England and Wales Court of Appeal (Civil Division) Decisions

STONE (HM Inspector of Taxes) v. RICHARD HENRY HITCH; THOMAS HENRY HITCH and IAN GEOFFREY HANDY [2001] EWCA Civ 1224 (26th January, 2001)

Case No: A3/1999/1007 CHRVF

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM HIGH COURT OF JUSTICE

CHANCERY DIVISION (REVENUE)

Jonathan Parker J

Royal Courts of Justice

Strand, London, WC2A 2LL

Friday 26 January 2001

LADY JUSTICE ARDEN

1. This is an appeal against the order of Jonathan Parker J dated 18 March 1999 whereby he allowed the appeal of the taxpayers by way of case stated pursuant to section 56 of the Taxes Management Act 1970 from the decision of the Special Commissioners, Mr T.H.K. Everett and Mr D.A. Shirley dated 2 March 1998 holding that an agreement dated 6 April 1984 ("the 1984 Agreement") made between (1) Thomas Henry Hitch on behalf of himself, his father and sister (together the Hitch family); (2) Conteglade Properties PTE Ltd ("Conteglade") and (3) Monarch Assurance Company Ltd ("Monarch") was a sham within the meaning of that term given by Diplock LJ in Snook v. London & West Riding Investments Ltd [1967] 2 QB 786, 802. In that passage, Diplock LJ said this:

`As regards the contention of the plaintiff that the transactions between himself, Auto-Finance, Ltd. and the defendants were a "sham", it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure ((1882) 21 Ch D 309); Stoneleigh Finance, Ltd. v. Phillips ([1965] 1 All ER 513,[1965] 2 QB 537), that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.'

2. The question stated for the opinion of the Court was whether on the facts as found the Special Commissioners erred in holding that the 1984 Agreement was a sham. There is no dispute as to the test for ascertaining whether a document is a sham, the relevant test being that laid down in the Snook case. In the present case the 1984 Agreement referred to in the case stated was carried into completion by a deed dated 22 June 1984 ("the 1984 Deed"). The question stated by the Special Commissioners does not refer to this Deed, a point to which I turn below.

The issues arising on this appeal

3. It is well-established that an unsuccessful party before the Special Commissioners can appeal to the court only on a point of law. Accordingly, as Jonathan Parker J recognised, the issues for determination by the court must be issues of law. However a perverse decision by the Special Commissioners on the facts may involve an error of law. The court will intervene "if the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances too the court must intervene. It has no option but to assume that there has been an error in point of law." (per Lord Radcliffe in Edwards v Bairstow [1956] AC 14). Accordingly in relation to questions of fact the court can review the findings of (primary and secondary ) fact by the Commissioners to see whether they are unreasonable, rather than from the point of view of correctness. For the reasons summarised below Jonathan Parker J reached the conclusion that the decision of the Commissioners could be set aside on this basis.

4. The issues for determination on this appeal as I see it are:

Was the Special Commissioners' finding that the 1984 Agreement was a sham such as to be capable of being set aside on the ground of unreasonableness?

Did the Special Commissioners make any finding as to whether or not the 1984 Deed was a sham?

As a matter of law, can an instrument which in part fulfils the requirements of a sham for the purposes of the Snook test be held, as respects such part, to be a sham notwithstanding that the balance of the instrument is not shown to be a sham?

If the Special Commissioners were (a) not in error on finding that the 1984 Agreement was a sham and (b) in error in not making a finding as to whether the 1984 Deed was a sham, is a finding that the 1984 Deed was (so far as it was an internal document) a sham in fact the only finding that they could have properly made on the question of sham as regards that Deed?

The factual background

5. The principal participants in the events underlying the Special Commissioners' decision are the Hitch family to whom I have already referred, Mr Patrick Taylor, a solicitor specialising in tax avoidance and companies managed or controlled by Mr Taylor. Mr Taylor managed or controlled Conteglade, a company incorporated in Singapore, Monarch and Monarch Munificence Ltd ("Munificence"), a charitable company formed in Northern Ireland. Two further companies participate in the relevant transactions, namely Crest Homes plc and Crest Estates Ltd. For simplicity, I will in general call them both Crest. They are not connected with either the Hitch family or Mr Taylor.

6. I now summarise the facts as found by the Special Commissioners or appearing from the documents referred to in their decision. It was the combination of facts rather than individual facts that led the Special Commissioners to consider that the 1984 Agreement was a sham. In summarising the facts, I adopt the helpful distinction made by Jonathan Parker J between internal documents, that is documents involving the Hitch family and Mr Taylor's companies, and external documents, being those involving some one or more of those persons and in addition other parties. The 1984 Agreement was an internal document. The 1984 Deed, however, was both an internal and external document. It was made between (1) the Hitch family; (2) Conteglade; (3) Monarch Munificence Ltd; (4) Monarch; (5) Crest Homes plc and (6) Crest Estates Ltd. It is common ground that in this case the external documents were not shams. An issue of law arises as to whether a document which is both an internal document and an external document is capable of ever being held to be a sham.

7. These proceedings arise out of the disposal and subsequent development of most of Abbey Farm, Blunsdon St Andrew, near Swindon, Wiltshire. Abbey Farm comprised two blocks of land divided by a lane. A particular feature of the prospective development of the farm was that it was thought that planning permission would be obtained for the land south of the lane (about 400 acres) but not for that north of the lane (about 60 acres) and this point appears to have played a significant part in the design of the arrangements which were put in place by the taxpayers. Mr Hitch senior, who has since died, acquired the farm in 1947 but since 1968 it has been owned by the Hitch family. The taxpayers for the purposes of these proceedings are Mr Henry Hitch (whom I will call Mr Hitch) the deceased's son and, with his sister, one of the deceased's executors, and his brother in law, Mr Geoffrey Handy (assessed on behalf of his wife, Beatrice Ann Handy, the deceased's daughter and Mr Hitch's co-executor). The Hitch family wanted to maximise the return from the disposal of their land and were anxious about the impact of development land tax and the events set out under the subheadings which follow constitute the various steps or links in the chain towards attainment of those objectives. References in this judgment to the red land are to land forming part of Abbey Farm to the south of the lane, but excluding the site of Mr Hitch senior's bungalow and adjoining paddock. References to the green land are to the remainder of Abbey Farm.

(i) Negotiations with British Car Auctions

8. Early in 1983 Mr Hitch instructed a Mr Geoffrey Edwards, a chartered surveyor, to dispose of Abbey Farm. On 18 March 1983 Mr Edwards wrote to Mr Hitch reporting that British Car Auctions ("BCA") had offered to buy the whole of Abbey Farm for £800,000. He advised refusal of that offer and suggested that the initial asking price as agricultural land should be £1m and that enhancement value of £30,000 per acre should be paid in the event of planning permission being granted for development. Shortly after this, Mr Edwards dropped out of the events until a question arose as to who should pay Mr Edwards' fees.

(ii) Start of Mr Taylor's involvement

9. In March 1983, Mr Hitch met Mr Taylor, a solicitor and a specialist in tax planning. The Special Commissioners found that the Hitch family wished to accept whatever offer for Abbey Farm would produce the largest post tax benefit for the family. On 5 April 1983 Mr Taylor wrote to Mr Hitch outlining possible solutions to the problems regarding development land tax, capital gains tax, capital transfer tax and income tax. The Special Commissioners attached a copy of the letter to their decision. That scheme involved off-shore trusts, a life assurance company and a charitable company. The solution would involve the charity dealing with third parties and the proceeds of realisation passing "down the pipe" to the charity or life assurance company. However, it has not been part of the Revenue's case that these arrangements were those actually implemented. The Hitch family appointed Mr Taylor their solicitor. Negotiations with BCA continued.

(iii) Appearance of Crest

10. In the Spring of 1984, Mr Hitch heard that a neighbour, Mr Francis, had negotiated a deal with Crest Homes plc ("Crest") and that he understood Crest would be interested in acquiring more land, possibly Abbey Farm. He informed Mr Taylor and Mr Taylor agreed to deal with Crest.

(iv) The 1984 Agreement

11. On 10 April 1984 Mr Taylor had a meeting with the Hitch family (Mr Hitch, his father and his sister) at Mr Hitch senior's bungalow, at which he obtained the signatures of all three taxpayers to the form of draft agreement subsequently dated 16 April 1984 ("the 1984 Agreement"). The Special Commissioners found that Mr Taylor had previously given some explanation of its contents and effect to Mr Hitch but that there had been no prior explanation of its contents or effect to his father or sister. The Special Commissioners stated that the 1984 Agreement "forms the linchpin of the taxpayers' case". As already stated, the parties to the 1984 Agreement were (1) the Hitch family (2) Conteglade and (3) Monarch.

(v) Some of the detailed provisions of the 1984 Agreement

12. The effect of the 1984 Agreement was to grant a 999 year lease of Abbey Farm (including seven acres belonging to Mr Hitch but excluding Mr Hitch senior's bungalow and adjoining paddock) to Conteglade in terms of an annexed draft lease in return for (1) an annual rent calculated by reference to existing value and (2) an annuity to arise at a future date and to be paid by Monarch. Mr Taylor was a director of Conteglade and a director and chief executive of Monarch. Clause 8 of the 1984 Agreement enabled Conteglade to assign the whole or part of the benefit of the 1984 Agreement to any person meeting certain specified financial criteria. The assignment was to be by notice in writing to the Hitch family.

13. The rent was based upon the agricultural value of the land, to be determined in accordance with the formula set out in the third schedule to the draft lease. This required (inter alia) that the Hitch family and Conteglade should, within 21 days of 16 October 1985 (i.e. "the First Specified Date") agree the open market value ("OMV") of the land on an agricultural basis as at that date, with rent (determined by reference to that OMV) to be payable from 16 October 1985 "or such later date" as might be agreed. The annuity payable by Monarch was, to be determined in accordance with the formula set out in the sixth schedule. This required that the Hitch family and Monarch should "within a reasonable time" agree the OMV of the land, but this time with the benefit of planning permission as at 8 March 1983 (being "the date of commencement of the Term hereby granted"). This value would then, through the application of the formula, determine the level of the annuity, which would be payable from 2004, or as agreed, or when planning permission for 70% of the property had been achieved. The date when this percentage is achieved has been referred to in these proceedings as the "wicket-keeper". In both cases the formula, in effect, required that the annual payment (be it "rent" or "annuity") should be such an amount that, as at June 1984, the market would value the right to receive it (i.e. from whenever it came on stream) at a figure equal to the OMV. Thus (for example) if the OMV (with planning permission) as at 8 March 1983 was agreed at (say) £5.78m, and the "annuity" was to come on stream as from 2034, then the "annuity" figure would be whatever sum would have to be payable annually as from 2034 for the market, at June 1984, to value the right to receive it as from that date (i.e. as from 2034) at £5.78m. (It will be seen that, ex hypothesi, and regardless of the deferment period, the market value of the right to receive such annuity will always be the same as the OMV of the land as at 8 March 1983).

(vi) Sealing and dating of the 1984 Agreement

14. Over the next few days Conteglade and Monarch each sealed the draft agreement which the tax payers had signed. The agreement was dated 16 April 1984. The Special Commissioners found that there never was a plan attached to the 1984 Agreement. Clause 1(b) of the 1984 Agreement referred to an annuity contract issued by Monarch whose commencement date was to be "the day of 1984". The Special Commissioners found that no such contract had ever existed. There were unfilled blanks in the document and errors of drafting which led the Special Commissioners to conclude that it was prepared at short notice and in haste. They particularly noted that although the rent was to be assessed on the value of the whole of Abbey Farm, including Mr Hitch's land, it was to be charged only on the green land, exonerating the red land.

(vii) Mr Taylor visits the Hitch family

15. On 16 April 1984, Mr Taylor made a visit to the taxpayers at Abbey Farm prior to his meeting with Crest. As regards this meeting the Special Commissioners made the following findings:-

"No satisfactory explanation has been given to us for Mr Taylor's visit to the taxpayers on 16 April 1984 before his negotiations with Crest. Mr Taylor's base at that time was in Cheshire and his meeting with Crest was in Surrey. A visit to the taxpayers in Wiltshire necessitated a considerable detour and the only explanation which has been offered to us was that he wished to show the taxpayers the completed sealed agreement. We believe that it is more likely that Mr Taylor wished to agree with the taxpayers the terms which he should try to negotiate with Crest. That belief is supported by the fact that Mr Taylor telephoned Henry Hitch on the 17 April to report the success of his negotiations. If the 1984 agreement was genuine the taxpayers could have little interest in the outcome of Mr Taylor's negotiations. Henry Hitch's evidence was that Mr Taylor had to secure a better deal from Crest than that on offer from British Car Auctions. Again if the 1984 agreement was genuine there was no need for British Car Auctions' terms to be bettered, insofar as the taxpayers were concerned."

(viii) Negotiations with Crest

16. After the 1984 Agreement was signed by the Hitch family on 10 April 1984, Mr Callcutt, a senior executive of Crest, arrived at the father's bungalow to introduce himself and his company. Mr Taylor told him that he would deal with any negotiations which took place with Crest. Mr Taylor and Mr Callcutt met again on 16 April, and at the end of their meeting, which extended into the small hours of the morning of 17 April, they agreed terms for the purchase of the red land by Crest. The Special Commissioners found that Mr Taylor misled Mr Callcutt into believing that Munificence was entitled to sell Abbey Farm, but it is common ground that little turns on this point. . Following the meeting with Crest, Mr Taylor telephoned Mr Hitch to advise him of the successful outcome of his negotiations with Crest.

17. The terms agreed between Mr Taylor and Crest were incorporated into an agreement dated 17 April 1984 and made between Monarch Munificence Ltd ("Munificence") as vendor, Monarch of the second part (as guarantor), Crest as purchaser. This document is known as the red land agreement. It is an external agreement, and no one suggests that it is a sham.

(ix) Grant of an annuity by Conteglade to Monarch and assignment of the annuity by Monarch to Munificence

18. Meanwhile, on 12 March 1984 an agreement had been concluded in writing between Monarch and Conteglade whereby in exchange for a cash sum Conteglade would grant an annuity to Monarch. The agreement provided that Monarch could renounce the right to the annuity at any time prior to 24 January 2004, and require the transfer to it of the fund from which the annuity was to be paid. The Special Commissioners found that this annuity was the first and only annuity ever granted by Conteglade to any person.

19. By an agreement dated 17 April 1984 and made between Conteglade, Monarch and Munificence (referred to below as "the Assignment"), Conteglade at the direction of Monarch agreed to the assignment to Munificence of all the interest of Conteglade in the red land. No notice of this assignment was given to the Hitch family as required by the 1984 Agreement. The Assignment made reference to the issue by Conteglade of the annuity dated 12 March 1984 to Monarch and also provided that the proceeds of sale of Abbey Farm and all enhancement payments should accrue to Monarch. On 2 March 1987, Monarch renounced the annuity stated to have been created in its favour by Conteglade in the agreement dated 12 March 1984.

20. These documents are internal documents. The Special Commissioners found that it followed from their conclusion that the 1984 Agreement was a sham that the Assignment was also a sham.

(x) The deed dated 22 June 1984

21. The 1984 Deed contains two distinct parts. Under the first part (clause 1), Mr Hitch and Mrs Handy created a 999 year lease over the red land in favour of Crest in consideration of the payment of £1m to Monarch and the covenant of Crest to pay enhancement payments in accordance with Clause 3(b) of the red land agreement of 57.5% as and when any part of the red land received planning permission. At the date of the hearing before the Special Commissioners Crest had paid enhancement payments totalling some £8m. Under the second part of the agreement (clause 2) Mr Hitch and Mrs Handy created a 999 year lease over the green land in favour of Conteglade in exchange for (1) a rent of £100 (2) a rent fixed by reference to the agricultural value of the land and (3) an annuity payable by Monarch to the Hitch family. Clause 1(4) (e) of the 1984 Deed provided that Crest should not be affected by clause 2 of the Deed.

22. Under clause 2(5) of the 1984 Deed Conteglade covenanted to retain at least a part of the green land. Under clause 2(6) of the 1984 Deed, Munificence and Monarch agreed that the price of £1m and enhancement payments referred to in clause 1 of the 1984 Deed were to be invested and applied by Monarch in the manner there specified, in particular in the provision of an annuity. The annuity was not rent and was not charged on the land.

23. The first schedule to the 1984 Deed mirrors the third schedule to the 1984 Agreement. The third schedule to the 1984 Deed mirrors the sixth schedule to the 1984 Agreement except that the second specified date referred to in the 1984 Agreement was deferred from 2004 to 2034. The Special Commissioners did not accept that the change was merely a typing error as suggested by Mr Taylor. The percentage of 70% for the land in respect of which planning permission had to be received before the annuity would be paid (and referred to above as the wicket-keeper) had not been reached by the date of the hearing before the Special Commissioners.

(xi) Enlargement of Crest's leasehold interest

24. Immediately following the grant to it of a leasehold interest in the red land, Crest created a first charge on the red land in favour of Monarch to secure the making of the enhancement payments to Monarch at the direction of Munificence. Following completion of the demise of the red land, Crest effected firstly an enlargement of its leasehold interest in the red land into a freehold interest pursuant to section 153 of the Law of Property Act 1925 and secondly voluntary registration of its freehold title subject to the charge in favour of Monarch.

(xii) Mr Edwards' fee note

25. In November 1984 Mr Edwards rendered fee notes to Mr Hitch senior and Mr Hitch for his services in accepting instructions for the sale of Abbey Farm and "eventually producing a willing and able purchaser". The bills were passed to Mr Taylor who wrote to Mr Edwards stating that he did not agree with the narrative of the bills and stating that it would be "prejudicial to Mr Hitch and the Hitch family in their overall financial context". Later Mr Taylor wrote to Mr Edwards stating that he would be concerned if the bills had been seen by anyone else. Mr Edwards invited Mr Taylor to draft the narrative for the bills. Eventually his fees were paid by Monarch and the narrative (apparently drafted by Mr Taylor) which was contained in documentation provided by Mr Edwards stated that the fees were for services to Monarch which resulted in its being able to acquire Abbey Farm and to sell part of it to third parties. Mr Edwards confirmed that he had no professional involvement with the Hitch family and stated that he could accept no further instructions from Monarch as he was now acting for BCA.

(xiii) Ascertainment of rent payable to the Hitch family

26. At some date in 1984 or 1985, Mr Taylor (together with a colleague) and Mr Hitch met at Heathrow Airport. Mr Taylor told Mr Hitch that the rent payable to the Hitch family under the 1984 Deed would be £99,900 on the basis that the current use value of the farm was £1m and that the relevant percentage was 10%. There was no negotiation over these figures.

(xiv) Date for payment of rent brought forward

27. By a deed dated 27 November 1985 and made between (1) the Hitch family, (2) Conteglade and (3) Monarch, the date for payment of rent was brought forward from 16 September 1985 to 22 June 1984 and the rent was to be payable in instalments of whatever amount and whatever times the party making payment may require. No consideration was provided by the taxpayers to obtain from the tenant rent for the period 22 June 1984 to 16 September 1985, worth some £125,000. Mr Hitch stated that the rent was brought forward for his sister's benefit.

(xv) Sale of parts of the green land

28. In August and September 1985, 1 and 2 Beeches Cottages (forming part of the green land) were sold for £30,000 or thereabouts each. The consideration was paid to Monarch at the direction of Conteglade. The taxpayers joined in the conveyances to release the cottages from liability for rent but received no consideration for doing so. Subsequently, the remaining green land was sold first from Monarch to Munificence for £450,000 and then by Munificence to Tithegrove Ltd for £450,000 plus interest as completion was delayed. Mr Hitch and his sister again joined in the first of these conveyances to release the property from rent but they received no consideration for doing so. The first conveyance stated that the sum of £450,000 was paid on completion but documentary evidence showed that by agreement between Monarch and Conteglade the sum was left outstanding until after completion of the Tithegrove transaction.

(xvi) Mr Peel's evidence

29. Mr Peel farmed that part of the red land which Crest had not then developed and he used buildings on the green land which stood on the site eventually sold to Tithegrove. There was contemporaneous written evidence in the form of a letter that he wrote to Tithegrove that Mr Hitch had allowed him to use the buildings to store his equipment. In this way Mr Hitch had continued to act as an owner of the green land even after the 1984 Deed.

(xvii) Benefits received by Mr Hitch's children and others

30. Between 1989 and 1998 approximately, Mr Taylor's companies, including Munificence, bought three houses at different times for Mr Hitch's daughters. In addition Mr Taylor at the request of Mr Hitch arranged for one of his companies to make a loan to, provide a guarantee for and become a partner in, a limited partnership carrying on the business of running ski chalets. The business was run by a Mr Silver, who had made an offer of free skiing to Mr Hitch. Ultimately the partnership broke up. Monarch did not recover its loan but received a chalet in La Plagne. Monarch also bought another chalet in Tignes. Mr Hitch stays in a basement flat of this chalet during the skiing season. He acts as local agent for the company which lets out this chalet and Monarch's other chalet in La Plagne. In his evidence Mr Hitch said that Mr Taylor had not refused any request he had made to him for money or money's worth.

31. The Special Commissioners also found that Mr Hitch had been less than candid in his dealings with the Inland Revenue.

Conclusions of the Special Commissioners

32. The Special Commissioners heard evidence over 14 days and described the case as a difficult one. The Special Commissioners noted that the burden of showing that any document was a sham was a heavy one and lay on the Crown. Notwithstanding that and that the evidence was largely circumstantial they came to the conclusion that the 1984 Agreement was a sham, and that in consequence the Assignment and the related recitals in the 1984 Deed also constituted a sham. The matters on which they relied in reaching this conclusions included the following:

A. The taxpayers wanted to sell Abbey Farm and had no wish to retain it.

B. Mr Hitch's evidence made it clear that he regarded the decisions to sell Beech Cottages and to pay Mr Taylor's fees as decisions made by the Hitch family.

C. Mr Taylor's inaccuracies, including the inaccuracies in the narrative describing Mr Edwards' services and in answers which he advised Mr Hitch to give to the Revenue.

D. The 1984 Agreement contained numerous errors and blanks and did not incorporate any standard conditions of sale.

E. Various aspects of the 1984 Agreement had not been performed as provided in the 1984 Agreement, namely: the lease to Conteglade was not completed on the following day; Conteglade had not served notice nominating Munificence as the assignee of the benefit of the 1984 Agreement, and there had been no valuation of Abbey Farm with planning permission (or agreement as to such value) as required by the 1984 Agreement for the purpose of fixing the annuity under the sixth schedule.

F. The fact that (as the Special Commissioners inferred) Mr Taylor visited the Hitch family on 16 April 1984 for the purpose of obtaining instructions as to the terms he was to negotiate with Crest. The Special Commissioners took the view that if the 1984 Agreement was genuine the taxpayers had little interest in the outcome of Mr Taylor's negotiations.

G. No satisfactory reason had been given for the advancement of the date for the payment of rent to the Hitch family.

H. The fact that the lease provided for the rent to be paid as and when Monarch required rather than on regular dates.

I. Mr Taylor received a 10% fee on moneys produced by dealings with Abbey Farm lands and this was consistent with his acting as an agent and banker rather than as a family solicitor. The Special Commissioners said: "We also find, despite Mr Taylor's equivocation on the point, that he receives 10% of moneys produced by dealings with Abbey Farm lands. If he was really acting only as the family's solicitor and not as their agent and banker he would have submitted fee accounts to them for professional charges. That did not happen." In my judgment, notwithstanding Mr Price's submissions to the contrary, that finding is a finding that Mr Taylor was acting as agent and banker for the Hitch family, and the same would apply to any of the companies which he managed and controlled, there being no contrary evidence to indicate that they were acting independently of him.

J. There was no explanation for the taxpayers agreeing to release the Beeches Cottages or the remainder of the green land from the liability to rent for nil consideration.

K. The explanation that in providing houses to Mr Hitch's daughters Mr Taylor's companies were making charitable donations to the poor and needy could not be accepted as the true explanation.

L. The investment by Mr Taylor's companies in the skiing business, and acquisition of the second chalet, at Mr Hitch's request, was consistent with the existence of some wider financial arrangement between the Hitch family and Mr Taylor. The Special Commissioners said: "We are asked [sc. by the taxpayers] to accept that Henry Hitch has only to ask for financial assistance, for whatever reason, and such request is granted. Mr Sutcliffe testified to Mr Taylor's reputation as a very tough negotiator: (Day 11, page 23, line 28). Bearing this in mind we do not accept that a mere request for funds would result in the immediate production of funds without there being a wider financial arrangement such as is suggested by the Crown."

33. The Special Commissioners did not accept that in April 1984 the taxpayers intended to grant a long lease of Abbey Farm to a Singaporean company or that that company intended to become the tenant of Abbey Farm on the terms contained in the 1984 Agreement. They decided that the 1984 Agreement, the Assignment and related recitals in the 1984 Deed were shams. Those recitals provided as follows:

"(2) [The Hitch family] have agreed prior to the date herof to demise the land shown edged red and green on the plan annexed to Conteglade

(3) Conteglade has agreed prior to the date hereof to procure the demise of the land edged red on the said plan to [Munificence]"

34. The Special Commissioners also discharged assessments on the taxpayers made in the alternative for 1986/7 and 1987/8.

35. At the outset of their decision, the Special Commissioners state that a transcript of the whole proceedings is available to the court if required. For my part I have not found it necessary or appropriate to look at these transcripts.

Judgment of Jonathan Parker J

36. As respects the form of the question posed for the opinion of the court in the case stated Jonathan Parker J observed that it was common ground that this question must be read as comprehending the Special Commissioners' further conclusions that the Assignment and the two specified recitals in the 1984 Deed, were, in consequence of their primary findings, also shams. The Revenue also submitted to him that the Special Commissioners must by necessary implication have found that further parts of the 1984 Deed were a sham. Jonathan Parker J rejected that contention: -

"The Revenue submits that by necessary implication (that is to say, as a necessary consequence of the findings that the 1984 Agreement and the 17 April Internal Agreement were shams) clause 2 of the 1984 Deed and the Schedules referred to in that clause must also have been found by the Special Commissioners to be shams. Mr Vallance QC submitted that the omission of any reference in the Decision to clause 2 of the 1984 Deed as being also a sham must have been accidental. He even went so far as to submit that what the Special Commissioners (impliedly) found was not merely that clause 2 of the 1984 Deed was a sham but that the true arrangement between the Hitch family and Mr Taylor was and is as submitted by the Revenue to the Special Commissioners, viz. that Mr Taylor (both personally and via his companies) has at all times acted as agent or banker for the Hitch family, and that Mr Taylor (or his companies) hold the proceeds of the realisation of the farm land on (in effect) a bare trust for the Hitch family.

As to the submissions that there is to be implied into the Decision a finding that clause 2 of the 1984 Deed was a sham, in my judgment the mere fact that the Special Commissioners expressly referred only to two of the recitals in the 1984 Deed as being "shams" is enough in itself to dispose of the submission that they impliedly intended to refer in the same way to some other part or parts of the 1984 Deed. In any event I would be very loath to attribute to any tribunal (especially one consisting of Special Commissioners as experienced as those who heard this case), by a process of so-called implication, a finding which it has not chosen to express in terms. It is also perhaps relevant to note that although the Revenue had the opportunity, in the normal course, to suggest revisions or additions to the case stated, it did not raise this point at that stage.

I accordingly proceed on the footing that the only parts of the 1984 Deed which the Special Commissioners found to be "shams" are the two recitals."

37. Jonathan Parker J directed himself as to the approach to be adopted by the court as set out in Edwards v Bairstow, above. He then examined the facts found by the Special Commissioners at length and with great care. He took eleven factors which the Special Commissioners had identified as being the basis for their conclusion that the 1984 Agreement (and the assignment and related recitals in the 1984 Deed) was a sham. He examined them each individually in turn. At several places in his judgment he refers to the fact that the evidence showed that the scheme was artificial, and he points out that the Revenue were not challenging the scheme on the basis of Furniss v Dawson [1984] AC 484. But, as pointed out by Mr Vallance on this appeal, for that basis of challenge to succeed it would have to be shown that there was a pre-ordained series of transactions. There might be some difficulty about that in a case such as this. For the purposes of this judgment it suffices if I take what Jonathan Parker J says about what he termed factors 4,5,7,9,10 and 11 (which equate to subparagraphs e, f, g, i, and j above and in the case of factor 11, subparagraphs k and l above).

38. With regard to the fact that the 1984 Agreement was not performed in accordance with its terms in the three respects indicated, Jonathan Parker J held that the material question which the Special Commissioners should have considered was whether the 1984 Agreement was performed at all. If it was it was more difficult to hold that it was a sham.

39. With regard to Mr Taylor's meeting with the Hitch family on 16 April 1984, Jonathan Parker J held that this showed that the arrangements were collusive and not at arm's length. However he held that it did not "touch upon the question of sham."

40. With regard to the fact that the Hitch family provided no consideration for the advancement of rent, Jonathan Parker J recognised that this was an uncommercial arrangement but held that the fact that parties to an agreement decide to vary it in a way that is uncommercial does not mean that the agreement is a sham. It is not inconsistent with their intending the agreement to have its expressed effect.

41. With regard to Mr Taylor's 10% fee, Jonathan Parker J held that it was difficult to draw any conclusion without further findings as to how the fee had been paid, which the Special Commissioners had not made. He held "it may be, for all I know, that further arrangements (artificial but not sham) were entered into between Mr Taylor's companies and Mr Taylor personally whereby Mr Taylor ended up in receipt of a sum which happened to be equal to 10 per cent of the moneys received from time to time from purchasers of Abbey Farm. For reasons already explained, the existence of such arrangements would not, in my judgment, point to the 1984 Agreement being a sham."

42. With regard to the absence of consideration for the release of the Beeches Cottages and the land sold to Tithegrove from the liability for rent, Jonathan Parker J held that that factor demonstrated merely the artificiality of the scheme.

43. With regard to the provision of benefits for Mr Hitch and his children, Jonathan Parker J held that, there being no finding as to what the wider financial arrangement between the parties was, the existence of such an arrangement was not necessarily inconsistent with the 1984 Agreement taking effect according to its tenor.

44. In all Jonathan Parker J was clearly not convinced that the matters which the Special Commissioners had identified as supporting their conclusion of sham necessarily led to that conclusion.

45. Jonathan Parker J then turned to the 1984 Deed. He held that there was no doubt that so far as the red land was concerned it was not a sham. He further held that since Conteglade went on to sell the green land and the outside purchasers were clearly intended to obtain good title to the green land the remainder of the 1984 Deed could likewise not be characterised as a sham. On that basis there was no scope for an argument that the 1984 Deed was a sham. In addition the 1984 Agreement must have merged into the 1984 Deed and so it could not be held to be a sham. Moreover Jonathan Parker J drew attention to the fact that it was possible that the arrangement involved Conteglade being a tenant of the green land for a limited period only while a purchaser was found. That did not mean that the 1984 Agreement was sham.

46. In conclusion, Jonathan Parker J held that the only reasonable conclusion on the facts was inconsistent with the decision of the Special Commissioners and he accordingly allowed the taxpayers' appeal.

Submissions by the Revenue

47. For the Revenue, Mr Vallance submits that there is a crucial difference between an artificial transaction and a sham. In the former case, the parties intend to carry out the transaction (although it may be an unnecessarily complex way of achieving the desired result). In the case of a sham the parties do not intend to carry out the transaction at all.

48. The Revenue estimate that Crest has so far paid some £8m for the red land, in addition to the sum of £1m, and that Monarch has received some £552,000 in respect of the green land. The Revenue also estimate that the amount ultimately payable by Crest could be as much as £100m.

The benefits to the Hitch family include the provision of the three houses for Mr Hitch's daughters, the investment in the skiing business, acquisition of a second chalet at Tignes and the payment of Mr Edwards' fees. There may be other benefits of which the Revenue does not know.

49. The Revenue are in the nature of things unable to spell out the terms of the wider financial arrangement which they say exists between the Hitch family and Mr Taylor, but it is unnecessary for the Special Commissioners or the court to make findings as to those terms on the facts of this case. It is sufficient to say as did the Special Commissioners that Mr Taylor acted as agent and banker for the Hitch family.

50. The Hitch family's contention is that all they are entitled to is the rent of £100,000 and, when the wicket-keeper is reached or 2034 (or such earlier date as the parties agree) arrives, annuity payments from Monarch. On the Revenue's case, in effect the true arrangement between the parties is that Mr Taylor would for a fee of 10% launder the capital gain receivable on the disposal of Abbey Farm and make payments as and when available to the Hitch family and that the annuity was bogus. There are difficulties in the interpretation of the wicket-keeper. It may relate to the red and the green land and if it does there is doubt as to whether the wicket-keeper will ever be reached. It is common ground that the scheme (if it works) uses certain exemptions from capital gains tax and development land tax available to overseas companies and charities. This: (1) any gain which accrued to Conteglade as a result of the Assignment would be exempt from capital gains tax as Conteglade was an overseas company; (2) since Crest did not purchase from Conteglade there was no obligation (as there would otherwise have been, Conteglade being an overseas Company) to withhold part of the purchase price for development land tax; and (3) Munificence itself made no gain (and was in any event a charity). Indeed Mr Price submits that the intention of the parties was to take advantage of these exemptions. The proceeds will be receivable by Conteglade, which is a Singaporean company, and it will be liable to pass the proceeds to Munificence, a charitable company. In those circumstances, there is no liability to capital gains tax and no obligation on any UK person to withhold monies to meet development gains tax. Munificence itself makes no gain. Indeed Mr Price submits that the intention of the parties was to take advantage of these exemptions.

51. Mr Vallance submits that the Special Commissioners accepted that clause 2 of the 1984 Deed was a sham and that the facts which are probative of a sham in relation to the 1984 Agreement are equally probative of a sham in relation to that part of the 1984 Deed. As a matter of common sense the Special Commissioners could not conclude that the 1984 Agreement was a sham but that the related parts of the 1984 Deed were not a sham with the result that a valid lease of the green land was after all created in favour of Conteglade. That the Special Commissioners were of the view that clause 2 of the 1984 Deed was a sham was apparent from the fact that they discharged the Revenue's alternative assessments for 1986/7 and 1987/8.

Submissions for the taxpayers

52. Mr Leolin Price QC, for the taxpayers, submits that the decision of Jonathan Parker J should be upheld. He submits that the Special Commissioners must have rejected the submission that clause 2 of the 1984 Deed was also a sham because they did not deal with that submission, and further that it would not have been open to the Special Commissioners to find that clause 2 of the 1984 Deed was a sham for the reason that with the benefit of the title which it had acquired under that clause Conteglade had passed title to the green land to the purchasers of the Beeches Cottages and to Tithegrove. The fact that the taxpayers had told lies to the Revenue or that the receipt clause in the Tithegrove conveyance was untrue did not mean that the 1984 Agreement was a sham. Mr Price also relies on the point accepted by Jonathan Parker J that the 1984 Agreement had merged into the 1984 Deed.

53. Mr Price submits that the Hitch family intended that the 1984 Agreement should have legal effect and that they executed a number of documents which were dependent on the grant of a lease to Conteglade. There is nothing to show that they intended to give the impression to third parties that they had created different legal rights and obligations from those appearing in the documents as executed. There is no basis for the Special Commissioners' finding that Mr Taylor acted as agent or banker for the Hitch family. The Commissioners made no finding as they would have needed to so that the Hitch family and Mr Taylor agreed that the lease arrangements were fictitious. Nor was there any finding of any intention to deceive. The fact that the parties agreed to vary an agreement as executed did not mean that that agreement was a sham.

54. Mr Price submits that there was no advantage or disadvantage to the Hitch family in releasing the green land from liability to rent since Conteglade had covenanted to retain at least part of the green land. The lease of the green land was not, however, capable of enlargement unless the liability to rent was released. Moreover, the landlord had no right of re-entry if rent was not paid, but this was not evidence of a sham.

55. Mr Price submits that the Hitch family were concerned in the terms negotiated with Crest because they were interested in the success of planning applications. This submission does not, however, address the fact that the annuity was fixed by reference to 1983 value, not the value of the land from time to time.

56. Mr Price submits that the date of 2034 was not of significance and did not show that the 1984 Agreement was a sham since the parties could have agreed an earlier date for the commencement of the annuity. However, as I see it the fact remains that the date was never brought forward. Indeed if it had been the Revenue might have claimed that the payments of annuity were in fact of capital.

57. Mr Price submits that it would be a considerable extension of Snook for this court to hold that part only of a document could constitute a sham for the purposes of the Snook test. However he accepts that in very special circumstances the court could find that the parties had slipped into an effective agreement a provision which was not intended to have effect and which was a sham. However he submits that for the reasons given above this was not such a case. In any event it could not be said that the parties did not intend that there should be a lease and obligations to pay rent and an annuity. If Conteglade had been the agent of the Hitch family there would have been no valid lease. There was no finding by the Special Commissioners that Conteglade was merely an agent for the Hitch family. The Special Commissioners clearly thought that there was a lease of the green land. Indeed Mr Price informs us that the taxpayers have paid tax on the basis that the rent was indeed rent.

58. Mr Price submits that the Hitch family could not have used a company connected with them instead of Conteglade to obtain the tax advantages which they desired.

59. Mr Price submits that the court cannot make a finding which the Special Commissioners ought to have made but did not make. This would be going beyond the function of the court as set out in Edwards v Bairstow, above.

60. As respects the meeting of 16 April 1984, Mr Price submits that there was a connection between the annuity and the development of the red land because of the "wicket-keeper", and he further submits that there is no finding by the Special Commissioners that Conteglade or Mr Taylor was acting as agent for the Hitch family in the negotiations with Crest. However, the connection relied on does not wholly explain Mr Taylor's visit and as I see it the Special Commissioners found that Mr Taylor and his companies were agents for the Hitch family when they found that there was a wider financial arrangement as suggested by the Crown, and that Mr Taylor was agent and banker for the Hitch family.

61. Ms Penelope Reed, following, drew the Court's attention to National Westminster Bank plc v Jones, 22 June 2000,unreported, in which Neuberger J draws a distinction between artificial schemes and shams though he accepted that a sham was likely to involve artificiality. In addition, as regards the rights of innocent third parties under a transaction entered into pursuant to a transaction which is later held to have been a sham, Neuberger J suggests, obiter and without deciding the point, that possible prejudice to such third parties should not stand in the way of the court holding that a transaction was sham unless perhaps their rights conflicted with those of another innocent third party (judgment, para.60).

Conclusions

62. Before turning to the issues as I have formulated them, I will set out the principles which are in my judgment the relevant principles as respects sham transactions.

63. The particular type of sham transaction with which we are concerned is that described by Diplock LJ in Snook v. London & West Riding Investments Ltd, above. It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties, in this case the Revenue, or the court, the appearance of creating different rights and obligations. The passage from Diplock LJ's judgment set out above has been applied in many subsequent decisions and treated as encapsulating the legal concept of this type of sham. Mr Price referred us to Sharment Pty Ltd v. Official Trustee in Bankruptcy (1988) 82 ALR 530 in which the Federal Court of Australia drew on Diplock LJ's formulation of sham in Snook's case.

64. An inquiry as to whether an act or document is a sham requires careful analysis of the facts and the following points emerge from the authorities.

65. First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.

66. Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.

67. Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.

68. Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied: see for example Garnac Grain Co. Inc v H.M.F. Faure and Fairclough Ltd. [1966] 1 QB 650, 683-4 per Diplock LJ, which was cited by Mr Price.

69. Fifth, the intention must be a common intention: see Snook's case, above. This is relevant to issue 3 below.

70. I now turn to the various issues that arise for determination on this appeal.

Issue 1 - Was the Special Commissioners' finding that the 1984 Agreement was a sham such as to be capable of being set aside on the ground of unreasonableness?

71. I agree with the Judge as a general proposition that, if the 1984 Deed is not a sham, the fact that the 1984 Agreement is a sham is of no material consequence for tax purposes and this appeal must fail. (That hypothesis presupposes the sequence of events that before the 1984 Agreement was completed the parties underwent a Damascene conversion to the view that the 1984 Agreement as completed should constitute the real agreement between them). As the Judge points out, the 1984 Agreement would then have merged into the 1984 Deed. However, that is only true as I see as a general proposition. In this instance, the upshot of the Special Commissioners' findings was that Mr Taylor was agent and banker for the Hitch family. It would follow from the facts as found by them that the Taylor companies, including Conteglade, were not true third parties but nominees or agents for the Hitch family. In this scenario Conteglade's capacity as such would not automatically dissolve on completion of the 1984 Deed but would survive and apply also to that Deed. This may explain why the Special Commissioners did not find it necessary to make any finding with respect to the 1984 Deed. I would also agree with the Judge, but again only as a general proposition, that it is of no consequence that a document (which is not itself a sham) contains a recital referring to a prior agreement which is a sham. However the recitals in question (which I have set out above) are not totally without significance in the present case since they indicate that the parties to the 1984 Agreement and the Assignment had not abandoned those agreements by the time the 1984 Deed was executed. The 1984 Agreement and the Assignment remained, either actually or apparently, the document which governed their rights and obligations.

72. The Special Commissioners made no express finding about whether the 1984 Deed was a sham, and the consequences of this on their decision is the subject of the later issues I have identified. It is necessary, however, to consider whether the decision should be set aside even apart from this issue.

73. As I have said above the applicable test is that laid down in Edwards v Bairstow. It involves an examination of the reasonableness rather than the correctness of the Special Commissioners' decision. As Lord Radcliffe held at the end of his speech in that case:

"As I see it, the reason why the courts do not interfere with commissioners' findings or determinations when they really do involve nothing but questions of fact is not any supposed advantage in the commissioners of greater experience in matters of business, or any other matters. The reason is simply that, by the system that has been set up, the commissioners are the first tribunal to try an appeal and, in the interests of the efficient administration of justice, their decisions can only be upset on appeal if they have been positively wrong in law. The court is not a second opinion, where there is reasonable ground for the first. But there is no reason to make a mystery about the subjects that commissioners deal with, or to invite the courts to impose any exceptional restraints on themselves because they are dealing with cases that arise out of facts found by commissioners. Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and, if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado."

74. Accordingly the issue for the court is this: (leaving aside at this stage the 1984 Deed) was the only reasonable conclusion which the Special Commissioners could have come to on the facts inconsistent with Special Commissioners' decision that the 1984 Agreement (and the Assignment) constituted a sham? To answer this question I turn to the Judge's analysis of the factors I have set out above.

75. Jonathan Parker J's approach was to take the matters identified by the Special Commissioners as the basis from which they inferred that the 1984 Agreement had been a sham individually. In my judgment they should also be considered in the round. It is helpful to set out the story in a nutshell. What the Special Commissioners found was that the Hitch family wanted to sell Abbey Farm. They agreed to grant a 999 year lease of the farm to Conteglade in return for a basic rent by reference to the agricultural value of the land and an annuity by reference to the increase in the value of the land on the basis that it was developable. The annuity would not be payable until 70 % of the land became developable, a point which had not been reached at any material time. The lease contained a number of peculiarities, in particular that part only of the land (the green land) was subject to the liability for rent. Crest emerged as an assignee of the lease of the red land and it took a lease on execution and immediately enlarged it so that it held a freehold interest in the red land. The green land was sold in several parcels. Each time it was sold the Hitch family agreed to release that part of the green land from its liability to bear the rent. The annuity never became payable yet Mr Taylor's companies provided three houses for Mr Hitch's daughters and invested in a skiing business at Mr Hitch's request and acquired a second chalet at Tignes. There was no credible explanation for the payment of these benefits at Mr Hitch's direction. In addition Mr Taylor was paid a fee of 10% of the sums received on dealings with the Abbey Farm lands. The Special Commissioners took the view that in those circumstances there was to be some other financial arrangement between the Hitch family and Mr Taylor - one which effectively imposed an obligation on him to make payments on demand at the Hitch family's direction. There was no evidence as to the terms of that arrangement. But, (as I deduce) as a result, the Special Commissioners did not accept that the 1984 Agreement set out the true arrangement between the parties or that the parties to the 1984 Agreement intended that it should take effect according to its tenor - why else should Mr Hitch be able to request payments at his direction if Conteglade was simply liable to pay the rent and annuity in accordance with the terms of the 1984 Agreement? That conclusion received some support also from the fact that the parties did not abide by the terms of the 1984 Agreement and failed for example to agree the value of the land with planning permission even though that value would be the basis of the annuity. In this instance the Special Commissioners had a detailed knowledge of the evidence in the case. They decided that the inferences which they drew were the appropriate inferences. They could have made more detailed factual findings; some of the findings are limited and elliptical (see for example the finding that Mr Taylor was agent and banker for the Hitch family, to which I refer above). However the facts actually found by them in my judgment entitled them to draw those inferences. Accordingly, their findings were not inconsistent with the conclusions to which they came and were sufficient to exclude review by the court on the principles set out in Edwards v Bairstow.

76. I agree with the Judge that the parties were at liberty to structure the sale of Abbey Farm by the grant of 999 year leases which could be enlarged by the lessee. Likewise there would seem to be no reason why Conteglade should not take the lease of the green land on the basis that it would be assigned when purchasers were found for the green land. However I would not agree with the Judge that performance of the 1984 Agreement in part was sufficient to remove the possibility of its being a sham. Part performance of the 1984 Agreement does not in my judgment mean that it cannot be a sham. The terms actually performed may be terms of the true arrangement between the parties and they may accordingly have somewhat different consequences from the same terms appearing in the sham transaction. The correspondence of the terms in this respect is then coincidental and partial. The reason why the 1984 Agreement was not the true agreement in this case is that there was on the facts as found by the Special Commissioners some other larger arrangement between Mr Taylor and the Hitch family which was not revealed to the Revenue or the Special Commissioners and which provided for benefits to be paid to the Hitch family. These benefits were not in the form of the annuity provided for by the 1984 Agreement but in some other form. The only relationship between Mr Taylor and the Hitch family in evidence arose out of the sale of Abbey Farm, and in the absence of some other credible explanation the inference was irresistible that the benefits paid to Mr Hitch and his family were paid out of the proceeds of sale received by Munificence for the sale of the land. As I see it the Special Commissioners were entitled to conclude that the Hitch family had some immediate and absolute right to those proceeds and that Mr Taylor was merely an agent and banker for them. (It follows from the Special Commisisoners' finding that the parties did not intend to create a lease in favour of Conteglade that the rent was merely a minimum annual payment of such benefits).

77. Nor would I agree with Jonathan Parker J that the meeting between Mr Taylor and the Hitch family on 16 April 1984 at which on the Special Commissioners' findings Mr Taylor took instructions as to the terms he was to negotiate with Crest does not "touch " on the question of sham. I agree with the Special Commissioners that this meeting could be one of the matters from which the inference of sham could arise since by this time a deal had apparently been struck between the parties which meant that the Hitch family had no control over, or interest in the detail of, the negotiations with Crest.

78. Likewise I do not agree that the advancement of rent for no consideration and the release of parcels of the green land from the liability for rent for no consideration was not a matter from which it could be inferred that the 1984 Agreement was a sham. The Special Commissioners were entitled to approach the matter on the basis that it was unlikely that the Hitch family were doing this so as to confer some benefit on Mr Taylor's companies unless there was some arrangement for the Hitch family to benefit beyond that disclosed on the face of the 1984 Agreement itself. Accordingly, those matters were consistent with there being an arrangement for the sale of Abbey Farm in parcels to third parties in a manner which resulted in benefits to the Hitch family of the kind described above.

79. Likewise the 10% fee paid to Mr Taylor is as I see it a material matter. It suggests some service apart from that of giving legal advice. The point that there was no evidence as to how it was paid and that there was a possibility that it was coincidentally a fee of that percentage, as suggested by the Judge, do not seem to me to be matters on which the Special Commissioners can be criticised: if there had been evidence on these points, the taxpayers had had an opportunity to produce it and failed to do so. Once it is appreciated that there was no evidence to suggest other than that the parties had agreed that Mr Taylor should have this percentage it becomes clear that the inference is capable of being drawn in the absence of a contrary explanation that he (Mr Taylor) was acting as agent for the sale of Abbey Farm. We are told that the taxpayers did not suggest that the percentage was coincidental as the Judge thought possible.

80. Accordingly in my judgment and leaving aside the effect of the 1984 Deed, the facts as found by the Special Commissioners are not inconsistent with their decision that the 1984 Agreement, the Assignment and the related recitals in the 1984 Deed were shams in the Snook sense. They concluded that the real arrangements between the parties transcended and transformed those documents. The status of the 1984 Deed is therefore of importance in this appeal and thus the further issues set out below must be determined.

Issue 2 - Did the Special Commissioners make any finding as to whether or not the 1984 Deed was a sham?

81. On this appeal the Revenue again contend that by implication the Special Commissioners found that clause 2 of the 1984 Deed is also a sham, alternatively, that no other conclusion was open to them. The taxpayers disagree and contend that the Special Commissioners made no such finding. From this they argue that that it is pointless and logically impossible for the 1984 Agreement to be a sham if the 1984 Deed which carried it into effect was not a sham. This argument is of great importance to this case since it was at the foundation of the taxpayers' submissions and also of the judgment of Jonathan Parker J.

82. In my judgment the Special Commissioners made no finding about the 1984 Deed. In this I agree with the judgment of Jonathan Parker J and I find his reasoning compelling on this point. Jonathan Parker J took the view that this was as far as the court needed to go on an appeal by way of case stated from the Special Commissioners. On this point an error in my judgement arose. There is no logical difference, so far as the function of the court is concerned, between an omission to draw an inference and the making of an inference. In either case the inference or the failure to draw an inference is susceptible to review on appeal if it meets the test laid down in Edwards v Bairstow, above. Accordingly if the Revenue can in this case show that the absence of a finding as to whether the 1984 Deed was sham is inconsistent with the other facts found by the Special Commissioners in my view the Court would be entitled to reach the conclusion that the Special Commissioners had committed an error of law in not making that finding. I consider this aspect of the case further under Issue 4 below.

83. The Revenue accept that they could have asked the Special Commissioners to include in the case stated a question as to whether they should have made a finding as to whether the 1984 Deed was a sham when the draft case stated was circulated to the parties, and that they failed to do so.

84. I would add that the Special Commissioners proceeded on the basis that the conclusion that that the 1984 Agreement was a sham was all that was necessary to enable them to disallow the taxpayers' appeal and discharge the Revenue's alternative assessments. In my judgment this was not the correct approach since it relies on an assumption that there is no change of circumstances between the two agreements and that their content is the same. In fact in the present case by the time of the 1984 Deed the transaction involving the disposition of the red land to Crest had been agreed. No one suggests that this is a sham transaction and that leads to the next issue, which is whether the 1984 Deed could ever be held to be a sham even if only the transaction involving the green land was a sham.

Issue 3 - As a matter of law, can an instrument which is in part fulfils the requirements of a sham for the purposes of the Snook test be held, as respects such part, to be a sham notwithstanding that the balance of the instrument is not shown to be a sham?

85. I have already noted that it is an established requirement of a sham transaction that the parties should have the common intention that it should not take effect according to its tenor and in addition that a false impression should be given to third parties. But this point raises one of the issues of law that has arisen in this case: common to whom? Mr Price submits that the intention must be common to all the parties to a document save in very exceptional circumstances, which he does not define and which he submits it is not appropriate to define since they were not applicable in this case. Thus, on his submission, all the parties had to have a common intention, and hence the 1984 Deed was incapable on the facts as found by the Special Commissioners of being a sham. He refers to this as the "all or nothing" principle. Mr Vallance submits that this is not a necessary requirement of a sham, and does not apply where (as here) the document implemented more than one transaction. In principle I accept Mr Vallance's submission. In Snook's case Diplock LJ was concerned with the situation where the document implemented a single transaction, and his words must be read in the context of the case before him. In any event, the effect of Mr Price's submission is that the court will be precluded from finding that a document is a sham because it includes an additional provision which is intended to be effective. This might deprive the doctrine of sham of any operation in a situation which is logically indistinguishable from the situation where the doctrine of sham already applies. In my judgment, the law does not require that in every situation every party to the act or document should be a party to the sham. I accordingly reject Mr Price's submission save that I accept that the case where a document is properly held to be only in part a sham will be the exception rather than the rule, and will occur only where the document reflects a transaction divisible into separate parts. For the purposes of this case, it is sufficient that the court can identify two transactions in the document, one in favour of Crest and one in favour of Conteglade. The first of these two transactions involves a new party. It may be that it is not necessary that there should be a new party but since that point does not arise I need not express a final opinion on it.

86. In conclusion clause 2 of the 1984 Deed is capable of being a sham even if (as is common ground) clause 1 of the same deed is valid and effective, and not a sham.

Issue 4 - If the Special Commissioners were (a) not in error on finding that the 1984 Agreement was a sham and (b) in error in not making a finding as to whether the 1984 Deed was a sham, is a finding that the 1984 deed was (so far as it was an internal document) a sham in fact the only finding that they could have properly made on the question of sham as regards that Deed?

87. The Revenue must show that clause 2 is ineffective, not simply that it was voidable. No authority has been cited to us which would suggest that a sham transaction could on its own be other than a void transaction. There being no statutory provision in point here, that consequence would in my judgment follow. However, if a third party in good faith and for valuable consideration enters into a transaction to acquire rights created by the sham transaction, the question would arise whether he could acquire rights from one party only, and if so whether the transaction would cease to be void and, if so, with effect from what date. He may well be able to rely on the doctrine of estoppel or be protected by the law in some other way. Be that as it may, that difficulty does not arise here. Transactions took place in reliance on clause 2 of the 1984 Deed: see the sale of 1 and 2 The Beeches Cottages and the sale of green land to Tithegrove. But all parties to clause 2 of the 1984 Deed joined in the conveyances and thus the purchasers of these properties will have acquired good title. Moreover, while these conveyances (and the subsequent enlargement by the purchasers of their leasehold interests) have reduced the land subject to clause 2 of the 1984 Deed, clause 2 of the 1984 Deed continues to have the same effect, if any, as it did on execution of the 1984 Deed. Accordingly, if that part of the 1984 Deed is a sham, it did not cease to be such by virtue of the subsequent conveyances.

88. Accordingly I do not accept the taxpayers' argument that Conteglade conveyed title to the Beeches Cottages and to the land conveyed to Tithegrove so that it must itself have acquired valid title to the green land under clause 2 of the 1984 Deed. Valid title would have been obtained even if Conteglade's true capacity was that of agent for the Hitch family as owners of the green land. In fact (as I have said) the Hitch family were parties to the conveyances because of the release of the property sold from liability for rent. In those circumstances it would not be possible for anyone to argue that good title was not thereby conveyed to the purchasers. Moreover, and this is a separate point, the fact that Conteglade acted as an agent for the Hitch family does not mean that clause 1 of the 1984 Deed would have to be a sham since in law that relationship could be established by agreement between the Hitch family and Conteglade independently by the 1984 Deed and Crest was not, and was not required to be, a party to such agreement.

89. I have already stated that, in my judgment, the Special Commissioners should have made a finding as to whether or not the 1984 Deed was a sham. The next question for determination is whether, within the limits of the court's function laid down in Edwards v Bairstow, the court can supply that finding or has to remit the matter to the Special Commissioners for such a finding. In my judgment if the court concludes that a particular finding is one which, if the Special Commissioners had been asked to make a finding on that point, it would have been unreasonable for the Special Commissioners not to have made, given their other findings, then the court can, in performance of its review function as laid down in Edwards v Bairstow, supply that finding. In addition in my judgment the court can take this course in the present case even though the question is not raised in the case stated. The status of the 1984 Deed is intimately connected with the question that has been raised and the course the court would otherwise take is to remit the matter to the Special Commissioners. For my part I do not consider that that would be the just or expedient course here since the appeal raises novel points of law and because in view of the death of Mr D.A. Shirley the matter could not be remitted to the same Special Commissioners.

90. I turn therefore to consider whether it would be unreasonable for the Special Commissioners not to have made any particular finding with regard to the question whether the 1984 Deed was a sham if asked to do so. No one has suggested that clause 1 of the 1984 Deed was a sham (but the Revenue contended both before the Special Commissioners and on this appeal that clause 2 of the 1984 Deed was a sham). In my judgment, given the unassailability of the Special Commissioners' conclusions on the 1984 agreement, and the absence of any evidence on which it could be found that the parties had decided to abandon the sham transaction before the 1984 Deed was executed, the only conclusion which the Special Commissioners could reasonably have reached on the question whether any operative part of the 1984 Deed was a sham, if asked to make a finding on that point, was that clause 2 of the 1984 Deed was a sham for the same reasons as they had held the 1984 Agreement was a sham..

91. Accordingly, in my judgment, the answer to the question in the case stated is that the Special Commissioners did not err in holding that the 1984 Agreement (and the Assignment and the related recitals in the 1984 Deed) constituted a sham but that they ought to have gone on to hold that in consequence clause 2 of the 1984 Deed, by which the 1984 Agreement was completed as respects the green land, was also a sham.

92. In the circumstances, I would allow the appeal.

SIR MARTIN NOURSE:

93. I agree

LORD JUSTICE KAY:

94. I also agree.