A Grimm Tale

PETER VAINES ATII, FCA, Barrister, TEP reviews a disturbing decision in a recent professional negligence case.

The recent judgment of the High Court in the case of Grimm v Newman is so alarming that it is deserving of immediate comment. I have no doubt that more considered and learned comments will be made in due course.

A tainted remittance?

In essence, the point was this. On the advice of his accountant, Mr Grimm, who was domiciled outside the United Kingdom, made a gift to Mrs Grimm out of his foreign income. She remitted this money to this country, applying it in the purchase of a half interest in a house with Mr Grimm where they proposed to live. The question arose whether the transfer of this money to the United Kingdom represented a remittance by Mr Grimm of his foreign income.

Mr Newman considered that it did not. He advised in the clearest terms that providing the gift was completed abroad, from funds outside the United Kingdom and that there was no reciprocity, no taxable remittance would arise. Many professional advisers will have considerable sympathy with that view and so I believe would the Inland Revenue.

An enquiry

However, this question did not arise in the conventional manner. Mr Grimm was in the middle of an enquiry into his affairs by the Special Compliance Office and the point arose in the course of the enquiry. Anybody with any experience of such enquiries knows that many points are raised by the Inland Revenue. Some of the points raised will have real substance but others will not, for a variety of reasons. Whilst Mr Newman considered the arrangements did not give rise to any taxable remittance, it was (or was thought to be) tactically advantageous to concede this point as part of the overall negotiations. Unfortunately, however, Mr Grimm decided to focus on this particular aspect and brought an action for professional negligence against Mr Newman on the grounds that his advice regarding remittances was negligent.

Mr Justice Etherton explained that it was not necessary for him to express a concluded view on the matter and anyway it was not binding on the Inland Revenue. It is difficult to understand why his Lordship felt it unnecessary to express a concluded view. After all, Mr Grimm was claiming that Mr Newman's advice was wrong and that he therefore had to pay additional tax. This tax would only have arisen if the money remitted by Mrs Grimm represented a remittance by Mr Grimm of his earnings. There seems to be no room for equivocation here. Either it was a taxable remittance or it was not. I do not see how Mr Grimm could be entitled to a payment of damages as a result of his Lordship not expressing a concluded view on whether it was taxable or not. However, this is a diversion. I propose to concentrate on the main grounds on which the decision was (or appears to be) based.

Relevant cases

It is perhaps appropriate to start with the case of Carter v Sharon [1936] 20 TC 229 which clearly established that where a gift of foreign income is completed outside the United Kingdom and the donee subsequently brings the funds to the United Kingdom, no taxable remittance arises. The charge to tax on the remittance only arises where income is either received by the taxpayer in this country or to which he is entitled at the time it comes here. In Carter v Sharon the taxpayer arranged for a banker's draft to be sent from her income funds in California to her daughter's bank in the United Kingdom. The key point was that the gift of the money was complete and irrevocable when the banker's draft was posted in California. Accordingly, the gift was made outside the United Kingdom and was not taxable as a remittance of income.

Mr Justice Etherton acknowledged the existence of the case of Carter v Sharon but that is all. He dismissed it with the words 'on the other hand [there is] Harmel v Wright' and after a brief description concluded:

'The facts, reasoning and decision in Harmel v Wright highlight the breadth of what constitutes a remittance to the United Kingdom under the statutory charging provisions which I have set out above, by virtue both of the express broad wording of section 132(5), Taxes Act 1988 and section 12, Taxation of Chargeable Gains Act 1992 and also the approach to construction taken by the court in Thomson v Moyse and Harmel v Wright itself.'

No further argument or reasoning was provided, which is a pity because the overwhelming importance of the facts in Harmel v Wright [1974] STC 88 is that companies were used as a conduit so that the funds found their way back to the taxpayer. What happened is he had some foreign income which he used to subscribe for shares in a foreign company, which lent the money to another foreign company also under his control, which then lent the money to him in England. There was no real alienation of the income by the taxpayer; it may have been held by different entities but they were all under his control.

In Thompson v Moyse 39 TC 291 the taxpayer had funds derived from foreign income on deposit in New York. He drew cheques on his New York account and sold the cheques to a bank in London where he received sterling. In both these cases it was held that there was a remittance of the income to the United Kingdom.

Worlds apart

These cases deal with an entirely different issue, that is the characterisation of monies received by the taxpayer in the United Kingdom. Tracing foreign income or disregarding conduit arrangements so as to regard sums actually received by the taxpayer as the income from which they derived is a very long way from the Carter v Sharon circumstances where there was genuine alienation of the income by an absolute and outright gift. What is more, the money or the assets acquired with the money remained the absolute property of somebody else. That is the clear position as a result of Carter v Sharon and supported by another leading case on this subject, Timpson's Executors v Yerbury 20 TC 155 in which the Court of Appeal expressed the view that:

'the actual sums of the taxpayer's income should at least come to this country under such circumstances that the taxpayer, if he does not actually receive them, is entitled to them.'

No suggestion has ever previously been made that Harmel v Wright or Thompson v Moyse overrules Carter v Sharon or renders it redundant. Indeed quite the reverse; each provides authority for a different part of an overall code. (Carter v Sharon was not even mentioned in Harmel v Wright.) However, the suggestion has been made now because his Lordship specifically stated that the argument for a charge to tax on the remittance was:

'not because of any reciprocity in relation to the original gift by the claimant to Mrs Grimm, but in consequence of the width of the relevant statutory charging provisions and the gloss placed upon them, particularly by the judgment of Mr Justice Templeman in Harmel v Wright.'

The case in question

Returning to the position of Mr Grimm, he had given his wife the funds to enable her to purchase a joint interest in the matrimonial home. Had Mrs Grimm merely lent the money back to Mr Grimm so that he could purchase the matrimonial home, one could see some force in the argument; however, there was no circularity here or any conduit. Mr Grimm gave his wife some money and she used it to buy an asset which she retained. The reasons given for the conclusion that these arrangements gave rise to a remittance were as follows:

(a) Mr Grimm obtained a proprietary interest and right of occupation in the whole property.
(b) Mr Grimm obtained a right to acquire the whole property if Mrs Grimm predeceased him.
(c) The purchase by Mrs Grimm of her half interest in the property was of financial benefit to him.

These are curious reasons which I am sure will raise more than a few eyebrows. The third one merely encapsulates the other two and the argument simply came down to this: Mr Grimm received a benefit from the arrangements and that was enough to prevent Carter v Sharon from providing any protection.

Other gift situations

I respectfully suggest that this should not be the case. One or two other comparative situations should bring the issues sharply into focus. Let us suppose we have a husband and wife both United Kingdom resident and both foreign domiciled. The husband gives income funds to the wife outside the United Kingdom and she uses them to purchase a Ferrari which is brought to the United Kingdom and given to her husband for his exclusive use. This may not be a remittance of the money, but that seems not to be a relevant issue in Grimm v Newman. The bringing of the Ferrari to the United Kingdom for the husband's use is clearly of financial benefit to him and, on Mr Justice Etherton's reasoning, this must be a taxable remittance. But that is absurd. If the husband had purchased the Ferrari himself and brought it to the United Kingdom it would not have been taxable as a remittance (it is not a sum or a generally recognised form of money) so why should it be taxable because his wife does so?

Let us take another example. The man gives his wife the income funds abroad and she remits the money to her United Kingdom account. She is then able to buy clothes which are pleasing to her husband's eye and his pocket. She is also able to buy food and thereby does not succumb to the ravages of disease or malnutrition enabling her husband to enjoy her company for a longer period. Perhaps she uses the money to maintain her horses or pay her dressmaker which are financial burdens that would otherwise have fallen on him. What if she goes to Sainsbury's and buys food and other household items which they will both enjoy?

Are all these things benefits which should cause the gift to be treated as a taxable remittance? I suggest that they are not. The important issues must be entitlement and reciprocity. If the money is the absolute property of the donee and is defrayed by them at their complete discretion, there should be no question of any remittance. It is only where the use of the money is dictated by the donor by right or by some kind of prior understanding that the position changes. However, this is really just another way of saying that the gift must be absolute, outright, unconditional and free of any reciprocity if the principle established in Carter v Sharon is to apply.

Other published material

Another particularly disappointing aspect of this case is that the prevailing professional view of these arrangements was that they are entirely effective providing of course they are genuine and there is no reciprocity. Unfortunately, the judge found that none of the specialist textbooks referred to 'would have justified a reasonably skilful and careful tax adviser giving an unqualified assurance that the proposals … would not give rise to tax in the United Kingdom'.

The following passage from one of those textbooks makes one wonder how his Lordship could have reached that conclusion:

'If a foreign domiciliary wishes to make gifts to a United Kingdom resident, he can therefore safely do so out of his foreign income without incurring any tax. It is only necessary to arrange for the sums of income to be received by the donee abroad and subsequently brought by him into the Untied Kingdom. In this way a foreign domiciliary can effectively remit income to his children or to his spouse, though not to himself.'

Equally compelling is the Inland Revenue view which may be found in the Inspector's Manual at paragraph 1565, which reads:

'it may be claimed that income arising abroad has been alienated from the taxpayer's possession by gift abroad (for example to a relative) so that it is no longer his income when received in the United Kingdom. This may be challenged on the grounds that the gift was not completed until the income was received in the United Kingdom (Timpson's Executors v Yerbury) or that financial assistance for the gift has been received in the United Kingdom.'

Admittedly, the Inland Revenue manuals were not published at the time Mr Newman gave his advice, but there is no reason to believe that the Inland Revenue took a different view at the time. No reference to Harmel v Wright or any conduit implications are made there, although there are of course numerous references to them elsewhere in the manuals.

Under the circumstances one would have thought that Mr Newman would have been on good ground – at least to the extent of discharging his duty of care.

Not the last word?

It would not only be self protection that causes many tax professionals to have considerable sympathy with Mr Newman and it is difficult to escape the feeling that he has been rather unfortunate. One can only hope that there will be an appeal, or another case, in which the authorities can be examined more fully, not least Carter v Sharon which many may feel should have been given rather more weight. Another alternative would be for the Inland Revenue to make some kind of confirmatory statement about its views in the matter to quell the disquiet which will naturally arise as a result of this decision.

Peter Vaines is a partner in Haarman Hemmelrath.

Issue: 3839 / Categories: