about their separation and divorce. The Appellants perpetuated their deceit by lying under oath on these matters at the hearing.
(2)	Misleading BDO and the Respondents about Nestor initiating the loan notes. The Appellants lied to PwC and the Respondents about this in the Appendix 7 statement to the Hansard report.
(3)	The Appellants lied to PwC and the Respondents in their Appendix 7 statement in numerous other respects. The most blatant lies concerned the Appellants not receiving any financial advice prior to their meeting with BDO on 15 August 1997.
(4)	Mrs Coll lied to Mr Wood during the Hansard interview on 29 June 2005 about receiving tax advice and about her state of knowledge regarding the tax liability on the share sale. 
272.	The Respondents submitted that the Appellants’ catalogue of untruths provided the context for interpreting their evidence which went directly to the question whether they misled PwC about the granting of clearance.
273.	The Respondents contested the truth of the Appellants’ assertions that they told PwC that clearance had been refused.  The Appellants did not mention this fact in their witness statements. It was contrary to their counsel’s opening remarks that it was an unspoken assumption on the part of PwC that clearance had been granted. The notes of their first meeting with PwC on 15 June 1998 did not refer to the clearance application.  Mr Coll’s evidence that he handed over the clearance documents to PwC at the first meeting was not supported by the correspondence which indicated that details of the clearance were sent on 6 July 1998. Further the Appellants did not give authority to PwC to ask BDO for their file on the tax advice given. Finally the Appellants did not correct the blatant error about the grant of clearance in Instructions to Counsel drafted by PwC about the Belgian route.
274.	The Respondents concluded that if I found that the Appellants acted fraudulently the penalty set at 85 per cent of the tax due should be upheld or increased to 100 per cent in light of their repeated lies under oath. If on the other hand, I found that the Appellants acted negligently the penalty should remain at 85 per cent because the statements in the 1997/98 tax were made with a high degree of negligence and regard should be had to their lies under oath.
 The Appellants’ Case  
275.	The Appellants relied on the 6 July 1998 documentation to PwC which showed that they had provided PwC with copies of the clearance application and the refusal of clearance by Inland Revenue. Thus as far as they were concerned PwC was aware of the refusal of clearance before they prepared the draft instructions to counsel on the Belgian route and the 1997/98 tax returns. The Appellants considered that the documentation supported their evidence that they told PwC about the correct status of the clearance.
276.	The Appellants stated that they carefully checked their returns which reported the acquisition of loan notes. They noticed the specific reference to having obtained clearance in respect of the share sale. The Appellants believed the statement to be correct. They disclosed to PwC the full information about the clearance application. The Appellants paid PwC handsomely for their tax expertise.  The Appellants did not understand the technicalities associated with clearance applications. They had no previous experience of selling a business. Grosvenor was their first business sale. BDO advised them in the letter of 7 November 1997 to Mr Rayman that despite the refusal of clearance the sale of Grosvenor shares for loan notes was a paper for paper transaction and did not constitute a disposal for capital gains tax. The Appellants believed that PwC had checked with BDO about the clearance application. The Appellants considered they were entitled to rely on PwC expertise in completing their returns accurately.  In short they acted honestly and in good faith when they signed the 1997/98 tax returns.
Reasons for Decision 
277.	My decision related to the incorrect statement about the disposal of the Grosvenor sales in the 1997/98 returns. Some of the documents received during the Appeal appeared to link the penalty to the 1997/98 and 1998/99 returns. I received no direct evidence on the 1998/99 returns which were not included in Volume 1 of the Hearing Bundle – Appeal Documentation. 
278.	Under section 95(1) TMA 1970 the Appellants are liable to a penalty if they acted fraudulently or negligently when they made the incorrect return for 1997/98. Unlike the wording of section 29 and section 36 of the TMA 1970 the liability under section 95(1) is not triggered by the negligence of another acting on behalf of the Appellants. Thus under the penalty assessment I am concerned with the actions of the Appellants themselves.
279.	As a general rule the outcome of a penalty assessment will be dependent upon the determination of the associated substantive tax dispute. This is why penalty assessments are normally heard at the same time as the substantive tax Appeal (see Jacob J in King v Walden [2001] STC 822), which is reinforced by the wording of section 101 TMA 1970 providing a rebuttable presumption that the findings of the amount in respect of which tax is charged in the assessment arose is sufficient evidence for penalty proceedings.
280.	In this Appeal, however, the Respondents have based their penalty assessment not only on the facts of the substantive dispute but also upon a specific fraudulent or negligent act of the Appellants which did not form part of the factual matrix of the substantive Appeal. Thus my decision that the Appellants’ sale of their shares in Grosvenor constituted a disposal for capital gains opened the gate for the Respondents to defend the Appeal against the penalty assessment, in that a tax loss was established. However, for the Respondents to succeed they would have to demonstrate that the Appellants were fraudulent or negligent in completing the 1997/98 returns. Unlike the substantive Appeals the onus was on the Respondents to show on the balance of probabilities that the grounds for making the penalty assessments were made out and if so the quantum of the penalties was not excessive.
281.	The Respondents’ principal case was the Appellants acted fraudulently in completing their 1997/98 returns. Their fraudulent proposition was derived from the Respondents’ analysis of the evidence which in their view showed that the Appellants misled PwC about the correct status of the clearance application. The Respondents in constructing their case relied on examples of lies perpetuated by the Appellants in the Appeal proceedings which if proved demonstrated a pre-disposition to mislead professional advisers, and in turn supported their allegation of directly misleading PwC.
282.	My starting point is to consider the evidence on directly misleading PwC. At the outset of the hearing on 24 November 2008 the Respondents applied for directions requiring PwC to disclose copies of documents sent by Mr Coll on 6 July 1998, and copies of enclosures with the draft instructions to counsel on the Belgian route. The Appellants in the end did not oppose the Application and gave permission for PwC to disclose the documents requested. 
283.	The disclosure revealed that the Appellants had supplied PwC with details of the clearance application and  refusal of clearance by Inland Revenue which carried the reference number CGT248/2193/97 before the  instructions were sent to counsel and completion of the 1997/98 returns by PwC on behalf of the Appellants.  The fact that the Appellants supplied the information undermined the Respondents’ allegation of fraudulent conduct. 
284.	The Respondents’ response to the disclosure was four pronged. First they pointed out that the Appellants had not called witnesses from PwC to explain why PwC disregarded the disclosure regarding clearance. I consider that the Respondents’ criticism of not calling witnesses lacked substance. The Appellants had sacked PwC for their purported negligence in handling their tax affairs, and according to the Appellants PwC were not prepared to give its permission for its staff to give evidence on behalf of the Appellants. Further, the Appellants had discharged the evidential burden of showing that PwC was aware of the refusal of clearance, shifting back the evidential burden to the Respondents. Arguably it was for the Respondents to call PwC or apply for a witness summons. 
285.	Second, the Respondents pointed out that Mr Coll did not give PwC a copy of the Special Commissioners’ decision upholding the refusal. I place no weight on this omission Mr Coll provided PwC with BDO’s letter arranging for the Special Commissioners to hear the Appeal which in my view put PwC on notice. 
286.	The third prong was that they lied throughout the hearing and duped their previous tax advisers BDO. The final prong was the evidence which the Respondents said showed that the Appellants had directly misled PwC about the correct status of the clearance application.
287.	 The third prong required closer examination. I dealt with the fact  finding on the substantive Appeal on the footing that the burden of proving  the assessment was wrong rested on the Appellants, and that its determination did not depend upon the Appellants acting fraudulently. Essentially my decision on the section 137 dispute was that the Appellants’ had failed to discharge the burden upon them, their version of the events was not reliable and inconsistent with the whole evidence presented in the Appeal. It did not necessarily follow from my finding that the Appellants were lying. On occasions witnesses can delude themselves in believing they are telling the truth even when they are not.  As I emphasised in the substantive Appeal I was dealing with events which occurred about 11 years ago which would have an effect on the Appellants’ recall  of the precise details of events. 
288.	Under the penalty assessment Appeal it is, however, necessary for me to consider whether my findings in the substantive Appeal supported the allegation of lying bearing in mind that the Respondents have the burden. The Appellants did not know that they were under investigation in respect of their tax affairs until the end of 2003. The Respondents’ concerns about the Grosvenor transaction did not emerge until June 2005. The Appellants’ Hansard statement on the Grosvenor transaction compiled by PwC in December 2005 was largely based on a reconstruction of events evidenced in Mrs Coll’s diary for 1997. I examined the original diary and found it to be a chaotic document, which was fundamentally flawed as a source document. Many entries in the diary were rudimentary and conveyed no sense on their own. Mrs Coll acknowledged that she used the diary as a jotter with some entries having no connection with the date under which they were recorded. Respondents’ counsel rightly pointed out the mistakes in the Appellants’ Hansard statements and the omissions in Mrs Coll’s diary. I am not convinced, however, that the mistakes and the omissions were evidence of the Appellants’ dishonesty. Rather I consider the Appellants were unwise to place so much reliance on a fundamentally flawed document which contributed to the unsatisfactory nature of their evidence on the section 137 dispute.
289.	The Respondents accused the Appellants of fabricating their evidence about   the state of their marriage and potential divorce. I did not consider the state of the Appellants’ marriage a significant fact for the purpose of determining the substantive Appeal. The critical feature of the arrangement  was not the state of the marriage but  the plan to redeem the loan notes when Mr Coll was resident in the Republic of Ireland. I consider that the Appellants’ marriage was in difficulties but their plan to separate was at a preliminary stage. The clearance application exaggerated the marriage difficulties but in my view did not amount to a complete fabrication.
290.	My findings in the substantive dispute about the Appellants requesting loan notes, the doubts held by Mr Scott and Ms Pearson about the information provided by Mr Coll on the loan notes and the Appellants’ continuing intention to leave the United Kingdom were damaging to the Appellants and indicative of a deliberate attempt by them to conceal their true intentions.  
291.	The fact of concealment of their intentions to live abroad did not, however, inevitably lead to a conclusion that the Appellants deliberately misled PwC on the true status of the clearance application. The specific act forming the Respondents’ allegation of fraud took place when the Appellants checked the 1997/98 returns on or around 18 January 1999, some 14 months after they changed the original plan for Mr Coll to live in Republic of Ireland. The critical issue was their state of mind on or around 18 January 1999 not on 20 November 1997 when they completed the sale of Grosvenor shares. Further the fraudulent allegation related to the true status of the clearance application not that they concealed their intentions to move abroad.  The lapse in time between 20 November 1997 and 18 January 1999, and the different subject matter rendered the finding of concealment to live abroad of limited probative value in establishing whether the Appellants misled PwC on the clearance application. 
292.	The direct evidence of duping PwC relied upon by the Respondents consisting of inconsistencies between the oral and written evidence was weak. Essentially the evidence raised doubts about when Mr Coll first shared the information on the clearance application with PwC. 
293.	In their fraud statement the Respondents enlisted in support of its fraud allegation the disclosure about “The loan notes as an approved paper for paper transaction” in the Hansard report dated 13 October 2004 prepared by Mr Lavery. In my view the disclosure did not assist the Respondents’ case as it appeared to be a repetition of the statements made in the 1997/98 tax returns  which in all probability were used by Mr Lavery when compiling the report.   
294.	I conclude that the evidence adduced by the Respondents in support of its allegation of fraud was insufficient to displace the evidence relied upon by the Appellants of having no fraudulent intention when they completed the 1997/98 returns.   Mr Coll’s act of sharing details of the clearance application and its refusal with PwC before it prepared the 1997/98 tax returns was not an act normally associated with a fraudulent intention to deceive the professional advisers. Thus I hold that the Respondents have not satisfied me on the balance of probabilities that the Appellants fraudulently made incorrect returns for the 1997/98 tax year.
295.	The Respondents pleaded in the alternative that the Appellants were negligent in completing their 1997/98 returns.  In the Respondents’ view the facts spoke for themselves. The returns contained a material inaccuracy regarding the sale of the Grosvenor shares. The Appellants were under an obligation to check the accuracy of the returns which they failed to do. In response the Appellants argued that they paid for the services of a leading accountancy firm to complete their returns accurately. They provided PwC with all the necessary information on the clearance application to complete their task. The Appellants had checked the returns and noticed the statement on the clearance application. They were not experts in tax and genuinely believed that the statement was correct. In short the Appellants were entitled to rely upon the expertise of PwC and in so doing had discharged their standard of care in completing the returns accurately.
296.	On the facts presented PwC made a mistake in completing the returns with the incorrect statement about clearance. PwC, however, in its covering letter with the returns asked the Appellants to review their returns and if satisfied with the accuracy of the forms to sign them for onward transmission to  UK Inland Revenue. Although the Appellants noticed the statement on clearance, they did not query the accuracy of it with PwC. The Appellants knew that clearance had been refused and should have confirmed the accuracy of the statement with PwC before signing the returns. The Appellants adduced no evidence that they questioned PwC about its understanding of the clearance application.  In evidence Mr Coll stated that “it did not cross my  mind to ask PwC whether they got it right on the clearance application”. The Appellants assumed that PwC had made a correct return.
297.	Thus I find in relation to negligence that
(1)	The 1997/98 returns contained a material inaccuracy regarding the status of the clearance application which in turn understated the tax due on the transaction.
(2)	PwC drafted the returns with a material inaccuracy.
(3)	The Appellants were under an obligation to check the accuracy of their returns, which they were reminded of by their professional advisers.
(4)	The Appellants knew that clearance for the transaction under section 138 TCGA 1992 had been refused.
(5)	The Appellants saw the statement on clearance in the returns but assumed that it was correct.
(6)	The Appellants did not question PwC about the statement before signing the forms.
298.	I am, therefore, satisfied on the above findings that the Appellants were negligent in completing the 1997/98 returns, and that a penalty was merited. 
299.	Mr Wood decided to abate the maximum penalty of the total tax due  by 15 per cent. He considered that there should be no abatement for disclosure, ten per cent for co-operation which in his view was poor on the part of the Appellants and five per cent for gravity. 
300.	Mr Wood’s assessment of the penalty was understandably influenced by his perception that the Appellants had concealed the true status of the clearance application. This was demonstrated by his 24 August 2005 letters when he first indicated that he was not going to pursue the capital gains tax issue in respect of the sale of Grosvenor shares but withdrew this letter after discovering that clearance had not been granted
301.	Under section 100B of TMA 1970 I have discretion to reduce the penalty if I consider it to be excessive. I decide that the penalty for each Appellant should be 30 per cent of the tax due under the disposal of Grosvenor shares. In reaching my decision I took account of the following factors:
(1)	The size of the penalty should principally be determined by the Appellants’ culpability in relation to the incorrect 1997/98 returns.
(2)	 The Appellants acted negligently rather than fraudulently in completing their 1997/98 returns.
(3)	The Appellants disclosed in the 1997/98 returns the disposal of Grosvenor shares. Their error related to the incorrect statement about the clearance application rather than concealing altogether the details of the transaction.
(4)	The focus of the Hansard enquiry was on the offshore trusts for which a separate penalty was imposed, and the Belgian Route.  The Respondents’ concerns about the status of the clearance application emerged after the 29 June 2005 interview, following which the Appellants co-operated with the enquiry by providing a detailed Hansard report.  
302.	I direct that the parties agree the precise amount of the penalty based on my finding that it should be 30 per cent of the tax due. I give leave to the parties to refer the matter back to the Tribunal in the absence of an agreement between them.  

   

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE:21 April 2009

LON/