The administrative court held that, on the true construction of an agreement between the Revenue and certain taxpayers for the payment of a sum in respect of unpaid tax, interest and penalties, it did not preclude the Revenue from raising enquiries and serving notices in relation to a subsequent tax year.

Facts

The taxpayers started trading in partnership in 1998 as consultants and seafood dealers. The Revenue took the view that the trading activities of the partnership lacked any obvious commercial purpose and that its true purpose was to allow the taxpayers and the companies controlled by them to gain a series of tax advantages.

The partnership ceased trading in July 2002 when the business was sold as a going concern along with the assets of the partnership which included trading stock valued at £35,000 and goodwill valued at £2,800,000. According to the sales agreement, the payment by the company was to be by means of a loan account entry. The result of that transaction was the potential for significant tax advantages for both the purchaser and the vendor. The Revenue alleged that the transaction was an attempt at a tax avoidance scheme.

Accordingly they began an investigation into the tax affairs of the taxpayers and their companies. The result of the investigation was an agreement in writing concluded on 24 May 2004 between the Revenue and the taxpayers whereby, in consideration of proceedings not being taken against any or all of the taxpayers, they offered to pay the sum of £525,000 in respect of tax, interest and penalties. The Revenue accepted that offer but on 26 May 2004, the tax inspector wrote to the taxpayers informing them that he intended to open an enquiry into their tax returns for the year ending 5 April 2003. When they received no response, the Revenue issued notices pursuant to TMA 1970, s. 19A requiring the production of certain documents in connection with their enquiry.

The taxpayers appealed to the general commissioners who decided that, as a result of the agreement dated 24 May 2004, the Revenue were precluded from raising enquiries and serving notices for the tax year to 5 April 2003. The Revenue applied for judicial review of that decision.

Issue

Whether, upon its correct interpretation, the agreement of 24 May 2004 precluded the Revenue from raising enquiries and serving notices in respect of the relevant year.

Decision

Wyn Williams J (granting the application) said that, when interpreting an agreement, the court had to consider the meaning which the document would convey to a reasonable person with the background knowledge that would reasonably have been available to the parties in the situation they were in at the time of the contract. Moreover, the law excluded from the admissible background the previous negotiations of the parties and their declarations of subjective intent. On the true interpretation of the agreement, the sum of £525,000 was in respect of the liabilities and potential liabilities from the tax years between 1998 and 2002 as itemised in the schedules attached to the agreement. Clause 1 of the agreement was capable of no other meaning. It was also important to have regard to cl. 2(d) which, on any view, contemplated further enquiries being raised in connection with the sale and purchase of the partnership business. Accordingly, the taxpayers' interpretation of the agreement accepted by the commissioners, could not be correct. There would be no purpose in raising enquiries if, depending on the result of the enquiries, there was no prospect of the Revenue recovering additional sums because the agreement itself precluded it.

Queen's Bench Division (Administrative Court).
Judgment delivered 27 April 2007.