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	United Kingdom Special Commissioners of Income Tax Decisions
You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Carvill v HM Inspector of Taxes [2004] UKSC SPC00447 (29 November 2004) URL: http://www.bailii.org/uk/cases/UKSPC/2004/SPC00447.html Cite as: [2004] UKSC SPC447, [2004] UKSC SPC00447

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SPC0047

COSTS – Special Commissioners' power to award costs – Revenue withdrew opposition to appeal shortly before hearing – Appellant claimed costs of proceedings while matter was before Special Commissioners - Matter had been before Special Commissioners for nearly four years – Whether costs claimed by Appellant were costs "of and incidental to a hearing" – Yes – Whether Revenue had acted wholly unreasonably in connection with hearing – Yes – Special Commissioners (Jurisdiction and Procedure) Regulations 1994, SI 1994/1811, reg 21(1)

THE SPECIAL COMMISSIONERS

R K CARVILL Appellant

- and -

K FROST

(HM INSPECTOR OF TAXES) Respondent

Special Commissioner: STEPHEN OLIVER QC

EDWARD SADLER

Sitting in London on 7 and 8 June, 12 and 13 October 2004

Giles Goodfellow QC, instructed by Slaughter & May, solicitors, for the Appellant

Timothy Brennan QC, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2004


 


DECISION

Introduction

1. This is a costs application by Mr R K Carvill. Mr Carvill has applied for an order that the Inland Revenue should pay the costs of and incidental to his appeals against the series of Schedule E assessments for the years 1983/84 to 1995/96 inclusive ("the Appeal Assessments"). The Appeal Assessments for the six years to 1988/89 ("the Early Year Assessments") were issued in February and April 1990; the rest ("the Later Year Assessments") were raised at regular intervals after that.
2. All the Appeal Assessments were duly appealed to the relevant inspector of taxes. They had originally been referred to the general commissioners and on 10 January 2000, at the request of the Inland Revenue, they were transferred, with the consent of the special commissioners, to the special commissioners. From then until December 2003 a number of case management directions were given and contentious applications were made. The appeals were eventually listed for hearing in February 2004 but on 19 December 2003 the Inland Revenue wrote to Mr Carvill's legal advisers, Slaughter & May, informing them that they no longer intended to defend the appeals.
3. The appeals, had they come before us, would have raised two issues. The first, referred to as "the liability issue", was this. Had Mr Carvill, a non-domiciled individual, been performing in the UK the duties of his employment with R K Carvill (International Holdings) Ltd ("IH"), a non-resident company? If so, his emoluments from IH were taxable on the arising and not on the remittance basis. Second, in relation to the years of assessment 1983/84 to 1988/89 inclusive, had the assessments been validly made? This latter issue is referred to as "the validity issue".
4. The tax assessed in the Appeal Assessments was of the order of £5m. The costs claimed by Mr Carvill as being the costs of and incidental to the proceedings before the Special Commissioners are said to be in the region of £1.4m.
5. Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (1994/1811) makes provision for costs in limited cases. It reads as follows:

"21(1) Subject to paragraph (2) below, a Tribunal may make an order awarding the costs of, or incidental to, the hearing of any proceedings by it against any party to those proceedings (including a party who has withdrawn his appeal or application) if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.

(2) No order shall be made under paragraph (1) above against a party without first giving that party an opportunity of making representations against the making of the order.

(3) An order under paragraph (1) above may require the party against whom it is made to pay to the other party or parties the whole or part of the costs incurred by the other party or parties of, or incidental to, the hearing of the proceedings, such costs to be taxed if not otherwise agreed.

(4) Any costs required to be taxed pursuant to an order under this regulation shall be taxed in the County Court according to such other scales prescribed by rules of court for proceedings in the County Court as may be directed by the order or, in the absence of any such direction, by the County Court."

6. The Inland Revenue resist the costs application. There has, they say, been no hearing of any proceedings (other than the preliminary hearings); the Tribunal has therefore no power to make any award. And even if the Tribunal did have such a power, it should not be exercised in the present circumstances; the Inland Revenue have not acted "wholly unreasonably" in connection with the hearing in question. Moreover, argued the Inland Revenue, applications for costs under regulation 21 were made, following directions hearings on 23 March and 25 July 2003. These applications were refused and there was no appeal and no application for judicial review. Those refusals were therefore final and cannot be re-opened.
7. We will deal first with the issue of whether in the present circumstances we have any jurisdiction to make a costs award.

Jurisdiction to award costs

8. The Inland Revenue claimed, as we have already noted, that we have no jurisdiction to award costs in any event, quite irrespective of any question of "wholly unreasonable" actions on their part. The costs referred to in regulation 21 are, they say, the costs of and incidental to the hearing. There was no hearing; therefore there can have been no costs to which the power can apply. Nor was there any hearing of any "proceedings" as defined in regulation 2 by the Tribunal. This is because "Tribunal" is defined in regulation 2 as "the Special Commissioners by whom the proceedings are heard" and there are no special commissioners who have heard the proceedings.
9. Mr Carvill disagrees. It is too restrictive an interpretation and, in particular, it ignores the effect of the words in brackets in regulation 21(1) "(including a party who has withdrawn his appeal …)".
10. We think that we have jurisdiction, in principle, to make a costs award. Regulation 21(1) has been drafted the way it has, not to restrict costs awards in the way the Inland Revenue have claimed, but because of a peculiarity of the "direct" tax appeal system. With disputes about indirect taxes (such as value added tax and customs duties) the appeal lies to the Tribunal which has power to make costs awards "of and incidental to and consequent upon the appeal". See regulation 29(1)(a) of the VAT Tribunal Rules (1986/590). Costs may therefore run from the moment that the appeal has been lodged to the VAT and Duties Tribunal; the corollary is that no professional expenses or other costs incurred during the pre-appeal period in the course of disputing and negotiating with the Customs and Excise may be awarded. With direct (i.e. Inland Revenue) tax disputes the position is quite different. Save in the case of penalty appeals (dealt with in Taxes Management Act 1970 ("TMA") section 100C) the taxpayer's appeal lies to the Inland Revenue. The appeal (covering the matters referred to in section 31(1)) is to be notified in writing within 30 days of, e.g., the issue of the assessment or the notice of amendment; notification is to the "relevant officer of the Board": see section 31A(1)(c). The taxpayer's appeal is then with the inspector or the Board and the "commissioners" (i.e. the general or the special commissioners) are not engaged until the matter is brought before them. In the case of appeals to the special commissioners that may happen by operation of section 46. This brings regulation 3 of the Special Commissioners Regulations into play. Regulation 3 is in Part II of the Regulations entitled "Preparation for a Hearing". Regulation 3 provides that any party to proceedings which are to be heard by the Special Commissioners may serve notice on the clerk that he wishes a date for the hearing to be fixed and the clerk's function is to send out a hearing notice. "Preparation for the Hearing" covers directions, witness summonses, preliminary hearings, postponements and adjournments etc. The Hearing and Determination of the Proceedings is covered by Part III of the Regulations. This covers the sittings and proceedings dealing with costs.
11. What that explanation shows is that the draftsman has, by using the expression "the costs of and incidental to the hearing of the proceedings", been careful to confine costs to those incurred while the special commissioners have jurisdiction over the appeal. Cost incurred in the earlier stages of the appeal proceedings, i.e. while the appeal is being dealt with by the officer of the Board cannot qualify for an award. The expression "costs of, or and incidental to, the hearing of any proceedings" imposes a further qualification. It will not, as Park J observed in Gamble v Rose [1998] STC 1247 at 1257, cover any costs that in some way arise during the period when the special commissioners have jurisdiction. They have to be costs incurred while the matter is before the special commissioners and the matter is being heard or prepared for a hearing. It follows that if, as here, the appeal hearing has not taken place, the costs will nonetheless qualify for an award (always so long as they satisfy both the Gamble v Rose test and the "wholly unreasonable" test). That construction makes sense of the words in brackets in regulation 21(1).
12. In principle therefore we have jurisdiction to entertain Mr Carvill's application for costs. We leave until the end of this Decision the question of whether any award we make now can cover the earlier preliminary hearings. We come therefore to the question whether the Inland Revenue have acted "wholly unreasonably". In Gamble v Rose supra at 1257g Park J observed that it "will be a very rare case where a tribunal can say that a party had acted wholly unreasonably" he went on to say that the "party must act wholly unreasonably – a very exacting standard".
13. Cases where the special commissioners have awarded costs are extremely rare. The Inland Revenue almost never ask for costs. The only case that we are aware of is an advance warning by the Inland Revenue in Mr Carvill's appeal against assessments raised under Income and Corporation Taxes Act 1988 section 739. Mr Carvill, as will appear later, appealed to the Special Commissioners against the earlier section 739 assessments and his appeal was unsuccessful. Before his subsequent appeal to the Special Commissioners against section 739 assessments for later years, the Inland Revenue warned him that they would seek costs against him under regulation 21(1). As it happened Mr Carvill's appeals succeeded and the Inland Revenue did not pursue their costs application – and presumably would have had no grounds to do so.
14. We take the phrase "wholly unreasonably" as we find it, observing only than that the word "wholly" has been used in an emphatic sense.

Events leading to the present claim

15. We now examine the circumstances leading to Mr Carvill's claim for costs. By the time the appeal was due for hearing 19 years had passed from the date of the first year covered by the Early Year Assessments and 13 years had gone by from the time when the Early Year Assessments were raised and appealed (to the inspector).

The 1982 reorganization

16. The history relevant to this application starts shortly after 1982. The Carvill group, of which Mr Carvill had been the major shareholder, was reorganized in 1982. The factual background is set out in the published decision of the Special Commissioner, Dr J F Avery Jones CBE, issued on 20 March 2000. This has been published in [2000] STC (SCD) 143. The business of the group had consisted of the arranging through the Lloyds market of the re-insurance of risks initially underwritten in the United States. The business was brought to the Carvill group by US brokers who procured it in the US. Because of the strengthening of associations between US and UK insurance brokers, the Carvill group feared that, being an independent broker, the source of its business might dry up. Accordingly it mounted a two-stage campaign. The procurement of business in the US from its sources there would be carried out through its directors and employees there. Once procured, that business would be placed in London through its existing undertaking in the UK. The group was reorganized to effect this and the reorganization involved the establishment of a parent company in Bermuda (a centre for international re-insurance business), namely IH.

The dual employment arrangements

17. Mr Carvill, who had previously been employed for overseas work by another company in the Carvill group, entered into an employment agreement with IH. He was paid emoluments by IH for his duties as international business division executive and as director, both of which duties were, according to the agreement, to be performed outside the UK. Another company (resident in Jersey), RKC (Personal Services) Ltd ("Personal Services"), employed Mr Carvill as an executive insurance and re-insurance broker in respect of his UK duties. The tax law at the time gave relief for earnings for work done partly abroad and partly in the UK. In January 1983 Mr Carvill's advisers (Tusons) made a claim for tax relief (the 25% "foreign emoluments deduction") in respect of his earnings from Personal Services.

The first investigation (1983-85)

18. The claim led to a three year investigation by the Inland Revenue Special Office. In the course of the investigation, which lasted from 25 March 1983 to January 1986, the Inland Revenue obtained details of the activities conducted in the UK by Mr Carvill, of the group structure and of the legal arrangements governing Mr Carvill's employments. It was decided by the Special Office, on termination of the enquiry, that the residence position of IH should not be challenged. In the events, Mr Carvill had withdrawn his claim for relief.

Mr Carvill's tax returns

19. In all his tax returns, covering his emoluments, Mr Carvill disclosed that he had obtained earnings from IH for duties performed wholly abroad. Under the heading "Amount received in the UK" relating to those earnings, these were consistently stated to be "Nil". As we understand the position this was a correct method of dealing with income arising to an individual who is resident and ordinarily resident in the UK but domiciled abroad where that individual has been receiving foreign emoluments from an office or employment the duties of which were performed wholly abroad. These emoluments were excluded from Case I of Schedule E by Finance Act 1974 Schedule 2 paragraph 4, and see Taxes Act 1970 section 181 but were taxable within Case III to the extent such emoluments were remitted to the UK. The statutory duty to report the source of income and the amount from each source is laid down in Taxes Management Act 1970 section 8. The duty to report the amount of the emoluments chargeable under Case III of Schedule E was limited to the amount remitted and did not include the amount received. This follows from the fact that the amount received (as opposed to the amount remitted) was not relevant to the amount of the charge under Case III. We mention this point to emphasize the fact that there was no element of concealment on Mr Carvill's part as regards his emoluments from overseas – the point is relevant, as mentioned below, in the context of whether there was "discovery" so as to justify the raising of the Early Year Assessments.

The second investigation

20. This started in February 1988 and led to the Inland Revenue's specialist section 739 investigation group taking over all enquiries. These resulted in (i) the raising of the Early Year Assessments (i.e. the Schedule E assessments on Mr Carvill in respect of his emoluments from IH), (ii) corporation tax assessments on IH raised in February and April 1990 on the basis that IH was resident in the UK for tax purposes and (iii) section 739 assessments, raised in July 1990, on Mr Carvill for the years 1985/1986 to 1988/89. The section 739 assessments related to IH's dividend income received from other companies in the Carvill group. The reasons for raising all these assessments was covered in an internal memorandum of 11 January 1990 from Mr A Bowes of the section 739 investigation group to his manager (Mr Hughes). Mr Bowes gave evidence before us. The circumstances leading to the making of the Schedule E Assessments will be relevant when we come to examine the "validity" issue.

Appeals to the inspector

21. All assessments were appealed. Tusons then corresponded with the Inland Revenue concerning the reasons for raising the Schedule E assessments. The reply given by Mr Bowes in a letter dated 19 June 1990 was to "protect the interests of the Revenue by arranging for the assessments to be raised at the earliest possible date." The same letter goes on to ask of Tusons who exercised or exercises central management and control of IH and where that central control of management was exercised.
22. The Schedule E assessments which, as noted, included the Later Year Assessments all cover the unremitted earnings obtained by Mr Carvill under his employment contract with IH. The assessments were made of the grounds that such earnings were taxable under Schedule E Case I; but on the strength of Mr Carvill's non-domiciled status and his claim that the duties were performed wholly outside the UK from a foreign employer (IH) those earnings were, he contended, "foreign emoluments" and so were excepted from Schedule E Case I. There was no contention by the Inland Revenue that the earnings had been remitted to the UK, i.e. that they were within the Case III charge.

Investigation into residence of IH

23. Starting in mid-1990 there then followed an investigation into the question of where control and management of IH was exercised. We examine this in more detail later. In mid-1991 after a period during which little of any substance occurred, the section 739 Investigation Group passed conduct of the entire investigation to the Inland Revenue Special Office. On 3 September 1991 that office asked for copies of IH's Board minutes and for copies of Mr Carvill's contracts of employment. These were duly supplied in October 1991 and, after nine months of making appropriate enquiries, the Inland Revenue vacated the corporation tax assessments that had been raised on IH and accepted that it was not resident for tax purposes in the UK – a conclusion, it should be recalled, that the Special Office had reached in January 1986.
24. This last event should, we observe, have left a question mark over the status of the Schedule E tax assessments relating to Mr Carvill's work for IH. Because IH was accepted as non-resident, the emoluments could not be taxed under Schedule E Case I on the basis of its residence in the UK. While there had been correspondence between Tusons and the IR Special Office from June 1991 until November 1994 in the course of which questions had been asked and answered about Mr Carvill's employment arrangements, Tusons ultimately ascertained that the reason for raising the Early Year Assessments had been IH's possible residence in the UK.
25. Focusing on the position of the Appeal Assessments at that stage, i.e. 1992-1994, we think that the underlying basis for making them (i.e. the purported UK residence of IH) had proved to be without foundation and that the justification that had so far been advanced by the Inland Revenue was no longer there. The Inland Revenue might have contended that Mr Carvill's emoluments from IH were taxable under Case I of Schedule E (even if IH were non-UK resident) on the grounds that he was carrying out his duties of that employment in the UK. But there is no sign of any suggestion on the Inland Revenue's part to that effect until a letter of 19 February 1996.

Brokerage-sharing arrangements : 1992-1995 investigation

26. As it happened, another investigation had been commenced by the Special Office in January 1992. This had related to the brokerage sharing arrangements entered into between IH, R K Carvill Ltd (the UK operating company) and Carvill America Inc; these had been directed at the issue of whether R K Carvill Ltd was disadvantaged by the brokerage sharing arrangements under transfer pricing arrangements. Numerous queries had been raised over a two and a half year period to 7 November 1995 when the Special Office accepted that the arrangements did not disadvantage R K Carvill Ltd. In the course of these communications Tusons explained in detail the nature of the activities of all the companies involved.

The Everett appeal

27. Mr Carvill had appealed the section 739 assessments for the early years and in December 1994, Mr T H K Everett, a special commissioner, dismissed the appeal.

Further enquiries into the performance of Mr Carvill's duties for IH and Personal Services

28. Following Mr Everett's decision enquiries continued into the employment arrangements. The Inland Revenue required information (set out in a Taxes Management Act 1970 section 20 precursor letter dated 21 February 1997) of - "All telephone and fax bills relating to lines used by Mr Carvill in the UK for business purposes during the period 6 April 1988 to 5 April 1996" and "All client files held in the UK or elsewhere for each account in relation to which Mr Carvill had an involvement in the period 6 April 1983 to 5 April 1996". A long exchange of letters ensued between April and October 1998. In their letters and having identified a number of clients of IH, the Inland Revenue sought, among other things, to ascertain the capacity in which Mr Carvill had been seeing these clients when he met them in the UK. Tusons repeated the information which had previously been provided to the Inland Revenue. This information stated that Mr Carvill's employment contracts specified the geographic locations in which he was obliged to work for each of his employers, the geographic division corresponding to the difference in Mr Carvill's duties between the procuring of business in the USA and the placing of that business in the UK. Tusons explained, that in the process of placing the business that was procured in the USA, it was the norm for the overseas broker who procured the business to visit the London underwriters who intended to underwrite the business and that, when Mr Carvill met these brokers and their clients in London, the meetings were invariably to do with the placing of business in the London insurance markets.

Transfer of appeals against Appeal Assessments to special commissioners

29. As already mentioned, the Schedule E appeals were transferred to the special commissioners, the formal transfer date being 10 March 2000.

Further exchanges of information

30. In response to the section 20 notice precursor letter, correspondence ensued between Tusons and the Inland Revenue and on 21 March 2000 the Special Compliance office inspector handed over part of Mr Bowes' memorandum of 11 January 1990 which showed that the first batch of Schedule E assessments had been raised on Mr Carvill on the basis that IH had been UK resident.

The Avery Jones Decision

31. The section 739 appeal hearing on the later year section 739 assessments took place at the end of 1999 and the beginning of 2000. Again, the issue was the dividend income received by IH from other Carvill companies, but the wide scope of the section required a broad examination of many facets of the Carvill group and Mr Carvill's relationships with group companies. The decision of Dr Avery Jones was given on 20 March 2000. Dr Avery Jones, in deciding the section 739 appeals, had been required to consider in relation to section 741 whether, among other things, Mr Carvill had set up his employment arrangements for the purpose of avoiding tax. In his decision, Dr Avery Jones records (in paragraph 55) that while the Inland Revenue had accepted Mr Carvill's general strategy as commercial, it had contended that IH had been inserted for tax reasons, including the benefit of the remittance basis. Dr Avery Jones noted that, as he understood it, the Inland Revenue had accepted that if there were commercial reason for setting up IH, the obtaining of tax benefits would not have been the avoidance of tax. On that basis it would be for him to determine whether IH had been set up for commercial or tax reasons. In paragraph 58 Dr Avery Jones records his conclusion, having heard Mr Carvill give evidence for over two and a half days, that IH had not been set up to avoid tax. In paragraph 59 he set out the commercial reasons that had been given for the establishment of IH and he accepted that these, rather than tax benefits, had been the reasons behind its establishment. In paragraph 61 to 66 Dr Avery Jones examined the tax effects of setting up IH. He gave reasons for accepting that tax did not feature in Mr Carvill's strategy. In particular, in paragraph 62, Dr Avery Jones found that the obtaining of the tax benefit of the employment arrangements was not the purpose of setting up IH. He further found, at paragraph 66, that the fact that IH had provided a vehicle for Mr Carvill's non-UK employment had been a consequence but not a reason for setting up IH. Finally, in paragraph 92 where he considers the application of section 741(b), Dr Avery Jones repeated that the obtaining of tax benefits from the employment arrangements had not been a purpose of setting up IH.

Further material obtained by the Revenue

32. On 3 April 2000 the General Commissioners authorized the issue of a formal section 20(3) notice requiring the provision of a number of documents. These related to specific client files selected by the Inland Revenue. These were duly provided by Mr Carvill's advisers.
33. On 25 May 2000 and in the light of Dr Avery Jones's decision, Tusons wrote to the Inland Revenue summarizing what they saw as Mr Carvill's position. In the letter they re-iterated the points they had made in earlier letters about Mr Carvill's employment contracts and the duties he performed under them in the UK and outside the UK, stressing again that the duties of procuring business were performed outside the UK and the duties of placing the re-insurance arrangements were carried out within the UK.

Some observations

34. Breaking off the narrative at this point, we make some observations. For the years of assessments following the Inland Revenue's acceptance of IH's non-resident status, the original basis (i.e. IH's UK residence) on which the Schedule E assessments were made (both as regards the Early Year Assessments and assessments for later years) had proved to be unfounded. By 1996, as already noted, the Inland Revenue were seeking information to sustain a different basis, namely that Mr Carvill had one worldwide employment or, alternatively, he was carrying out duties for IH while in the UK. By mid-2000 the Inland Revenue had, through Tusons, assembled a very great deal of information about the details of Mr Carvill's performance of his duties, with particular emphasis on the duties performed by him in the UK.
35. Second, so far as we can discern from the information provided to the Inland Revenue after the matter had been referred to the Special Commissioners, as from that time no further relevant information of any material significance was either provided to or obtained by the Inland Revenue.
36. Third, as Mr Middleton (the Director of the Special Compliance Office in 2000) explained in evidence, the group leader at the Special Compliance Office (a Mr Martin McMahon) had had day-to-day oversight and control of the investigation but once the matter had been referred to the special commissioners, and had thereby entered into litigation then (to quote Mr Middleton) "the solicitors call the shots". Our review of the files show that from 2000-2003, there had been three different solicitors in the office of the Solicitor of Inland Revenue successively handling the appeal proceedings.
37. Fourth, we have read and compared the Everett with the Avery Jones decisions on the section 739 appeals. One thing that clearly emerged from the Avery Jones decision is that Mr Carvill and his representatives adduced much fuller evidence in support of their case as to the commercial reasons behind the 1982 reorganization. The unqualified findings as to the commerciality of the arrangements as a whole and the reason for Mr Carvill's employment agreements were based on evidence that had not been adduced (because it had been thought to have been lost) at the earlier hearings; we refer, for example, to the Neville Russell Audit file.

Proceedings before the Special Commissioners

38. Once the appeals had been lodged with the special commissioners, correspondence and communications took place between the parties and between them and the clerk to the special commissioners. Directions were given at a preliminary hearing on 5 June 2001. In consequence of these directions Mr Carvill's Statement of Case was served on 7 August 2001. The issues as understood by Mr Carvill were identified. The Case recited some of the findings of Dr Avery Jones's decision and asked that the Inland Revenue should state to what extent they intended to challenge the facts set out in that decision.
39. On 22 August 2001 the Statement of Case on behalf of the Inland Revenue was served. This contains statements to the effect that Mr Carvill's employment contracts did not represent the reality of his employment arrangements with IH and that the split of duties alleged by Mr Carvill was wholly artificial and designed, for tax purposes, to give a misleading impression. The findings in Dr Avery Jones's decision, to the extent that they were relevant, were not admitted.
40. Mr Carvill then requested further information in December 2001. This sought details of the facts on which the Inland Revenue relied to support the allegations made in their Statement of Case concerning the lack of reality and artificiality surrounding Mr Carvill's employment contracts. It asked whether sham were being alleged in relation to the contracts. The Inland Revenue resisted provision of further information and a further preliminary hearing was arranged and the special commissioner (S J L Oliver QC) gave a decision on 15 February followed by a Direction Order on 18 March 2002. The Special Commissioner required that the Revenue should provide "a clear route map in advance of the hearing that sets out [their] position as regards the case they are presenting and the facts and matters (such as they are) on which they have based their decision to sustain the Schedule E assessments …". Specifically the Inland Revenue were required to provide answers to Mr Carvill's request and to produce documents relating to the raising of assessments by the section 739 specialist inspector in 1990 to which access had previously been denied.
41. On 26 March 2002 the Inland Revenue provided copies of the documents relating to the raising of the assessments in 1990. They then filed a response to the earlier request of Mr Carvill. In this (dated 7 May 2002), the Inland Revenue stated that it was not making the positive case that the contracts of employment were shams; the Inland Revenue said that they did not at present have evidence to suggest that.
42. Because the parties were unable to produce a statement of agreed facts, witness statements were produced to address the facts that had not been admitted. In accordance with directions issued on 16 October 2002, Mr Carvill's advisers submitted witness statements from six witnesses, including Mr Carvill. Two of the statements were from individuals based in the US. The sixth statement, we understand, supported the assertions that had been put to the Revenue regarding Mr Carvill's duties in the USA and the UK.
43. On 28 November 2002 Mr Carvill's advisers served a request for further information seeking to clarify the issues between the parties as to the "commercial" context within which Mr Carvill's employment contracts had been constructed and the way in which the contracts had operated. The Inland Revenue objected to the requests and a further preliminary hearing was arranged for 23 May 2003. Following that hearing, directions were given by the Special Commissioner (Mr Oliver) requiring the Inland Revenue to respond to all but one of Mr Carvill's requests for further information. In those directions it is stated that the Inland Revenue did not require Mr Carvill to prove certain facts that had been set out in his Statement of Case (i.e. that IH had been set up as part of a major change in the Carvill Group's commercial strategy and that IH had engaged Mr Carvill and others to assist in its role of procuring re-insurance business from the USA). Those latter facts were admitted by the Inland Revenue at the preliminary hearing of 23 May 2003.
44. The response of the Inland Revenue to the request for further information (see paragraph 43 above) made it clear that the Inland Revenue would continue to maintain that Mr Carvill had entered into his employment contracts with the tax consequences in mind and that, as regards matters concerning, for example, whether or not he and IH intended to abide by the terms of the relevant employment contract, the Revenue would reserve its position to see what might emerge during the course of the hearing. Those directions had followed the preliminary hearing on 23 May 2003 and they contained a direction requiring the Inland Revenue to serve a witness statement from Mr Bowes. Mr Bowes' witness statement was served on 14 July 2003. Dates for the substantive hearing were then agreed for early February 2004 but this was followed by an Inland Revenue request to change the dates because their counsel would not be available. The Inland Revenue's request was not acceded to and they asked for a further preliminary hearing to decide the matter. That took place on 23 July 2003 and the Inland Revenue's request was dismissed and as a result they had to seek to appoint new counsel.
45. Mr Bowes' witness statement became the subject of discussion between the parties. Some papers appeared to be missing from the file that had been submitted on 26 March 2003, following the disclosure order of the special commissioner, and the Revenue supplied those that could be traced while refusing to supply others on the grounds that they were not relevant. A further preliminary hearing then had to be arranged for 18 December 2003. Slaughter & May, acting for Mr Carvill, gave notice in their letter of 25 November 2003 to the clerk to the special commissioners that Mr Carvill would be seeking the costs of the hearing against the Inland Revenue. On the afternoon before the hearing, the Inland Revenue agreed to give over the papers concerned, but would not meet Mr Carvill's costs. The hearing duly took place on 18 December 2003. At that stage a new counsel was representing the Inland Revenue. The special commissioners (Mr Oliver and Mr Edward Sadler) ordered that the Inland Revenue should pay Mr Carvill's costs.
46. On 19 December 2003 the Inland Revenue wrote to Slaughter & May to advise them that they no longer intended to defend the appeals.

Conclusions

47. Mr Brennan stressed that the Tribunal should not adopt the approach of second guessing decisions and judgments taken by the Inland Revenue without having seen the majority of documents and without having heard the evidence. In any event it was inappropriate, he stressed, to do other than exercise the power to award costs on a summary basis. Above all, we should avoid debating the underlying features of the appeal itself.
48. A summary decision (had we adopted that approach) would have been as follows. Without hesitation we would decide that the Inland Revenue had acted wholly unreasonably in the sense contemplated by regulation 21(1). There should have been a rigorous review of the Appeal Assessments at the time when they were referred to the special commissioners, which happens also to have been the time when Dr Avery Jones's decision was released. There is no evidence that such a review took place. Indeed the strong inference is that by then bureaucratic drift had taken over. The Inland Revenue had more than enough information on which to take the view that the most likely outcome was that the appeals would succeed on both the validity issue (for the Early Year Assessments) and the liability issue (for the Appeal Assessments as a whole). As it was, they allowed things to run on. They fought skirmish after skirmish at preliminary hearings and invariably lost. In the pleadings process they made serious and substantial allegations (for example, as to the artificial or "sham" nature of Mr Carvill's employment arrangements) which they were then forced to withdraw since they had no evidence to support them. There is no evidence that they obtained any new information; indeed they had all the information by the start of 2000. Even the information provided in response to the section 20 notice issued in early 2000 appears to us to have restated what was already known to the Inland Revenue. Put bluntly, the decision taken on 18 December 2003 not to resist the appeals should have been taken nearly four years earlier.
49. Despite Mr Brennan's plea to adopt that summary approach, we felt that it was fairer to the Inland Revenue to look in detail at what had been going on in the 20 years starting with the First Investigation and ending with the abandonment of their position in December 2003. The key event, as we saw it, was the decision to raise the Early Year Assessments in 1990. Once this was taken and implemented the assessments for the succeeding years appear to have followed as a matter of course. For that reason we start by examining the validity issue, i.e. the validity of the Early Year Assessments.
50. The Inland Revenue's letter of 19 December 2003 states – "We are instructed to inform you that our client no longer intends to defend this appeal"; there is no explanation. They were asked by Slaughter & May - "Why, nearly 14 years into the proceedings and just weeks before the appeals were to be heard, it had been decided that the appeals should not be defended". On 6 January 2004 the Inland Revenue (Solicitor's Office) wrote back explaining that the decision had been taken following receipt of legal advice which was subject to legal professional privilege and in relation to which "our clients have not waived privilege".
51. There being no statement of what the Inland Revenue perceives to have been the weakness of their position, we have to decide the "wholly unreasonable" issue on the basis of intelligent inference. We are a specialist tribunal and, as such, should be in a position to form a view where the problems lay. We infer that the problems must have been, first, the evident weakness in the assertion that Mr Carvill had either one worldwide employment or was performing duties as employee of IH in the UK and, second, the vulnerability of the Early Year Assessments.
52. The event that really started the 14 years of conflict was, as noted above, the decision to raise the Early Year Assessments. The underlying reason for that decision must have remained the same for some if not all of the Later Year Assessments. That decision was based on the recommendation of Mr Bowes in his memorandum of 11 January 1990. The memorandum signalled the start of the broadside of assessments released over the next few weeks. These included the six Early Year Assessments, the two (or three) section 739 assessments and five corporation tax assessments directed at IH.
53. The Early Year Assessments, it will be recalled, were issued in February and April 1990. Mr Bowes, on whose recommendation to Mr Hughes the Early Year Assessments were raised, stated in his witness statement of 2003 that, as a result of enquiries he had discovered that Mr Carvill had received substantial remuneration from IH which he had not entered in his return. On that basis it is contended that the Early Year Assessments were "discovery" assessments made under section 29(3) TMA. The assessments were, Mr Bowes said, raised on the basis of evidence that the Bermudan companies (e.g. IH) were resident in the UK. The response for Mr Carvill is that ever since the 1983/84 return was submitted and for each subsequent year of assessment, the inspector knew that Mr Carvill had foreign emoluments and that he knew Mr Carvill was employed by IH. The returns stated that Mr Carvill had foreign employments but, quite properly, did not disclose the unremitted income. Moreover some of the Early Year Assessments had been the subject of section 54 TMA agreements which had necessarily covered the employment contract with IH as a source of income. There could not, it was pointed out for Mr Carvill, have been a relevant discovery.
54. The documentary evidence shows that the assessments for 1984/85 to 1986/87 were the subject of section 54 agreements. The assessment for 1983/84 had been appealed and "settled" by the Special Compliance Office without referring to a section 54 agreement. The assessments for 1987/88 and 1988/89 were covered by the section 54 agreements but those agreements were made in 1990 and 1991, i.e. after the issue of the Early Year Assessments. Thus, where there was a section 54 agreements that will have finally concluded the matter, so long as it covered Mr Carvill's employment with IH. At all events for the assessments to have been validly made under the only relevant power in this instance (that is, under section 29(3) TMA) there must have been a "discovery". The term "discovery" has been given a wide ambit by the courts and has been said to be apt to cover any case in which for any reason its newly appears that the taxpayer has been undercharged: see, for example, Cenlon Finance v Ellwood 40 TC 176 per Lord Simonds at page 203.
55. It is significant that the group leader of the Special Compliance Office who contributed to the Middleton Enquiry of 2000 (referred to below) reported, in a memorandum of 19 July 2000, that the Early Year Assessments were best of judgment (section 29(1)) TMA assessments, (so that he presumably did not consider them to be section 29(3) TMA "discovery" assessments). Mr Bowes' 2003 witness statement, however, says that those assessments were linked to the company residence of IH "and my discovery of the previously undisclosed quantum of remuneration paid to Mr Carvill". We have already observed that Mr Carvill's tax returns were complete; the foreign source employment income of a non-domiciled person only becomes "income" for tax purposes when remitted. The fact of Mr Carvill's employment was disclosed, and the quantum of Mr Carvill's remuneration from that employment cannot in itself be relevant. We do not therefore consider that there had been a relevant non-disclosure that could have been the subject of a discovery.
56. It is also significant that nothing in Mr Bowes' report of 11 January 1990 to his principal (Mr Hughes) makes any reference to a discovery. It simply says :

"Lastly, on the matter of assessments, I propose to ask London Provincial 4 to make a protective assessment for 1983/84 and estimated assessments for later years in respect of remuneration etc. paid by IH to Carvill personally, even though we can only bring these into assessment if we get home on the managed and controlled argument."

Mr Bowes' report makes no reference to the earlier Schedule E investigation conducted between 1983/86 which had raised the possibility of UK residence of IH as a basis for taxing Mr Carvill's emoluments and which had concluded that the residence position of IH should not be challenged.

57. Nothing in the contemporary working papers provided by Mr Bowes throws any more positive light on the discovery issue. To the extent that the discovery related to the UK residence of IH, the indications are that the Special Compliance Office were proceeding on surmise alone. We refer, for example, to Mr Hughes' note of 30 January 1990. Referring to IH he observes – "We must also bear in mind the possibility of treating these companies as centrally managed and controlled in the UK." The letter goes on:

"I think we could use the next letter as an opportunity to ask for the Articles etc. of the Bermudan companies and details of the directors' names and addresses and dates of appointment. This will signal our intentions on the central control and management aspect and we can call for more details of meetings, minutes and correspondence etc. at a later date. If we decide to take up the cudgels on the central control and management direction and this is the option with the largest yield we will have to seek some advice."

Mr Hughes' note was followed by the raising and issue of the Early Year Assessments.

58. It is significant that by January 1990 the six year limitation period was closing in on the earliest years (1983 and 1984). 13 assessments falling into three different categories had, on the advice of Mr Bowes, to be made. The officers involved in the recommendations to assess were specialists in the section 739 field but not, as far as we are aware, routinely dealing with Schedule E investigations. They had to act and act quickly and it could well have been that in the pressures of the moment they overlooked the procedural requirements for section 29(3) assessments. We will come back to this point (in paragraphs 62-64 below) when we examine the guidelines in "IH 2508".
59. In June 1990 Tusons asked for clarification of the reasons for the Early Year Assessments and were, as already recorded, told by letter from Mr Bowes of 19 June 1990 that it was "to protect the interest of the Inland Revenue". The Inland Revenue then and only then, set about their enquiries to determine whether it could indeed be asserted that IH was resident in the United Kingdom – notwithstanding that at that time the UK residence of IH was the basis on which the assessments were made. On 26 June 1990 (according to a memorandum sent by Mr Bowes to SPI (Company Residence) Melbourne House – a document disclosed by the Inland Revenue in mid 2003) Mr Bowes writes:

"Another avenue of attack is to challenge the residence status of IH and its predecessor … I see the two prongs as complementary, rather than alternatives particularly as it seems likely that we will not be able to bring into the UK tax net the considerable remuneration paid to R K Carvill by IH unless it can be established that this company is resident in the UK.

As you can see from recent correspondence with Tusons I have not gone beyond posing the opening questions on the residence of the two Bermudan companies. I would welcome your advice on how to test the central management and control of these companies."

That letter produced the encouraging response from J Holdsworth of SPI (Company Residence) dated 2 August 1990. This told Mr Bowes to start by getting hold of all the board minutes of IH and informed him that "If Mr Carvill and his cronies have done their homework, these minutes will purport to show that all board meetings were held outside the UK and the decisions of substance, amounting to act (sic) as central management and control were made at those meetings."

60. The enquiry into the residence of IH went on until 23 July 1992 when it was terminated and IH was accepted as non-resident. The officer in charge, Mr G Mulligan, offered his apologies for the difficulties caused by the "premature issue of the assessments".
61. Our conclusion, so far, is that it is more than likely that (i) the officers raising the Early Year Assessments did not at the time consider that there had to be a discovery to justify those assessments and (ii) in any event no proper discovery had ever been made which could have formed the basis of the Early Year Assessments. We do not have to decide the point. Nevertheless we can say with confidence that had the matter been properly investigated in the ensuing 13 or 14 years, warning lights would have alerted the Inland Revenue to the weakness of their case as regards the validity of the Early Year Assessments.
62. We were shown the Inland Revenue document IH 2508. This, which was produced by the Inland Revenue as an exhibit to Mr Middleton's evidence, gives instructions to investigators as to how they should raise discovery assessments. The investigating officer is told to write to the taxpayer and the agent warning in advance of assessments and giving them the reason for the action. It goes on to say – "You must not raise such assessments without showing on the file why you consider there to be un-assessed liabilities and your basis for making the relevant discovery assessment." It goes on to say – "It is a matter for your judgment to decide if and when it is appropriate to raise assessments for all the earlier years and you should, at the point the assessments are made, be able to demonstrate that you have sufficient grounds for making a discovery …" Particularly relevant to the present situation is the following passage:

"When a case has to come before Commissioners for a contentious hearing you should conduct a review at an early stage to ensure that all assessments have been properly raised for all years, including any necessary alternatives."

It seems to us from an examination of the papers put in evidence, being the material that Mr Bowes had in his possession, that he did not carry out the recommended procedures, at least as far as the Early Year Assessments were concerned. Had the assessments been raised under section 29(3) on the strength of a proper discovery we would have expected to have seen the matter specifically addressed in the submission Mr Bowes made to Mr Hughes in his memorandum of 11 January 1990 when proposing that assessments be made. We would have expected to see, first, a note of evidence of a review having been carried out into all of the years of assessment concerned to see whether or not they were closed (and required, therefore, to be re-opened). There is no indication of such a review in that memorandum or indeed in any other papers that we were shown. Second, we would have expected to see evidence that Mr Bowes had given consideration to the circumstances surrounding the closure of those years of assessment, i.e. whether they had been closed as a result of a section 54 agreement, in which case they could only be re-opened provided the criteria set out in cases such as Cenlon Finance, supra, and Olin Energy Systems Ltd 58 TC 592 were satisfied. There is no such evidence. We would have expected, thirdly, to have seen evidence that Mr Bowes had looked at and considered the conclusions following the first investigation (1983-86). Fourthly, we would have expected to read a full submission by Mr Bowes to his senior officer to the effect that Mr Bowes regarded himself as having made some kind of discovery and that the criteria in the relevant cases were satisfied, such that the senior officer (Mr Hughes) could have made a judgment about that matter and responded to the effect that he understood himself to be authorizing the issue of assessments that would re-open already finalized years of assessment. There was no such submission and, accordingly, Mr Hughes gave no such authorization.

63. All those features further undermine the Inland Revenue's claim that the Early Year Assessments had been based on discoveries and had been properly made. Again a proper review at the outset of the litigation proceedings would have revealed these shortcomings and the consequent weakness of the Inland Revenue's position in relation to the validity of the Early Year Assessments.
64. Finally, in this connection we turn to the Middleton Enquiry. On 14 June 2000 Slaughter & May had written to the Chairman of the Board of Inland Revenue on Mr Carvill's behalf to complain about the way in which Mr Carvill's tax affairs were being handled. The letter took up a number of points. Among these it suggested that the Schedule E assessments raised by the section 739 specialist division did not appear to have been properly based. In his response of 24 July 2000 on behalf of the Board of Inland Revenue, Mr Middleton, the director of the Inland Revenue Special Compliance Office, rejected the complaint and said that he was satisfied that careful judgment had been exercised by the inspector concerned before raising the assessments. Slaughter & May pursued this point in further letters to the Chairman of 5 September and 15 November 2000 seeking access to the Inland Revenue papers on which the Special Compliance Office director had based his view but, in letters of 18 October and 22 December such access was denied and Mr Middleton repeated his view that the officers concerned had carried out their duties thoroughly. The last letter of 22 December contains the following passage:

"I can confirm that the papers do evidence an in-depth of review of the known facts as part of the process of deciding whether to raise assessments. The papers record the known details in respect of IH and information gleaned from previous correspondence in Revenue files including various items of financial information. The decision to investigate the residence status of IH, as well as the application of section 739 and the Schedule E issues, was taken in the light of internal guidance and Statement of Practice 6/83. Authority to proceed with the investigation and to make the assessments was sought and obtained at the appropriate level."

We did not see SP 6/83, but in the light of the evidence before us relating to Mr Bowes' report to Mr Hughes and Mr Hughes' authorization for the making of the assessments, there was a failure to adhere to the guidelines in IH 2508.

65. Counsel for Mr Carvill contended that it had been wholly unreasonable for Mr Middleton to have written the letter of 22 December 2000. We felt that Mr Middleton should have the opportunity to respond to that allegation and suggested that he might attend and give evidence. Our expectations were that Mr Middleton's response would have shown that by 2000 at least a firm hand was at the helm of the Schedule E assessments then under appeal before the Special Commissioners. We were not re-assured. It was apparent from an examination of the letters put in evidence by Mr Middleton that the enquiry made under his aegis had been carried out by the Special Compliance Office which had been responsible for the assessments in the first place. The enquiry had not addressed the merits of the Inland Revenue's case under Schedule E and in particular had not made an intensive review of the validity of the Early Year Assessments. An opportunity to stop the proceedings at that stage was lost.
66. By the time the appeals were referred for hearing to the special commissioners, the year 2000, the Inland Revenue had obtained information relating to Mr Carvill's employment arrangements with companies in the Carvill group; that information had been supplied in the course of the first investigation (1983-86) and in the course of correspondence with Tusons during the 1990s. Whether the "section 20 notice" of March 2000 produced any information of additional value was something that the Inland Revenue did not tell us. There was no suggestion on their part that anything informative had been obtained in succeeding years. As we understand the position anything relevant to the question of whether Mr Carvill either had a single worldwide employment or had been carrying out duties for IH while in the UK was in the hands of the Inland Revenue by the time the Special Commissioners proceedings were commenced and also, of course, by the time of the Middleton Enquiry.
67. Mr Brennan QC for the Inland Revenue emphasized, in answer to the suggestion that the Revenue's case was self-evidently so weak that it should not have been pursued, that there had been a complex history to Mr Carvill's affairs. The Revenue had not, he stressed, been obliged either to accept the approach of Mr Carvill and Mr Tuson at face value or to proceed on the basis that the facts were, or were all, necessarily in accordance with the conclusions of Dr Avery Jones rather than those of Mr Everett. Nor, it was argued, was the tribunal obliged to proceed on the basis that Mr Carvill's employment arrangements were commercially driven, particularly in circumstances where the alleged contractual change had followed very shortly on the agreement of his foreign domicile. He observed that a domicile-driven change in the contracts was not necessarily reflected in the change in the duties or in their location. Nor, having regard to the decision in Secretary of State v Bottrill [1999] ICR 592, should weight be given to the contractual label describing him as an employee of a company. Mr Brennan said that the decision of the Inland Revenue to withdraw on legal advice had been taken at a stage when the witness statements of both sides were available and such documentation as would be forthcoming was prepared. He contended that to withdraw a defence well in advance of a hearing is not unreasonable, still less is it "wholly unreasonable". To penalize a party in costs in such circumstances runs the risk of discouraging settlement of litigation that is before the Special Commissioners.
68. It seems to us that the conclusion ultimately reached by the Inland Revenue, which must have been based on advice that their case was highly likely to fail, could and should have been reached many years before December 2003. The beginning of the year 2000 was the occasion of the publication of Dr Avery Jones' decision. That contained clear findings of fact. The Inland Revenue may not have liked these but the standards of reasonable behaviour required them, in our view, to carry out a thorough and objective review of the merits of their case at that stage. The directions issued in the course of the pre-trial proceedings before the special commissioners emphasize that duty. In this connection it will be recalled that between December 2001 and May 2003 Mr Carvill had to make a series of applications pursuant to which he sought to obtain clarification and particularization of the Inland Revenue's case on both the "liability" and the "assessment" issues. It will be recalled that the Inland Revenue had been alleging that the UK and overseas contracts were "shams" or at least entered into for the purposes of tax avoidance or other non-commercial purposes. Mr Carvill needed details both of these and of the grounds on which the Inland Revenue claimed that he had only one contract of employment. Regarding the matters concerning the commercial background to and the reasons for the 1982 reorganization, which had been the subject of findings by Dr Avery Jones, Mr Carvill had to seek clarification as to which of these needed to be proved again at the hearing of the Schedule E appeal. Mr Carvill needed disclosure of the internal memoranda relevant to the reasons and grounds for the Early Year Assessments. And he needed Mr Bowes to be called as a witness. In relation to all of the applications Mr Carvill was successful with the Inland Revenue either agreeing to provide the relief sought by the application just before or during the course of the hearing or following directions being given by the Tribunal. The Tribunal was driven to emphasize the importance of the Inland Revenue providing a "clear route map in advance of the hearing that sets out the Commissioners' position as regards the case they are presenting and the facts and mattes (such as they are) on which they have based their decision to sustain the Schedule E assessments …": see the decision of 15 February 2002 (referred to above).
69. Further, in August 2003, following a review of Mr Bowes' witness statement, Mr Carvill was obliged to seek disclosure of the file produced by Mr Johnston in the course of the Fist Investigation. And in November 2003 Mr Carvill had to make another application for disclosure which was due to be heard on 18 December. On 17 December the Inland Revenue agreed to disclose the documents (again relating to the raising of the Early Year Assessments) but refused to pay Mr Carvill's costs of the application. Following a hearing on costs on 18 December the Tribunal ordered that the Revenue should pay Mr Carvill's costs of and incidental to the application on the grounds that the Inland Revenue had acted wholly unreasonably in connection with that application. The next day the Inland Revenue notified Mr Carvill that they no longer intended to defend the appeals. In our view, the Inland Revenue should never have allowed themselves to be put into the embarrassing position that they found themselves in from the beginning of the pre-trial applications until December 2003.
70. It is significant that the Inland Revenue has not sought to point to any new information disclosed by Mr Carvill which changed their view of the merits of the Inland Revenue's case. As we have already observed, most if not all of the factual information relied upon by Mr Carvill had been disclosed long in advance of the initial directions given by the Tribunal. A great deal of detail and explanation had been given in the course of the transfer pricing enquiry and the two contested section 739 appeals. In August 2001 Mr Carvill had provided a list of the documents on which he proposed to rely and inspection took place in March 2002. There is no suggestion that any of these documents were new to the Inland Revenue. It is significant also that detailed explanations had been given both by Tusons and by Mr Carvill concerning the reasons for setting up IH and Mr Carvill's employment arrangements in the course of both section 739 hearings. These explanations were tested at length by cross-examination.
71. As we see it the only relevant new material that came to light while the appeals were before the special commissioners were the Inland Revenue internal memoranda showing the basis on which the Schedule E assessments had been raised and the information on which the decision to make such assessments had been based. All this information had been in the possession of the Inland Revenue.
72. As we have already indicated the Schedule E appeals were crying out for a thorough and objective review shortly after the release of Dr Avery Jones' Decision. Had such a review been carried out it would have revealed both the technical weaknesses in the Early Year Assessments and the strength of Mr Carvill's case as regards his emoluments from IH. Instead of particularizing their case and stating the grounds on which they denied the allegations, the Inland Revenue put forward generalised allegations concerning the genuineness of the contractual arrangements which implied that such arrangements were shams – allegations which they were later unable to sustain. Further, the Inland Revenue sought to re-visit the findings in Dr Avery Jones' Decision as to the commercial purposes behind the incorporation of IH and the employment arrangements. This latter approach, Mr Goodfellow contended, had greatly increased the scope of the factual matters which Mr Carvill would have to prove at any forthcoming hearing of the appeal. The time spent in reviewing the documentary evidence and preparing the relevant aspects of the witness statements was greatly increased. We accept that. It is significant that the Inland Revenue only accepted the commerciality of the arrangements at the preliminary hearing before Mr Oliver in May 2003. They gave no explanation for this change of position and as to why they had felt justified in adhering to their earlier stance for so long.
73. There is also the Middleton Enquiry. Slaughter & May took the serious step of writing to the Chairman of the Board of Inland Revenue after the Avery Jones decision and after the Schedule E appeals were transferred to the special commissioners. They set out at length detailed concerns about the conduct of the various proceedings against Mr Carvill and specifically questioned the validity of the Schedule E assessments. At the highest level, therefore, the Revenue were put on notice that there were serious grounds for challenging their case. Had the Revenue, in response to that and the subsequent letters from Slaughter & May, carried out a thorough and objective analysis of the basis of the Schedule E assessments (and that, in our view, is what Mr Carvill could reasonably have expected in all the circumstances and history of his case), the conclusion would have been reached then, rather than in December 2003, not to defend Mr Carvill's appeal against the Schedule E assessments. Mr Brennan told us that it was no part of our role in a costs application to look into the internal workings of the Inland Revenue and examine the nature and extent of an internal review; if the taxpayer has a claim for administrative or other failing then that must be pursued elsewhere. It seems to us, however, at least in the circumstances of this case, that where we are required to determine the reasonableness or otherwise of the Revenue's conduct in pursuing a case from which it eventually decided to withdraw, internal action, such as the adequacy or otherwise of a review of the issues on which the Revenue's case is founded and which is carried out whilst the appeal is within the jurisdiction of this Tribunal, is directly relevant to the findings we are required to make as to the Revenue's conduct.
74. Taking all those factors into account we think that the Inland Revenue acted wholly unreasonably in relation to the hearing. The costs should cover all expenses incurred since March 2000. They should cover the costs of the present proceedings.
75. Save for the direction given following the hearing on 18 December 2003, the Tribunal made no orders for costs. At that earlier stage the Tribunal did not have full information as to what would be the relevance of the information or the particulars being requested. Indeed the Tribunal heard no proper submissions based on its costs jurisdiction in regulation 21(1) at those earlier applications. Consequently, it seems to us, we are in no way precluded by the doctrine of res judicata from revisiting the subject in the light of the much more detailed picture of the case that has been obtained as a result of developments subsequent to the particular application hearing and of this costs hearing.
76. Before leaving the matter, we feel that there are certain lessons that should be learnt as a result of these proceedings. We trust that they will be given careful consideration at the appropriate level within HM Revenue and Customs.
77. Why were ten years allowed to elapsed before the matter was transferred into the jurisdiction of the special commissioners? This was because the appeals against all the assessments have to be made to the inspector and there is no statutory provision that requires appeals to be transferred to the appeal commissioners within a particular period of time. With the advent of self-assessment long-running conflicts of this sort should be things of the past. While it may make sense for taxpayers to appeal direct to their inspector, stringent time limits should be imposed requiring the matter to be set down for hearing before the appeal commissioners, general or special. The time limits should be sufficient to enable an internal review take place. At the end of the statutory review period, the taxpayer should be allowed, as of right, to have the case set down for hearing before the relevant body of commissioners.
78. Second, the Inland Revenue should be required to support their assessments by a statement of case, to be lodged as soon as the tribunal assumes jurisdiction, that sets out in detail the facts and matters upon which they have relied in making the assessments. Had such a statement of case and a list of supporting documents been required of the Special Compliance Office in relation to the Early Year Assessments shortly after those assessments were made, the weaknesses exposed 13 years after the event would then have come to light. Once the matter is before the appeal commissioners, case management powers can be exercised, where necessary, to enforce the production of a full and circumstantial statement of case, and any changes to the statement of case should only be made with leave of the tribunal. This would have meant, in the present case, that the original statement of case lodged in 1990 relying on the UK residence of IH would have had to have been amended to reflect the change necessitated to the Inland Revenue's justification for maintaining the assessments.
79. Third, it seems to us essential that there should be one person in the Inland Revenue who has authority over the matter under appeal and who is seen to be the client. Initially we understood that Mr K Frost, HM Inspector of Taxes, was this person. We were told, however, that he had retired years ago. Mr Middleton, the director of the Special Compliance Office who should have been in the position to identify the person with authority over the Carvill Schedule E appeals, was unable to do so. He implied that the responsibility was with the solicitors in the Solicitors Office, but if that were so, it cannot be right in principle. Eventually, we were told, the newly-appointed head of the Special Compliance Office had taken the decision to abandon the proceedings.
80. Last, there should be a proper costs jurisdiction in special commissioner proceedings. It should be modelled on the costs powers of the VAT and Duties Tribunals and applied in the sensible and humane manner hitherto adopted by the Commissioners of Customs and Excise.

Direction

81. Application for costs (including costs of this hearing) allowed of an amount to be agreed. If the amount cannot be agreed the matter should be referred to us for further directions.

STEPHEN OLIVER QC

EDWARD SADLER

SPECIAL COMMISSIONERS

Release Date :29 November 2004

SC 3131/2000