GRIMM v NEWMAN
Hilary Carter and Maria Oats consider that this is more than a negligence case and that
there are worrying aspects of the Revenue’s interpretation of it
(taken from Issue No 19 – April 2002
The case of Grimm v Newman1 has caused a communal shudder amongst the tax advisory fraternity. The remit for tax advice on gifts has now been widened to cover the use of the gifted money and has placed an onus on the adviser to be more probing in their questioning of clients when asked to advise. The Revenue have taken note of this, even though it is not strictly a fiscal case. They see it as an extension of the existing precedents relating to offshore remittances to the UK. It is a case that those advising on offshore tax issues will ignore at their peril!
The facts of Grimm v Newman
Mr Grimm was resident in the United Kingdom, but domiciled in the United States. He sought advice from Mr Newman, a chartered accountant and partner in Chantrey Vellacott, who had particular expertise in advising resident, but non-domiciled individuals, on United Kingdom tax liabilities. Mr Grimm was about to get married and wanted advice on whether he could, without incurring a liability to UK tax, make a gift to his intended wife from his assets in the US, which she would then transfer to the UK and use to finance the purchase of her interest in a house in London, which they would purchase and live in together.
Mr Newman confirmed orally and then unequivocally in writing that the proposed gift would not give rise to UK tax, provided there was no reciprocity for the gift. He also warned against making large gifts on a regular basis. Relying on that advice, in November 1991 Mr Grimm made a gift to Mrs Grimm of various assets with a total value of US$685,000. In January 1992 he made a further gift of US$100,000. The Grimms then purchased Templewood Lodge as joint beneficial tenants, with Mrs Grimm contributing £386,983 to the purchase price, the balance being provided by Mr Grimm from other assets and by a £300,000 loan, secured on the property.
In 1994, the Special Compliance Office of the Inland Revenue commenced a wide-ranging inquiry into Mr Grimm’s tax affairs. In 1997, Mr Newman instructed Counsel to advise in conference on matters relating to the enquiry. During the conference Counsel advised that the gift to Mrs Grimm and subsequent remittance by her to the UK, gave rise to a tax charge on Mr Grimm. Counsel advised Mr Grimm to negotiate an overall settlement of the Inland Revenue’s various claims and suggested that it might be worthwhile to bargain by giving way on the gift to Mrs Grimm. Ultimately Mr Grimm concluded a global settlement with the Inland Revenue in the amount of £675,720, of which £90,953 comprised the tax payable on the remittances by Mrs Grimm.
Mr Grimm then sued Mr Newman for negligence and breach of contract claiming loss comprising the aggregate of the tax he had to pay on the remittances by Mrs Grimm, interest, wasted fees paid to Chantrey Vellacott and consequential expenses.
The litigation came before Mr Justice Etherton in the High Court. The relevant issue was what a reasonably competent accountant would have considered to be the meaning and effect of the relevant statutory provisions and how a reasonably competent accountant tax adviser would have responded to Mr Grimm’s request for advice.
In the absence of participation by the Inland Revenue in the trial, Etherton J. was reluctant to determine whether, as a matter of law, this particular transaction gave rise to a charge to tax. He recognised that his decision could affect the way in which future transactions are arranged and that it would be of some persuasive authority in any future proceedings involving the Inland Revenue and held that it was not necessary for him to express a concluded view on that issue.
Etherton J then proceeded to look at the arguments and gave an obiter view on whether there had been a constructive remittance by Mr Grimm under s.12 Taxation Chargeable Gains Act 1992 (TCGA) and ss.18, 65(5)(b) and 132(5), and Case V Schedule D and Case III Schedule E, Income and Corporation Taxes Act 1988 (ICTA). Under these sections and schedules, a resident non-UK domiciliary is only taxed on the remittance basis if the income or proceeds of the gain are actually brought into the UK. Under Schedule Dincome is taxable if it is remitted into the UK but Schedule E, Case III states that `emoluments shall be treated as received in the UK if they are paid, used or enjoyed in, or in any manner or form transmitted or brought to the UK……..`. By s135 (5) ICTA 1988 the rules on constructive remittances are also applied toSchedule E Case III income. There is, therefore, a much wider definition for Schedule E remitted income than for Schedule D remitted income. Remittance under s.12 (2) TCGA 1992 also has a wider definition than that of Schedule D income.
The question the judge therefore had to address was whether the donor could be said to have remitted the funds to the UK under the rules of constructive remittance even though the gift had been fully completed outside the UK?
He considered case law on the subject noting, first, the longstanding authority on the question of offshore gifts in the decision in Carter v Sharon2, which dealt with income under Schedule D. Etherton J summed up that case in the following words:
`Lawrence J held, on the facts of that case, that there was no charge to tax under Case V of Sch D in respect of a gift by a person domiciled outside the United Kingdom, where the gift was completed outside the United Kingdom, and even though the donee subsequently brought the gift to England and the donor was resident in England at that time.`
Therefore, provided there is no reciprocity and the gift is fully completed outside the UK, it has long been established law, which the Revenue had accepted, that there is no remittance by the donor when the gift is subsequently brought into the UK. The Revenue have in the past seemed willing to extend this ruling to also cover Schedule E income.
Etherton J’s summary of Carter v Sharon would appear to encapsulate the situation in Grimm v Newman,with the only difference being that the gift was later used in the purchase of a property in which the donor also lived. There was therefore a question over whether tax would be due under the Schedule E emoluments rules and so was caught by the constructive remittance rules. It is this aspect of the gift on which Etherton J chose to concentrate, holding that Harmel v Wright3 was the applicable precedent. In that case, income earned in South Africa was brought, by a series of transfers from one offshore company to another, to the UK where it was received into the hands of the original taxpayer. The difference with Carter v Sharon was that the companies in question were either under the control of the taxpayer or in the hands of associates on whom he could depend. He had therefore never really divested himself of the funds, so there was held to be a taxable remittance.
In Grimm v Newman, Etherton J held that in the light of the very wide scope of the relevant charging provisions, as elucidated in the relevant case law, the Inland Revenue had a strong argument that the transactions were within those charging provisions and were a constructive remittance under Schedule E. In our view Etherton J was relying on the difference between the definitions behind the two tax schedules to ignore the long held definition in Carter v Sharon. Etherton J found that Mr Grimm’s interest in the beneficial joint tenancy gave him a proprietary right which carried not only a right of physical occupation, but also a prospective right to ownership of the entire property on the death of Mrs Grimm. This was a manifestly important benefit, which gave him the contingent right to ownership of a much larger property than he could have afforded from his own resources, apart from the gift to his wife. In Etherton J’s view this was plainly a financial benefit to him, even if it turned upon an uncertain and possibly remote contingency, namely his wife pre-deceasing him before the sale of Templewood Lodge or the severance of the joint tenancy.
For these reasons, in Etherton’s judgment, a reasonably skilful and careful accountant tax adviser, with the same specialism as Mr Newman, would have recognised in 1991 that a scheme, by which assets representing income were paid to his wife and applied by her in the purchase of property jointly acquired with Mr Grimm and intended to be occupied by them, ran a high risk of being challenged by the Inland Revenue and stood a significant prospect of giving rise to a charge to tax as a constructive remittance by Mr Grimm.
Etherton J. also held that any reasonably skilful and careful accountant tax adviser would have advised Mr Grimm whether the risk of a charge to tax could be reduced by structuring the intended purchase by the Grimms as equitable tenants in common, thereby avoiding the complication of the right of survivorship inherent in a joint tenancy; would also have advised on whether any particular care should be taken in relation to the conveyancing, so as to reduce the risk of a charge to tax; and would have advised or sought to ascertain whether some other scheme for the purchase of a house in London might be feasible, with less risks of a charge to tax.
In defence of the claim, Mr Newman relied upon the fact that Mr Grimm was an experienced businessman, with knowledge of the need to structure his personal and financial affairs in such a way as to minimise the risk of tax on remittances or constructive remittances. It was claimed that it must have been obvious to such a sophisticated client, with such complex tax affairs, that no tax avoidance scheme came with any guarantee or assurance that it was immune from challenge by the Inland Revenue. Mr Newman also relied on the fact that the inquiries and discussions about the proposed scheme emanated from a Mr Ott, a lawyer and an adviser to Mr Grimm, who played `an over arching and co-ordinating role` in the discussions. Etherton J. dismissed this defence holding that both Mr Grimm and Mr Ott had relied on the unequivocal and unqualified advice given by Mr Newman, that it was reasonable for them to do so, and that the fact that Mr Grimm was a financially successful businessman did not entitle Mr Newman to assume that he would appreciate that the proposed scheme ran a high risk of challenge by the Inland Revenue.
Mr Newman also argued that, irrespective of his advice, Mr Grimm’s gift to his wife was inevitably bound to give rise to a charge to tax because of the further transfer of US$100,000 made in January 1992, without consulting Mr Newman. Etherton J. noted that Mr Newman’s advice was that Mr Grimm should be wary of making large gifts on a regular basis, and not that there should be no further gifts and that there was therefore no break in the chain of causation as a result of the payment in January 1992.
Mr Newman also contended that if he had given further or fuller advice, Mr Grimm would either not have proceeded at all with a proposal to buy a home with his wife, or he would have gone ahead with the purchase of a house in a way that would have given rise to tax. This was the least satisfactory area of the evidence before Etherton J. It was unclear precisely what alternative arrangements could or would have been put in place to fund the purchase of an equivalent property without giving rise to UK tax, other than by using assets of Mr Grimm on which UK tax had already been paid. However, on the evidence before him, Etherton J. concluded that Mr Grimm was entitled to argue that he would have proceeded with an alternative scheme, by which he would have acquired a new home by making an overseas gift of overseas assets to his wife, which she would then use to raise an overseas loan, had he been advised that such an arrangement would clearly and certainly not give rise to UK tax.
Mr Newman also argued that it was not possible to attribute any particular part of the settlement sum of £675,720 paid by Mr Grimm to the Inland Revenue to the gift to Mrs Grimm and therefore there was no loss attributable to his advice. Etherton J. held that the only reason why Mr Grimm was placed in a position in which he had to consider a compromise of the issue over his gift to Mrs Grimm was because of the negligence of Mr Newman and refused to disallow the loss on this basis. The Judge also held that the damages recovered by Mr Grimm could not be reduced to take account of dubious and speculative collateral advantages said to have been gained by settling the gift claim together with and at the same time as other claims by the Inland Revenue.
Mr Grimm was therefore entitled to recover the whole of the tax calculated on the assets transferred to Mrs Grimm, plus interest. He was not allowed to recover wasted fees, as he would have incurred fees in any event obtaining proper advice. Nor was he entitled to recover fees allegedly incurred dealing with the claims made by the Inland Revenue, as there was insufficient evidence to conclude that any specific level of fees was incurred by Mr Grimm n resisting the claims of the Inland Revenue in relation to this particular transaction.
Implications for tax advisers
This decision emphasises that tax advice should never be given in isolation. The advice should always be set within the context of the complete transaction. In this case, Mr Newman was merely told that there would be a joint acquisition of the property. He was not told, and did not, it seems, enquire into the possible relevance of, the details of that joint acquisition. The judgment states that Mr Newman should have considered how the gifted funds were to be used and certainly it may be that, had he enquired into how the property was to be held, he would have advised against ownership as joint tenants. Etherton J does not specifically say that, had the ownership been as tenants in common, Mr Newman would not have been liable. However, such a form of ownership would have, at least, removed Mr Grimm’s proprietary interest in Mrs Grimm’s half share, over which Etherton J was so concerned.
Etherton J does not consider whether Mr Newman would have been held liable if he had not known that the gift was to be used towards the joint acquisition of property. The courts place the onus on the professional adviser to obtain from their clients the information they need in order to give proper and complete advice. In these circumstances advisers must always ensure that they ask all relevant questions about how money, which is the subject of a gift, is to be used. Even if, at the time of the gift there is no set intention as to the use of the money, a health warning should be given that the gifted funds, once brought into the UK, should be kept completely separate from any funds and assets of the donor.
Implications for tax law
It is perhaps the implications of the judgment on tax law, regarding gifts, which is of most concern. For over sixty years, advisers have relied on the established law in Carter v Sharon which provided for completed gifts of offshore income not being deemed to be a chargeable remittance when subsequently brought into the UK by the donee. It would appear that Etherton J’s judgment has distinguished the use of that ruling for cases involving Schedule E income. By laying great significance on the benefit Mr Grimm received, by virtue of both a proprietary right (albeit a potential right if he benefited under survivorship) and a right of personal enjoyment, he has given a very wide meaning to the term `enjoyment` under s.132(5) ICTA and Schedule E Case III. In so doing, he relied on a case in which funds found their way back into the hands of the original owner, but, in contrast to Grimm v Newman, in circumstances where they had never really left them. The result of Grimm v Newman is that it widens the Schedule E definitions to cover situations where completed gifts have been made outside the UK, when previously it might have been thought that the gift would effectively negate the rules under Schedule E Case III.
The Inland Revenue were not a party in Grimm v Newman and Etherton J expressed himself as wary of laying down a judgment on whether such a gift was a constructive remittance without their participation. However, in order to decide on the negligence aspects of the case it was obviously necessary for him, effectively, to express a view on the tax aspects. We are already aware that the Revenue are now using the judgment in Grimm v Newman as a precedent.
We also understand the Revenue are using the case even more generally to argue that any funds brought into the UK from an offshore trust are a taxable remittance as income under s.12(2) TCGA 1992, even where the capital gains in question have been alienated in an offshore fund some years earlier. The implications of this are very worrying. Using the decision in that way seems to extend Grimm v Newmanmuch further than Etherton J himself can have intended. The Revenue are using this decision as authority although it is not a fiscal case, and it can only be hoped that there is a pure fiscal decision directly on the issue in the near future. It is unsatisfactory for tax advisers, in giving advice, to have to rely on a pure negligence decision (the precedent value of which is uncertain in this area) rather than on a pure fiscal decision. This is obviously a case which is going to have long-term and far-reaching implications for all working in tax advisory work.