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Cite as: [2004] EWCA Civ 604

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		Neutral Citation Number: [2004] EWCA Civ 604
		Case No: A3/2003/1759 CHANF

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION, MANCHESTER
DISTRICT REGISTRY
(His Honour Judge Maddocks)

Royal Courts of Justice
Strand, London, WC2A 2LL

21/05/2004

B e f o r e :

LORD JUSTICE POTTER
LADY JUSTICE ARDEN
and
LORD JUSTICE NEUBERGER
____________________

Between:

	Albert Floyd, Maureen Ann Floyd & Boundary Parks Limited	Appellants
	- and -
	John Fairhurst & Co	Respondents

____________________

Mr Edward Bartley Jones QC (instructed by Beachcroft Wansborough) for the Appellants
Miss Marion Lonsdale (instructed by Robin Simon LLP) for the Respondents
Hearing dates : 3 and 4 March 2004
____________________

HTML VERSION OF JUDGMENT
____________________

Lady Justice Arden:

This is an appeal against the order of HHJ Maddocks sitting as a deputy judge of the Chancery Division of the High Court of Justice, Manchester District Registry, on 14 July 2003. By his order, the judge gave judgment for the claimants on their claim in the sum of £10,549 and for the defendants on their counterclaim in the sum of £12, 943. The claimants appeal against that order.

The action arises out of negligent tax advice given by the respondents ("Fairhursts"), who were the appellants' accountants and tax advisers. The third appellant ("the company") was set up in 1980. The sole directors and shareholders were the first two appellants, Mr and Mrs Floyd. They were equal shareholders in the company. In 1991, Mr Floyd and the company each owned land at Irlam, near Manchester. The company's business was the storage and repair of containers. Mr Floyd's business consisted of the letting of industrial units. Part of the company's land and the whole of Mr Floyd's land was compulsorily purchased by Salford City Council ("Salford") on 28 March 1991. The total compensation payable in respect of both sites was £900,000. Of this, the company received £341,692.50 and Mr Floyd £558,307.50. This gave Mr Floyd a gain of £391,400, resulting in a liability to capital gains tax on the land element of the compensation of £156,560. This sum became payable and was paid on 1 December 1991.

In 1990, Mr Floyd asked Fairhursts to advise him and the company on the capital gains tax implications of the prospective compulsory acquisition. Fairhursts gave advice to Mr Floyd in March and July 1990 and then again between October 1991 and January 1992. Fairhursts advised, correctly, that the company could defer part or all of the tax from the gains realised by it if part or all of the compensation was reinvested in new qualifying assets (land, buildings or goodwill) used for the purposes of a trade. However, Fairhursts failed to advise Mr Floyd that, if he reinvested his share of the compensation in land, he could obtain rollover relief under sections 111A and 111B of the Capital Gains Tax Act 1979, now sections 247 and 248 of the Taxation of Chargeable Gains Act 1992. It is doubtful whether Mr Floyd could have obtained the same sort of relief as the company since his land had been used for letting purposes and this did not count as the use of land in a trade. Nonetheless, he would have been eligible for rollover relief under the sections mentioned, and I shall refer to this form of relief as "CPO relief".

The land held by Mr Floyd had originally been owned by him in partnership with a Mr Leech. The partnership was called Boundary Trading Company ("BTC"). In 1985, Mr Floyd acquired Mr Leech's partnership share for cash. The company owned 1.06 acres of the land compulsorily purchased, and Mr Floyd (as successor to BTC) owned the remaining 0.9 acres.

In this action, Mr Floyd's case was that he suffered loss equal to the tax paid less a small discount for the fact that the tax would be deferred, not avoided altogether. The appellants also claimed the costs they incurred as a result of an investigation by the Inland Revenue commenced in 1991 into the affairs of Mr Floyd, BTC and the company. This investigation was caused at least in part by the failure of the Floyds, the former partnership and the company to file tax accounts in time. The investigation resulted in a beneficial compromise between the Floyds and the Revenue. Negotiations were carried on by Fairhursts, and the judge was satisfied that the compromise was a good one from the point of view of Mr and Mrs Floyd. In the action, Fairhursts counterclaimed for the sum of £26,500, being the principal amount of fees owed to them, of which £12,143 related to work other than the Revenue investigation.

The principal use which Mr Floyd made of the compensation which he received from the compulsory acquisition of his land was to purchase a property known as Westage Farm. In due course this was sold in two parcels, each with the benefit of principal private residence relief ("PPR relief"). In this way a capital gain of £282,045 was achieved with a tax saving of £112,018. The judge made the following findings:-

"Following receipt of the proceeds Mr Floyd incurred expenditure which included the following main items:

	£
8 May 1991 repayment of mortgage on Quebec Cottage	113,020
1 June 1991 purchase of a classic car, Jaguar E type	20,100
10 October 1991 Westage Farm with barn and 5 acres	202,955
25 November 1991, 10 year policy	50,000
Same date 2 policies placed in trust for the children	100,000

It is perhaps convenient here to deal with Westage Farm. It was purchased by Mr Floyd at an auction sale for £200,000. The original attraction was that the barn offered garaging space for his collection of classic cars. However, acting on advice first from Fairhursts and then from Haslams (being the accountants he consulted in February 1993 when dissatisfied with Fairhursts) he first carried out improvements to the farmhouse which he then occupied as his principal private residence from 26 October 1993 and later sold with the benefit of exemption from capital gains tax under sections 222 to 226 TCGA 1992. He then on 13 July 1994 transferred the barn to a discretionary trust for his children and on completion of conversion works it was occupied by one of them as beneficiary and also as principal private residence so as to obtain PPR exemption for that part of the property when it came to be sold as 'The Farthings' on 3 September 1996. In round figures the exempt gain achieved for Westage Farm by this means was as follows:

	£
Purchase cost	202,955
Improvements to farmhouse and conversion of barn (as in Mr Floyd's statement)	165,000
Total	367,955

	£
Sale of farmhouse on 1.12.94	360,000
Sale of barn on 16.9.96	290,000
Total	650,000
Gain	282,045
Tax at 40%	112,018

I should note that the figure of £165,000 was given by Mr Floyd in his written statement. In his evidence at the hearing he corrected this to £195,000, but without supporting documents I do not think I can accept that larger figure. For present purposes, however, it may suffice to note that the venture produced and was expected to produce a significant tax free gain by the use of PPR relief." (Transcript pages 9 to 10).

In early 1993, the Floyds changed their tax advisers. They appointed Haslams to advise them. By the autumn of 1993 Haslams appreciated that CPO relief was available to the Floyds and that they could not claim it if they also claimed PPR relief on Westage Farm. However, by the time this happened, Mr Floyd had already bought Westage Farm and begun making improvements there. He did not have sufficient funds available to him to buy another property there and then to take advantage of the CPO relief. If he had been able to take advantage of CPO relief by acquiring an appropriate property (which could not be a property on which he sought to obtain PPR relief), he would have obtained a repayment of the sum of £156,560 and in addition the benefit of the capital gain and income stream on the new property. The period for making that investment was three years, subject to extension. Accordingly, he could have purchased the property at any time prior to March 1994, or indeed later if the Revenue had granted an extension.

There was a complication in that, on the sale of Mr Floyd's land, £108,000 of the compensation had been attributed to the land and £426,615 had been attributed to loss of the ability to let the industrial units on it. The balance of £23,692.50 was attributed to loss on the forced sale of equipment. Following enquiries by Haslams, the Revenue on 26 November 1993 accepted that the compensation for loss of the ability to let could be attributed to the land but they then expressed an intention to restrict the gain. The judge thought that the approach of the Revenue was unsustainable. However, Haslams took that matter no further.

The respondents do not contest that they negligently failed to advise on the availability of CPO relief in March and July 1990 and between October 1991 and January 1992. On this appeal, as before the judge, the appellants accept that the capital appreciation on, and income stream from, property acquired for the purposes of taking advantage of CPO relief can be compensated for by an award of interest.

Principal issue: would Mr Floyd have utilised CPO relief had he been aware of it?

The principal issue at trial was whether Mr Floyd would have taken advantage of CPO relief. It was common ground that this was not a question of assessing the chance of Mr Floyd having taken advantage of CPO relief. The court had to be satisfied, on a balance of probabilities, that Mr Floyd would have taken advantage of CPO relief, if competently advised. The judge determined this issue against Mr Floyd for the following reasons:-

"So here the question depends upon what Mr Floyd himself would have done if correctly advised.

I have not found this an easy question to determine. Insofar as it is appropriate for the court to have a leaning, I would start with a leaning in favour of the Claimant. It does not come well from a Defendant who has failed to advise the client of a potentially useful option to say that the client would in any case not have availed himself of it. Mr Floyd for his part was emphatic that he would have done so. He can pray in aid the fact that he had expressly consulted Fairhursts and had been referred to Mr Smethurst in order to have advice on CGT in relation to the CPO gain and of course any means of mitigation.

I am bound to say that I found Mr Floyd to be a less than satisfactory witness. He appeared to me to be a person who readily blamed others for the consequences of his own actions and decisions. Nevertheless, that does not exclude his evidence on this aspect which does not concern events which had happened but events which might have happened if he had been properly advised.

I must first look at the nature of the relief and the correct advice which should have been given. The salient features were these:

1. The relief did not extinguish CGT on the gain. The gain remained as taxable on the disposal of the land acquired, assuming the value of that land to be retained.

2. To obtain the full benefit, the whole proceeds, £534,615, would need to be invested in land and to obtain any benefit the land must exceed the indexed cost of the land acquired under the CPO, £143,215.

3. The substituted land could not be used for PPR relief on any future gain (see section 248(1)).

4. On the provisional figures provided by Mr Smethurst the main gain would have been on the Company's land and goodwill. In the event the figures negotiated by Mr King resulted in the larger consideration and gain being in the BTC land, the figures being £534,615 against an adjusted cost of £143,215. The first figure there was the sum to be reinvested for full relief and the second the initial sum to be invested before there was any relief. Mr Floyd could have reinvested an amount between these figures but the sum not reinvested would have attracted CGT at the full rate applicable, being 40%.

Whether on the original provisional figures or on the final figures, the prospective saving had its advantages and attractions. It did, however, require the funds to remain tied up in land indefinitely if the benefit was to be preserved and it precluded investment in a dwelling house for which the total exemption by PPR relief would be available on a future gain.

Viewed objectively, the benefits are not all one way, particularly to someone who might wish to be free to use his money for other purposes or to exploit PPR relief. In relation to the company which on the original provisional figures was expected to have the major gain, whilst CPO relief was not suggested it was made clear to Mr Floyd in the letter of 19 July 1990 that rollover relief was available yet there was no attempt at all by Mr Floyd to take the matter any further or to set up a meeting with his solicitor as he was invited to do. Instead, he allowed the CPO negotiations to proceed so as to place the larger part of the gains away from the Company where, on the advice he had, it could have been sheltered by rollover relief, to himself where, on that same advice, it could not be sheltered. That course of action cannot be viewed otherwise than as demonstrating or at least indicating a disinclination on the part of Mr Floyd to consider rollover relief with the restrictions it entailed. [A]

The second aspect arises from the time when the availability of CPO relief was appreciated, first by Mrs Stanley in April/May 1993, subject initially to the reluctance of Mr Williams to accept it, and then in November 1993, subject then to the letter from Mr Williams of 26 November 1993 attempting to reduce it. Mr Floyd's evidence is that he first learned of CPO relief in July/August 1993. It is material to note that the relief was still available up to 31 March 1994 or such further time as the Board would allow. I was referred to various Inland Revenue manuals. My conclusion is that if there had been a serious proposal to reinvest then time might well have been extended but, if the proposal was to use the proceeds of Westage Farm after claiming PPR relief, it would have been refused. [B]

As this stage it is fair to say that Mr Floyd had already committed his funds in ignorance of the availability of CPO relief. However, it is equally the case that, in particular, by having invested in property which could, and by this time was expected to, produce untaxed gains through PPR relief, not available if CPO relief was claimed for the property, he could see the advantages of that course of action. His decision at this point, although affected by investments he had already made and to which he was committed, equally points to a preference for the PPR route as against the CPO route.

It is no doubt possible that Mr Floyd would have taken advantage of CPO relief but it does not appear to me that it was probable. He was in my view more attracted by the prospect of having a large sum of money which he would be free to invest in any way he chose. Taking the evidence as a whole, I am not satisfied that if Mr Floyd had been advised of the availability of CPO relief and its implications he would have adopted it. On the balance of probabilities my conclusion is that, just as he rejected or ignored rollover relief on the trade, he would also have rejected the CPO relief. [C]" (Transcript, pages 21 to 24). (Letters [A], [B] and [C] added).

If wrong, should damages be discounted?

The judge went on to determine the damages that would have been payable to the Floyds if CPO relief had been available. He held that, because the tax was only deferred, he would have applied a discount of 25% to take account of the fact that there might have been a decision not to continue investing in property subject to CPO relief. This would have given rise to a need to pay the tax deferred.

Should the damages be reduced by reference to the tax saving on Westage Farm?

The judge also held that the Floyds had to bring into account (before the discount of 25% was applied) the gain which they made by claiming PPR relief on the various parcels of Westage Farm. He held that this gain was relevant as the investment in Westage Farm was made before the time for claiming CPO relief had expired and when the time might still have been extended. Moreover, the decision to proceed with PPR relief and to continue with the barn extension (subsequently named The Farthings) had been made before the time for taking CPO relief had expired and after Mr Floyd had become aware of the CPO relief option. Furthermore, the gain on Westage Farm and The Farthings could not have been achieved without the release of the compensation money and accordingly it did not seem to the judge appropriate to trace the actual destination of the compensation money. There is no appeal on this last point.

Revenue investigation: Fairhursts' fees

The judge then dealt with Fairhursts' fees in connection with the Revenue investigation. He took into account that Mr Floyd had kept poor records and was slow to respond to Revenue requirements. On that basis, he held that the responsibility for the investigation fell equally on Mr Floyd and Fairhursts, and that accordingly Fairhursts were only liable for one half of the interest and penalties payable by the appellants.

1989: Dividend or bonus

Before the judge the appellants also claimed for loss arising out of the payment by the company in 1989 of a bonus of £70,000 to Mr and Mrs Floyd. The appellants contend that the sum should have been paid by way of dividend which would have left the Floyds better off by some £15,416. However, the payment of a dividend would have resulted in an additional fiscal charge on the company of £12,775 so that, if both sums could be netted together, the net loss was £2,641. The judge held that there was no concluded decision to pay a dividend. Moreover, he held that the loss to the Floyds was the net sum of £2,641, although that sum could in turn be offset by other advantages such as the increase in the amount available for pension contributions by way of the use of the bonus. He held that the decision whether to pay a dividend or bonus was made by reference to all three claimants, the company being no more than the vehicle through which the Floyds traded and of which they were sole shareholders and directors.

Benefits from Revenue settlement

Fairhursts argued before the judge that the judge should take into account the benefits which Mr Floyd derived from the settlement with the Revenue. In particular Mr Floyd failed to make full disclosure to the Revenue and, in response to an express enquiry from the Revenue on this point, he omitted to disclose that he was wholly liable for the tax assessable on the partnership by virtue of an agreement that he had reached with Mr Leech. Moreover, the Revenue treatment of storage charges made to the company was benevolent, so that Mr Floyd paid less income tax on that undeclared income than he would have done if he had declared the storage charges in his tax returns in the first place. However, the judge held that he was not prepared to disturb the assessments which had been made.

Fairhursts' counterclaim

The judge then turned to the counterclaim by Fairhursts for their fees totalling £26,500. Fairhursts had themselves carried out an apportionment of the fees which related to the Inland Revenue investigation and to other work. They attributed the sum of £12,943 to that other work and the judge gave judgment in their favour in that sum.

Costs

On the question of costs, the judge ordered all three appellants to pay the respondents' costs, and directed them to make an interim payment of £80,000 by 11 August 2003. Mr Bartley Jones QC, for the appellants, did not submit to the judge that the company should not be treated as liable jointly and severally with Mr Floyd. However, he submitted that Mrs Floyd should not be liable jointly and severally with her husband as her only claim against the respondents had been for £1,002 on the basis that in 1989 they had negligently failed to ensure that the company paid her a bonus and not a dividend. The defendants, for whom Miss Lonsdale appeared, resisted this submission as they did not know whether assets were held jointly or by Mr or Mrs Floyd. In addition, Mrs Floyd had stood to gain from any success by the company in the action. After hearing these submissions, the judge decided that Mrs Floyd should be jointly and severally liable for costs without giving reasons.

Issues on this appeal

The issues which arise on this appeal are as follows:-

i) Was the judge entitled to find that Mr Floyd would not have utilised CPO relief in any event, even if he had been advised about it?

ii) Was the discount of 25%, applied by the judge, to the tax which would have been saved if CPO relief had been taken, excessive?

iii) Did the judge err in law in holding that the sum of £112,818 (the benefits obtained through use of PPR relief) should be set against the tax paid as a result of the failure to claim CPO relief (£156,560)?

iv) Was the judge entitled to find that there was no concluded decision to declare the dividend of £70,000 in 1989?

v) Was the correct measure of loss for the failure to declare the dividend the sum of £2,641?

vi) Should the judge have given judgment for Fairhursts' fees in the sum of £12, 943?

vii) Was the judge in error in making an order that Mrs Floyd should be jointly and severally liable with Mr Floyd and the company for the whole of the costs of the trial?

In addition, the respondents' cross-appeal raises two further issues:-

i) Issue (a) The judge was wrong in not holding that the respondents could not, in any event, have timeously paid the tax which was found due from them as a result of the Revenue investigation, and accordingly, the judge erred in holding that the respondents were liable to the appellants for the loss caused to them by having to pay interest to the Revenue for the late payment of tax.

ii) Issue (b)

The judge was wrong in not requiring Mr Floyd to bring into account the benefits he obtained from the settlement with the Revenue.

Issue (i): non-utilisation by Mr Floyd of CPO relief

I have already set out in full the judge's holding on this issue. The judge found, essentially for three reasons which I have marked [A], [B] and [C] in the passage set out above, after the relevant finding, that Mr Floyd's preference was for PPR relief. Mr Edward Bartley Jones QC, for the appellants, subjects each of the judge's reasons to detailed, critical examination. He submits that the judge found that Mr Floyd was honest. Mr Floyd's own evidence was that he would have taken advantage of the CPO relief if he had known it was available. That had to be the starting point, and effectively gives rise to a presumption which the respondents have to rebut. Mr Floyd had, after all, acted on other advice to mitigate tax. The judge makes the point that Mr Floyd is not a satisfactory witness, but the judge does not indicate that this has any particular impact on this issue.

Mr Bartley Jones then turns to the three further matters identified by the judge. The first is the question of the apportionment of the compensation monies between the company and Mr Floyd. Mr Bartley Jones submits that there is no evidence to support the judge's inference that the apportionment shifted in favour of himself and against the company, which would have been inconsistent with a wish on Mr Floyd's part to take advantage of CPO relief since only the company so far as he knew was entitled to such relief. The split between the company and Mr Floyd was in the event different from that envisaged in a letter dated 19 July 1990 from the respondents. The judge did not, however, conclude that the apportionment was improper or inappropriate.

Moreover, it was not significant, as the judge thought, that the company did not take advantage of rollover relief [A]. The company's gain was more modest, and the Floyds wanted the company to use its cash to repay monies owed to them. Nor was it significant that Mr Floyd knew about CPO relief at the time when it was still possible for him to take advantage of it [B]. It was illogical for the judge to determine what Mr Floyd would have done in 1991 by reference to what Mr Floyd actually did in 1993. Mr Floyd acted irrevocably by buying Westage Farm, and his acts of improving Westage Farm and realising PPR relief were in reasonable mitigation of his loss [C]. It was too late for Mr Floyd to take advantage of CPO relief in the autumn of 1993. By then he was in the process of improving Westage Farm and he would have had to give up PPR relief on Westage Farm unless he had other funds. To qualify for CPO relief, a property could be any land except a dwelling-house on which the gain would be exempt.

Moreover, the Revenue would not consider whether to grant an extension until he had actually purchased a replacement property, and it would be unreasonable for the court to expect him to have sold Westage Farm, desist from claiming PPR relief and then invest in a new asset which qualified for CPO relief purposes, all before knowing whether in fact the Revenue would grant him an extension. This interpretation of revenue practice on extension was not accepted by the judge. It was also disputed by Miss Lonsdale in her submissions on this appeal. The Revenue's stated practice was to look at each case on its merits (Revenue Interpretation, 5 November 1991). Here Mr Floyd would be able to say that he had not received appropriate advice until near the end of the three year period. The judge accepted that the Revenue might well have granted an extension (see the second extract from the judge's judgment set out above at [B]).

Mr Bartley Jones also challenges the judge's conclusion that Mr Floyd was more attracted by the PPR route, which would give him a large sum of money which he would be free to invest as he chose. In fact the judge held that only a discount of 25% was required to reflect the fact that tax would be deferred rather than avoided. The respondents should have advised him about both the merits and demerits of electing for CPO relief, though at the relevant time the highly aggressive scheme subsequently utilised at Westage Farm would not have been available.

The respondents, for whom Miss Marion Lonsdale appears, submit that the chain of causation was broken when Haslams discovered in 1993 that CPO relief was possible. Mr Floyd was made aware of the possibility of CPO relief in about October 1993. However, PPR relief was then claimed for Westage Farm. This election ruled out CPO relief. In its letter of 26 November 1993 the Revenue made it clear that it was prepared to consider a CPO relief claim. The respondents submit that the right course would have been for Haslams to ask for an extension of time for investing in a qualifying property from the Revenue. There would have been good grounds for an extension because of the confusion over the proper attribution of the proceeds of sale of Mr Floyd's land. The Revenue practice is to allow up to a further three years. There is a bias in favour of granting an extension because the practice manual provides that a district inspector cannot refuse an extension. Instead of seeking an extension, Haslams put in train a claim for PPR relief on The Farthings. Mr Floyd was wrongly advised that he needed to invest all the compensation to obtain CPO relief, whereas relief would have started to accrue as soon as he invested the base cost of the property acquired, namely £143,215. He could have used monies other than those used to acquire Westage Farm or he could have sold Westage Farm (without claiming PPR relief) and then reinvested in other land within an extended period (if necessary) permitted by the Revenue

Miss Lonsdale relies on other factors as showing that the chain of the causation was broken. There was no evidence that any suitable substitute property was available into which Mr Floyd would have invested for the purpose of obtaining CPO relief, or even that he had looked into such properties. Moreover, his surveyor had asserted to Salford at the time of the compulsory purchase that Mr Floyd and the company were unable to find any appropriate properties for relocation. The market for industrial property was falling. In 1993, 1994 and 1996, the company made a substantial loss on its industrial property investment business conducted on the land remaining after the compulsory purchase. Mr Floyd did not always act on professional advice, for instance, he had been advised by Fairhursts to refer their advice to his solicitor, which he had not done. Miss Lonsdale submits that on the evidence Mr Floyd was keen to repay the mortgage on Quebec Cottage, which carried interest at a high rate. Furthermore, Mr Floyd's tax liabilities were some £316,500. In order to raise sufficient funds to obtain CPO relief, he would have had to have given up Quebec Cottage, the life policies which he had purchased and Westage Farm. Indeed, he would have to have used all the compensation if he was going to discharge his other tax liabilities and take up CPO relief in full. As it was, by retaining his residences he obtained a large tax-free gain which was permanent and not subject to claw back as CPO relief would have been.

Issue (ii): Discount of 25%

It will be recalled that the judge held that, if he had awarded damages for the loss of CPO relief, he would have discounted the damages by 25% as CPO relief would only have resulted in a deferral of the tax liability. Mr Floyd's case was that he would have retained any substitute asset acquired for the purpose of obtaining CPO relief indefinitely and at least until retirement. Thus, on this issue too, Mr Bartley Jones in effect submits that Mr Floyd's evidence gives rise to a presumption that the respondents had to rebut. Moreover, he submits that there was no evidence to rebut the appellants' case. Thus, the judge's discount of 25% was excessive. No discount, or at maximum a discount of 10% should be made.

Miss Lonsdale submits that the discount of 25% does not only reflect the perceived length of time the investment might be held. It also reflects the fact that Mr Floyd would have been required to make a long-term investment in a falling market.

Issue (iii): set off of tax-free gains made on Westage Farm and The Farthings

Mr Bartley Jones submits that there is no principled basis for the set off against any damages of the gains made by Mr Floyd on Westage Farm and The Farthings. He further submits that no set off should be made because, if Mr Floyd had invested in property and obtained CPO relief, he would have got an income stream and capital appreciation. In order to obtain PPR relief he had had to give away the barn forming part of Westage Farm. The judge made no award of damages for this element of loss. Moreover, in applying the set off the judge was not comparing like with like and was double-counting because of the deduction of the gain made on Westage Farm. The only applicable principle was that Mr Floyd would have been under a duty to mitigate his loss, and that only required him to act reasonably and would not require him to embark on what could only be described as an aggressive scheme to obtain PPR relief.

Miss Lonsdale seeks to uphold the judge's judgment on this issue. Moreover, she submits that the judge was right to require the gain made on The Farthings to be brought into account since the terms of the discretionary trust in question, of which Mr and Mrs Floyd were the trustees, empowered them to add their names as potential discretionary beneficiaries. They could have appointed the whole of the capital and the income to themselves. Mr Bartley Jones takes the point that the powers were fiduciary powers, but it appears that it was always the settlors' intention that the proceeds of sale of The Farthings should be capable of being returned to them.

Alternatively Mr Bartley Jones submits that the rate of interest to compensate for the loss of the income stream and capital growth on the substitute property should be the judgment rate. If there was any set off, interest should be calculated so as to take account of the fact that receipt of part of the proceeds of sale at Westage Farm did not occur until the barn was sold on 16 September 1996.

Miss Lonsdale submits that the Floyds could not have obtained both gains. They had only limited funds to invest in property. Furthermore, on the question of income stream and capital appreciation, this was compensated for by interest.

Issue (iv): no concluded decision to pay a dividend

Mr Floyd's evidence at trial was that in July 1989 Fairhursts had advised Mr and Mrs Floyd to take dividends of £70,000 for the year ended 31 July 1989, and that he and Mrs Floyd agreed to this suggestion and gave instructions to Fairhursts to effect the necessary transactions. However, this was not done, as required by 31 July 1989. Mr Bartley Jones submits that there was no basis for the judge to reject Mr Floyd's evidence especially as the person at Fairhursts who was responsible for receiving and implementing the instructions, Mr Cyril Butterworth, did not give evidence.

Miss Lonsdale seeks to uphold the judge's judgment. Among other points, the judge's conclusion was supported by the fact that the Floyds signed the company's accounts for the year ended 31 July 1989 showing that bonuses, and not dividends, had been paid. The directors' report stated that the directors' recommendation was that no dividend should be paid for the year.

Issue (v): damages for failure to arrange payment of the 1989 dividend

Mr Bartley Jones submits that the principal element in the damages recoverable for the failure to arrange payment of the 1989 dividend is the national insurance which Mr Floyd, Mrs Floyd and the company each became liable to pay as a result of the directors' bonuses being paid, rather than a dividend, namely £1,387, £1,002 and £6,300. The judge, however, considered that the correct benefit was the saving of tax to Mr and Mrs Floyd if the dividend was paid (£15,416) less the tax which would have been borne by the company if the dividend had been paid (£12,775), leaving a balance of £2,641.

Mr Bartley Jones submits that this approach treats the company and the Floyds as a single economic unit contrary to the decision of this court in Adams v Cape Industries [1990] Ch.433, 532-544. It is unlikely that the value of the Floyds' shareholdings in the company would have been reduced in value by the sum of £12,775. There was no claim for the additional income tax which the Floyds incurred.

Miss Lonsdale seeks to uphold the judge's judgment. The three appellants would together have decided to pay a dividend: it was a joint course of action. Therefore, the only claim should be for the detriment they suffered net of any benefit to any other of them.

Issue (vi): Fairhursts' fees

Mr Bartley Jones submits that there was no evidence as to the basis on which Fairhursts carried out their apportionment as between fees relating to the Revenue investigation and other fees. He submits that there was no witness of fact on these matters. Fairhursts did not raise bills at the time because they did not wish to incur a charge to VAT. They had moreover lost all their time sheets and computer records to support the sums claimed. There was no apportionment as between the company and Mr Floyd. The only fees which could be said to relate to matters other than the Revenue investigation were those shown in the accounts of the company and BTC, less certain amounts paid on account. These matters would have entitled Fairhursts to judgment in the sum of £2,450. In any event, the judge should not have awarded interest from 30 April 1993, or at as high a rate as 8%.

Miss Lonsdale submits that the judge was entitled to reach the conclusion he did. He had before him extensive trial bundles which showed the extent of the respondents' work. Evidence was also given by Mr Cheetham and Mr Gale of Fairhursts. Mr Cheetham's evidence was that time sheets had been available when the counterclaim was calculated, but had been lost sometime thereafter. Mr Floyd also gave evidence that he was due to pay for work not associated with the Revenue investigation, such as accounts work and VAT advice on Westage Farm.

Miss Lonsdale further submits the appellants never asked for disclosure of time sheets. They had never said that Fairhursts' fees were unreasonable and the points now being made were not put to any of Fairhursts' witnesses. There had been a meeting with the Revenue on 6 December 1993 at which Haslams had stated to the Revenue that fees of £25,500 were owing to Fairhursts.

Issue (vii) costs

On costs, Mr Bartley Jones submits that the judge should not have made an order against the company or against Mrs Floyd. This point is not open to him as against the company since he accepted below that an order could be made against the company. With respect to Mrs Floyd, he argued before the judge that her only claim in the action was for the sum of £1,002 in respect of the dividend.

Miss Lonsdale seeks to uphold the judge's decision. The litigation was brought by the three appellants jointly. The company was known to have contributed £100,000 to the appellants' costs. There was also evidence that Mr and Mrs Floyd had also funded the litigation with monies belonging to the discretionary trust set up to shelter the proceeds of sale of The Farthings.

Cross-appeal issue (a)

Miss Lonsdale submits that the Floyds could not have paid the tax on time and that the onus was on them to prove that they could have done so. The judge in effect reversed the burden of proof by holding that Fairhursts were liable to pay one half of the interest on the outstanding tax which the appellants had to pay to the Inland Revenue (net of the interest which the appellants could have earned on the unpaid tax). The respondents' accountancy expert, Mr David Butterworth, had given evidence that the appellants had not had sufficient funds to pay the tax on time. The Floyds produced no evidence of any available capital in the relevant years. At the time, Mr Floyd had borrowed heavily to buy his own share of the BTC land and Mr Leech's partnership share. The company had also borrowed to fund its purchase of the land. From 1986 onwards, Mr and Mrs Floyd's available capital was modest relative to the tax liabilities in issue. The company needed its cash for working capital. Mr Floyd relied on his bank balances as showing he could have paid the tax on time, but this was not satisfactory proof of his ability to pay his tax liabilities on time.

The judge rejected Miss Lonsdale's submissions, holding that the case for saying that the appellants could not have funded their tax liabilities "was not made out to my satisfaction". This amounted to a reversal of the burden of proof. It was for the claimants to show that they could have paid the tax on time.

Cross-appeal issue (b)

Miss Lonsdale submits that the judge should have taken account of the tax advantages in the settlement with the Revenue which Mr and Mrs Floyd obtained. The tax which ought to have been paid on Mr Leech's share of the partnership tax should be credited to the respondents. Moreover, the appellants saved tax by reason of the generous way in which the Revenue treated the income which Mr Floyd received in the form of storage charges but did not declare as taxable income. Mr Floyd saved tax of £12,807 in this way. The judge refused to disturb the assessment made by the Revenue. However, he disallowed the interest claim on the tax payable on the storage charges to meet the fact that Mr Floyd had the use of his money for three years longer as the storage charge income had been brought into charge to tax in a later period than would otherwise have been the case. After the interest was netted against notional interest that Mr Floyd could have earned on the money and divided by two, the saving was only £1,378.

Conclusions

General

Issues (i), (ii), (iv) and (vi) involve appeals against the judge's findings of fact, but the latter are findings of different kinds. Issue (i) ultimately required the judge to form a view as to what Mr Floyd would have done in the hypothetical situation that he had received appropriate advice on CPO relief. Issue (ii) (to the extent that it raises issues of fact) is similar. Issue (iv), on the other hand, required the judge to determine whether the Floyds had made a particular decision, that is, a decision, not made in writing, to pay themselves remuneration in the form of a dividend. This requires an evaluation by the judge of what had actually happened. Issue (vi) required the judge to decide what services Fairhursts had provided which were not for the purposes of the Revenue investigation. The determination of this issue was necessarily likely to be greatly influenced by the contemporaneous documentation.

In those circumstances, I start with some general observations about this court's approach to findings of fact by a trial judge.

CPR 52.10 and 52.11 provide:

"52.10(1) In relation to an appeal the appeal court has all the powers of the lower court ...

52.11(1) Every appeal will be limited to a review of the decision of the lower court unless ...

(2) Unless it orders otherwise, the appeal court will not receive

(a) oral evidence; or

(b) evidence which was not before the lower court.

(3) The appeal court will allow an appeal where the decision of the lower court was

(a) wrong; or

(b) ...

(4) The appeal court may draw any inference of fact which it considers justified on the evidence."

The CPR does not, therefore, purport to set out the circumstances in which an appellate court can set aside findings of fact made by a trial judge. However, the CPR equips the appellate court with all the powers to enable it to do so, and to substitute its own findings, in an appropriate case.

The leading authority on the question when an appellate court can set aside findings of fact made in a lower court is Benmax v Austin Motor Co Ltd [1955] AC 370. The House of Lords drew a distinction between findings of specific fact and findings of fact which are really inferences from specific facts. (Specific facts of this kind are now often called "primary facts".) The House of Lords held that, in the case of inferences from specific facts, the appellate tribunal will more readily form an independent opinion than in the case of findings of specific facts, particularly when the finding of the specific fact was based on the witness's credibility. Lord Reid said (at page 376):

"... in cases where there is no question of the credibility or reliability of any witness, and in cases where the point in dispute is the proper inference to be drawn from proved facts, an appeal court is generally in as good a position to evaluate the evidence as the trial judge, and ought not to shrink from that task, though it ought, of course, to give weight to his opinion."

Lord Somervell pointed out that, even where the finding turned on a witness's credibility, it was impossible to lay down an absolute rule because it might be clear from the judge's judgment that he had failed to take into account some answer or document which plainly affected the accuracy of a witness or the judge's general conclusion (page 377).

Benmax v Austin thus draws a sharp distinction between two types of finding, namely those of specific fact and those which are really inferences from specific facts. As the recent decisions of this court show, the situation is more complex than that. Findings of fact range over a spectrum, with findings of fact based exclusively on advantages which the trial judge alone had, at one end, and other findings of fact, including inferences of fact, at the other end.

In Assicurazioni Generali SPA v Arab Insurance Group [2003] 1 WLR 577, Clarke LJ held:-

"14. The approach of the court to any particular case will depend upon the nature of the issues kind of case determined by the judge. This has been recognised recently in, for example, Todd v Adams & Chope (Trading as Trelawney Fishing Co) [2002] 2 Lloyd's Rep 293, and Bessant v South Cone Incorporated [2002] EWCA Civ 763. In some cases the trial judge will have reached conclusions of primary fact based almost entirely upon the view which he formed of the oral evidence of the witnesses. In most cases, however, the position is more complex. In many such cases the judge will have reached his conclusions of primary fact as a result partly of the view he formed of the oral evidence and partly from an analysis of the documents. In other such cases, the judge will have made findings of primary fact based entirely or almost entirely on the documents. Some findings of primary fact will be the result of direct evidence, whereas others will depend upon inference from direct evidence of such facts.

15. In appeals against conclusions of primary fact the approach of an appellate court will depend upon the weight to be attached to the findings of the judge and that weight will depend upon the extent to which, as the trial judge, the judge has an advantage over the appellate court; the greater that advantage the more reluctant the appellate court should be to interfere. As I see it, that was the approach of the Court of Appeal on a "rehearing" under the RSC and should be its approach on a "review" under the CPR. 1998.

16. Some conclusions of fact are, however, not conclusions of primary fact of the kind to which I have just referred. They involve an assessment of a number of different factors which have to be weighed against each other. This is sometimes called an evaluation of the facts and is often a matter of degree upon which different judges can legitimately differ. Such cases may be closely analogous to the exercise of a discretion and, in my opinion, appellate courts should approach them in a similar way.

17. In Todd v Adams, where the question was whether a contract of service existed, Mance LJ drew a distinction between challenges to conclusions of primary fact or inferences from those facts and an evaluation of those facts, as follows, at p 319-320, paragraph 129:

"With regard to an appeal to this court (which would never have involved a complete rehearing in that sense), the language of 'review' may be said to fit most easily into the context of an appeal against the exercise of a discretion, or an appeal where the court of appeal is essentially concerned with the correctness of an exercise of evaluation or judgment – such as a decision by a lower court whether, weighing all relevant factors, a contract of service existed. However, the references in rule 52.11 (3) and (4) to the power of an appellate court to allow an appeal where the decision below was 'wrong' and to 'draw any inference of fact which it considers justified on the evidence' indicate that there are other contexts in which the court of appeal must, as previously, make up its own mind as to the correctness or otherwise of a decision, even on matters of fact, by a lower court. Where the correctness of a finding of primary fact or of inference is in issue, it cannot be a matter of simple discretion how an appellate court approaches the matter. Once the appellant has shown a real prospect (justifying permission to appeal) that a finding or inference is wrong, the role of an appellate court is to determine whether or not this is so, giving full weight of course to the advantages enjoyed by any judge of first instance who has heard oral evidence. In the present case, therefore, I consider that (a) it is for us if necessary to make up our own mind about the correctness or otherwise of any findings of primary fact or inferences from primary fact that the judge made or drew and the claimants challenge, while (b) reminding ourselves that, so far as the appeal raises issues of judgment on unchallenged primary findings and inferences, this court ought not to interfere unless it is satisfied that the judge's conclusion lay outside the bounds within which reasonable disagreement is possible. In relation to (a) we must, as stated, bear in mind the important and well-recognised reluctance of this court to interfere with a trial judge on any finding of primary fact based on the credibility or reliability of oral evidence. In the present case, however, while there was oral evidence, its content was largely uncontentious."

In the same case Neuberger J stressed (at paragraphs 61 to 64) that the question whether there was a contract of service on the facts involved the weighing up of a series of factors. Thorpe LJ agreed with both judgments."

Mr Bartley Jones seeks to drive a wedge between the judgment of Clarke LJ cited above and the passage which Clarke LJ cites from the judgment of Mance LJ in Todd's case. He characterises the latter as evidence of a more "activist" approach to intervention by an appellate court in a trial judge's findings of fact. The purpose for which the passage is cited by Clarke LJ is that it recognises that there is a subset of findings of fact where the appellate court is reluctant to interfere. Those are cases where the findings of fact are based on the reliability or credibility of oral evidence. Both judgments are in accord on that point.

Cases where an appellate court needs to exercise caution before interfering with a trial judge's factual findings are not confined to those where the factual finding turned on the credibility or reliability of oral evidence. As Lord Hoffmann said in Biogen v Medeva plc [1997] RPC 1, 45:

"The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved. Where the application of a legal standard such as negligence or obviousness involves no question of principle but is simply a matter of degree, an appellate court should be very cautious in differing from the judge's evaluation."

Therefore, in determining whether a factual finding is of a type which an appellate court should only set aside with reluctance, it is relevant to ascertain whether the finding was based on the judge's findings as to the credibility or reliability of a witness's oral evidence and also whether the finding is in truth a complex evaluation of a number of factors which the judge would have made based on his perception of the case over the course of the trial and necessarily not fully expressed in his reasons for the finding in his judgment. I would add that in many cases the identification of factual findings of this subtle type is almost an instinctive process to the appellate court, and it finds its expression in the commonplace formula that the trial judge was, or was not, entitled to reach a particular conclusion.

The above discussion leads to the question of the standard of review to be applied to the trial judge's factual findings. As Mance LJ points out in Todd's case, the basic standard is the correctness standard. The appellate court is bound to reach a view as to whether the decision of the lower court is "wrong" (CPR 52.11(3)(a)). However, the correctness standard cannot apply simpliciter where the factual finding is based on the credibility or reliability of oral evidence or involves the more complex evaluation to which Lord Hoffmann refers in Biogen v Medeva plc. Furthermore, findings of that type are likely also to be on a spectrum ranging from findings based exclusively on the judge's determination of a conflict of oral evidence at one end to findings involving an evaluation which the appellate court can sensibly review at the other end. Hoffmann LJ gave valuable guidance on this problem in Re Grayan Ltd [1995] Ch.241, 254-255:

"Once one is clear about the precise nature of the decision which the judge has to make, it is easier to decide how an appellate tribunal should approach an appeal against his decision. The judge is deciding a question of mixed fact and law in that he is applying the standard laid down by the courts (conduct appropriate to a person fit to be a director) to the facts of the case. It is in principle no different from the decision as to whether someone has been negligent or whether a patented invention was obvious: see Benmax v Austin Motor Co Ltd [1955] AC 370. On the other hand, the standards applied by the law in different contexts vary a great deal in precision and generally speaking, the vaguer the standard and the greater the number of factors which the court has to weigh up in deciding whether or not the standards have been met, the more reluctant an appellate court will be to interfere with the trial judge's decision. So in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 Lord Bridge of Harwich was considering the application of the test of 'fair and reasonable' in the Unfair Contract Terms Act 1977. He said at pages 815 to 816:

'It would not be accurate to describe such a decision as an exercise of discretion. But [such] a decision under any of the provisions referred to will have this in common with the exercise of a discretion that, in having regard to the various matters to which ... section 11 of the Act of 1977 direct[s] attention, the court must entertain a whole range of considerations, put them in the scales on the one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.'

Similar comments were made in this court in In re Coventry, decd. [1980] Ch. 461 about a decision as to whether a testator had made 'reasonable financial provision' for a dependant for the purposes of the Inheritance (Provision for Family and Dependants) Act 1975. Buckley LJ, at pages 495 to 496, described such a decision as a 'value judgment' which should not be disturbed unless the judge had made an error of principle.

These cases are at one end of a spectrum and decisions such as whether a motorist has driven with due care and attention are probably somewhere near the other end. Where lies the decision that a director's conduct fell below the appropriate standards? In my view, near to the negligence end than that represented by Finney Lock or Coventry ..."

In Bessant's case, Robert Walker LJ summarised the matter in this way at paragraph 26:-

"How reluctant should an appellate court be to interfere with the trial judge's evaluation of, and conclusion on, the primary facts? As Hoffmann LJ made clear in the Grayan case [1995] Ch.241 there is no single standard which is appropriate to every case. The most important variables include the nature of the evaluation required, the standing and experience of the fact-finding judge or tribunal, and the extent to which the judge or tribunal had to assess the oral evidence."