Execution of documents – Signature – Series of legal transactions carried out by deed as part of tax-voidance scheme operated by claimants on behalf of clients – Clients signing draft documents – Clients not asked to sign final version of documents in which blanks filled in and changes made – Signature pages from drafts detached and stapled to final versions – Section 1(3) of Law of Property (Miscellaneous Provisions) Act 1989 – Section 20 of Taxes Management Act 1970 – Whether substitution of signature pages invalidating scheme – Whether reasonable grounds for suspecting fraud – Claim allowed
The first claimant company provided tax consultancy services; the second claimant was its principal shareholder and managing director. During the tax year 2002-2003, the claimants operated a tax-avoidance scheme for 23 clients, which involved the deliberate generation of a tax loss on investment in gilts. At the time, the scheme was lawful provided that the relevant transactions were genuinely carried out, in the correct order, so as to create legally enforceable rights and obligations. The transactions included: (i) the purchase of a gilt strip by the client; (ii) the grant of an option to purchase the strip to a trust of which the client was the principal beneficiary; and (iii) the sale of the option by the trust to a third party.
The documentation included a trust deed, an option agreement and a sale and purchase agreement. The clients were asked to sign incomplete drafts of these documents with various elements left blank. They were not asked to sign the final version of the documents; the signature pages from the drafts were detached and stapled to the final versions, which contained substantial changes in their terms, including the identity of the strip used from 2003 stock to 2004 stock.
In 2007, the first defendants approved an application to the crown court, under section 20 of the Taxes Management Act 1970, for warrants to enter premises associated with the claimants and their clients in order to search for documents. They laid an information alleging that there were serious flaws in the way in which the scheme had been implemented, which the claimants had dishonestly sought to conceal; they relied in particular on the substitution of the signature pages. The court granted the warrants.
The claimants brought judicial review proceedings, seeking to quash the first defendants’ decision to seek warrants, and the court’s decision to grant them, on the basis that there had been no reasonable grounds for suspecting tax fraud as required by section 20. They contended that the substitution of the signature pages was ordinary office practice and unobjectionable and that the clients had implicitly authorised the relevant changes to the final versions of the documents.
Held: The claim was allowed.
It had not been legitimate for the claimants to transfer signature pages from one document to another. There was a difference between a situation in which alterations were made to a document after signature and the instant case, where the changes were incorporated in a new document to which the signature page from the earlier version was attached: Koenigsblatt v Sweet [1923] 2 Ch 314 distinguished. It could be inferred that the parties had intended signature to be an essential element in the effectiveness of the documents. The common understanding was that the document to be signed existed as a discrete physical entity at the moment of signing. The requirement that a party sign an existing, authoritative version of the contractual document gave some protection against fraud or mistake.
Moreover, where the document was intended to be a deed, the requirement for signature under section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989, and the language in which that provision was couched, necessarily meant that the signature and attestation had to form part of the same physical document that constituted the deed.
Further, the evidence did not establish that the clients had implicitly authorised or ratified the change in the identity of the gilt strip as between the draft and final versions. The change was not immaterial. Although it might have been a matter of indifference to the clients from a commercial point of view, the transactions were intended to be real contracts creating real legal rights and obligations, in view of which the identity of the stock was not only material but fundamental.
Consequently, the substitution of the signature pages had affected the validity of the contracts in question and of the scheme as a whole. It was appropriate to apply a strict formal test to the validity of the agreement since their entire purpose was to create a series of formal legal relationships. Therefore, the information laid before the crown court showed reasonable grounds to suspect that the implementation of the scheme contained serious flaws.
However, the first defendants had misled the court by suggesting that clients had not been informed of the use of 2004 stock. That had weighed with the judge and formed an important element of the first defendants’ case that the claimants had acted dishonestly. The failure to disclose documents relevant to that point was a material non-disclosure. It was not certain that the court would have reached the same decision in the absence of that element. Consequently, the court’s decision to issue the warrants was unlawful and would be quashed.
Andrew Mitchell QC and Kennedy Talbot (instructed by Irwin Mitchell LLP) appeared for the claimants; Andrew Bird (instructed by the legal department of HM Revenue & Customs) appeared for the defendants.
Sally Dobson, barrister
