England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE FAMILY COURT
Mr Justice Moor
FD05D05438

		Royal Courts of Justice Strand, London, WC2A 2LL
		10th June 2015

Lady Justice King :

1. This is an appeal against an order made by Mr Justice Moor sitting in the Family Court on the 19 June 2014.
2. Before the court was a discrete issue of interpretation arising out of the judgment and subsequent order of the late Mrs Justice Baron, which itself followed bitterly contested financial remedy proceedings; the judgment is found at D v D & Others and the I Trust [2009] EWHC 3062 (Fam); [2011] 2 FLR 29.

Background

3. The first respondent is the estate of the late former husband of the appellant ("the husband"), who died on the 2 September 2011. The second and third respondents are BVI companies who owned the former matrimonial home Tillingdown Farm ("the Farm"). A Jersey based discretionary trust, The Ivy Trust ("the trust") is the sole shareholder of the second and third respondents. In the proceedings before Moor J and again before this court, the solicitor for the trustee, Mr Boyes and Mr Hugh Durrell, the executive director of the company managing the trust, attended the hearing as a courtesy to the court although they were not represented by counsel. No personal representatives/executors attended to represent the husband's estate.
4. The detailed history is to be found in the judgment of Baron J and, for the purposes of dealing with this discrete issue, it is not necessary to rehearse the background in any significant detail. The essential facts relate to the Farm and the husband's unhappy relationship with Her Majesty's Revenue and Customs ("HMRC") and can be summarised shortly. In about 1973, the husband purchased the Farm; whilst at one time it was held in the joint names of the husband and his first wife, by the time the husband and wife met in about 1989, the Farm was occupied and solely owned by the husband.
5. The husband and wife married on the 16 November 1994 and the Farm became the matrimonial home. There are two children of the marriage. By July 1999 the marriage was to all intents and purposes over.
6. In about 1993 prior to the marriage, the husband had begun to permit the illegal tipping of waste on land at the Farm. The husband at all times denied that he had benefitted financially from this activity. HMRC did not accept this to be the case and the income they alleged that he had received from these activities became known in the trial as the "tipping income". In due course, both stop notices and enforcement notices were served on the husband by the local county council in relation to the illegal tipping activities. Baron J found as a fact that as a means of avoiding enforcement, the husband had decided to transfer the Farm to offshore entities. This process involved various complex transactions before the Farm finally became owned indirectly by the trust. Contrary to the husband's case, Baron J found that the husband was the settlor of the trust which, until the financial remedy proceedings commenced, had no nominated beneficiaries.
7. Following the issue of financial remedy proceedings (then ancillary relief proceedings) in 2005, the husband nominated his three children; Z from a previous marriage, and C and B from his present marriage, as beneficiaries under the trust. Each of these three beneficiaries has a direct financial interest in the interpretation of the order with which this court is now concerned.

Mrs Justice Baron's Judgment

8. During the course of her judgment, Baron J found that:

i) By reason of the illegal tipping and the resultant enforcement actions, the value of the Farm had been reduced by between £1.5 m and £3.2 m gross.

ii) The trust was a nuptial settlement capable of variation and accordingly could provide the wife with a capital sum of £756,000.00 plus maintenance arrears and costs, all of which were to be paid by the 23 April 2010.

iii) In the event that the lump sum was not paid, the Farm was to be sold.

9. Baron J found that the husband had been guilty of serious litigation misconduct, which misconduct had caused substantial delay in the resolution of the wife's claims. Inevitably, the husband's conduct had also led to an unjustifiable increase in the costs incurred, which by then amounted to something over £500,000.00 against assets said, at the time of the trial, to be worth no more than £3.2m and against which potential unpaid tax of in the region of £2m had to be offset.
10. At the trial before Baron J therefore the issue of the unpaid tax was inevitably one of critical importance with the tax liability potentially devouring over 60% of the identifiable assets. Baron J unhappily received little assistance from the husband in formulating a schedule of assets which would accommodate a realistic assessment of the tax owed by him to HMRC. This left her with a frustrating sense of imprecision when endeavouring to calculate the fund available for distribution and in particular, to provide a home for the wife and the two young children.
11. During the course of the financial remedy application, HMRC issued assessments and applications against the husband; these were factored in by Baron J's in her judgment and her findings can be summarised as follows:

a) The court refused to deduct from the asset schedule any tax referable to tipping income, given its conclusion that;

i) If tipping income had not been received as the husband asserted, then no tax was due and the court's calculations would be unaffected …..but;

ii) If income had been received, it was for the husband to pay the tax, interest and penalties from what would be an undisclosed resource.

b) The court deducted tax and interest due in respect of legal farm income from which the wife had benefitted, but added back to the husband's 'side' of the schedule of assets the penalties levied on the same, such penalties having been incurred by the husband's "deliberate actions";

c) Baron J allowed a deduction of £1,090,000 (£1.09m) from the Schedule of Assets to cover payment of capital gains tax and corporation tax which were referred to globally in the judgment and order as "CGT". The figure of £1.09m was put forward as the maximum which would be due by way of both corporation tax and CGT on the sale of the Farm.

12. Prior to closing submissions Baron J had not been provided with any calculations in relation to CGT on the Farm. She said that she "cannot make any proper finding as result of the manner in which this evidence emerged at the eleventh hour" and later that: "The husband's solicitors for their part have produced an in-house note which indicated a figure of £1.9 million which would be a rolled up sum by way of corporation tax and CGT".

Baron J concluded:

"I believe that, as the husband is tax adverse, he will seek to reduce this tax to the legitimate minimum. Therefore, doing the best I can, I propose to deduct £1,900,000.00 from the asset schedule on the basis that if the CGT upon sale of T Farm is less than that figure the surplus will be divided in the same proportion as my overall award and vice versa if the sum is greater."

13. Having looked at the assets overall and having deducted a notional figure of £1.09m from the schedule to cover the worst possible outcome in respect of CGT, Baron J said "for the avoidance of doubt the proportion of CGT payable to each party should it be less than £1.09 million is 45/55%".
14. This conclusion was thereafter incorporated into Paragraph 3(c) of the order of the 23 October 2009 Paragraph 3(c) which said:

"In the event the capital gains tax payable upon sale of the property is less than £1.090,000.00 the petitioner wife shall receive 45% of the difference between the actual capital gains tax payable and £1.090,000.00."

15. Having finalised her schedule of assets on this basis, Baron J held that the assets were to be divided as to approximately 45% to the wife and 55% to the husband which would provide the wife with £756,000.00 with which to re-house her and the children.
16. For Baron J to have awarded the wife 45% of the assets may, at first blush, appear to be high in a case where although there were children, the marriage had only subsisted for 4 years and in circumstances where all the assets had been owned by the husband, prior to the marriage. Baron J explained her decision on the basis that she had concluded that but for the actions of the husband in relation to tax, there would have been a further substantial sum available to distribute between the parties. If that sum had been taken into account on the schedule of assets then the division of assets required in order to provide the lump sum required to meet the needs of the wife and children would have equated to roughly 26% to the wife. Given the length of the marriage, this would, Baron J concluded, have been fair division of the assets.
17. The husband neither appealed the order nor complied with its terms. After considerable difficulty, the Farm was told by the trustees and the wife received the lump sum ordered by Baron J. It is the interpretation of Paragraph 3(c) following the death of the husband that lies at the heart of this appeal.

Tax

18. Upon reading Baron J's judgment, it is apparent that she had considered with care how to approach the outstanding tax issues. She identified three distinct categories, each of which would receive different treatment and which variously:

i) should be properly deducted from the asset schedule and therefore for which both parties should be responsible, for example legal farm income;

ii) should be added back to the husband's side of the asset schedule, for example penalties incurred by the husband for failing to declare income and pay tax;

iii) should be neither added back nor deducted from the schedule of assets, namely the potential tax on the tipping income. (see paragraph 11(a) above)

19. In many, if not most, financial remedy cases there are no tax issues to be taken into account. The parties are most commonly in employment, and therefore paying their income tax under the PAYE scheme; their home, if privately owned, is not susceptible to CGT as it is protected by the principal private residence exception.
20. When a property appears on a schedule of assets in financial remedy proceedings its worth is calculated for inclusion on the schedule as a net figure regardless of whether it is anticipated that the property will be sold. Only in this way can the parties, and the court, make a proper assessment of the net value of assets and therefore calculate the amount available for distribution to meet the needs of the parties or otherwise determine what would in each case represent a fair outcome.
21. In practical terms parties to financial remedy proceedings routinely agree a percentage deduction from an agreed valuation of the house to represent costs of sale. If CGT is payable, a calculation of the amount due is agreed and deducted from the gross value of the property; in this way a net figure for inclusion on the schedule of assets is produced. The aim therefore is to arrive at a figure net of costs of sale and any tax arising on sale. The most usual tax is CGT but in order to achieve the necessary net figure the same approach applies equally to any other tax which may be levied on the sale of a property; such tax may not always be CGT but could be as in this case, corporation tax or inheritance tax.
22. The failure of the parties to have tackled the CGT/corporation tax issue prior to the trial meant that Baron J was unable to determine a precise figure for CGT and corporation tax and accordingly she had no alternative, (if the case was not to be adjourned and further unaffordable costs incurred), but to deal with the matter as she did through her order at paragraph 3(c). The general principle that property appears on the schedule of assets net of tax was unaffected by her pragmatic treatment of the problem she faced.
23. Through her analysis of the tax position Baron J made it abundantly clear that her intention (reflected in the order), was to ensure that in the event that the total amount of CGT assessable on the Farm was less than the estimate of £1.09m with the result that the total net assets of the parties was in excess of that upon which she had based her calculations, the wife would benefit from the surplus in the same proportions as had been determined to be fair in relation to the overall division of the assets.
24. The husband failed to pay the lump sum and therefore under the terms of the order the Farm had to be sold. A number of enforcement hearings were conducted and the trustees entered into negotiations with HMRC to reach a compromise in respect of the outstanding tax in order to crystallise the figure due to the wife.
25. HMRC produced a schedule setting out their assessment of the outstanding tax at £2,290,917.00 ("The HMRC schedule"). The HMRC schedule separated the tax into seven categories. By dint of considerable skill and hard work, the trustees were able to reach a compromise with HMRC for a payment of £850,000.00 in full and final settlement of all taxes, interest and penalties.
26. None of the seven categories on the original HMRC schedule represented the CGT that had been anticipated as due by Paragraph 3(c) of Baron J's order; this was because as a consequence of the husband's death, no CGT (or corporation tax) was now payable. Rather, instead of the forecast CGT of £1.09m, an inheritance tax charge ("the wife's IHT"), of £393,653 was assessed by HMRC as being due upon payment of the lump sum ordered by Baron J consequent upon the money being brought onshore and paid to the wife in the UK. The wife's IHT therefore represented an eighth category of outstanding tax and brought the total (when added to the HMRC schedule), to £2,684,570. This latest charge, Mr Boyes, solicitor for the trustees, explained to the court was tax attributable to a benefit to the wife consequent upon her receiving payment of the lump sum. This additional eighth category was not specifically included in the negotiations at the time the figure of £850,000 was agreed with HMRC although as will be seen it was subsequently covered by the terms of the compromise order filed at court on 23 January 2013.
27. Mr Boyes explained that during their negotiations the HMRC had declined to weight/allocate the £850,000.00 between the various forms of tax owed by the husband and set out on the HMRC schedule. This approach by HMRC is reflected in the consent order dated 23 January 2013, which formalised the compromise agreement; the order simply attributes the £850,000 in numerical order across various identified liabilities.
28. Given the complexities of the husband's affairs, and the deviousness which had marked his dealings with the Revenue, the compromise order with HMRC marked a successful, practical and proportionate outcome of potentially expensive, uncertain and complex enforcement proceedings both for the tax payer and the trustees.
29. The compromise order set out various liabilities which would now be settled by the payment of the sum of £850,000.00; no figures were attributed to the specific liabilities and the liabilities did not marry up with the seven categories of tax contained on the original HMRC schedule although it included them all in one form or another; the order did however specifically include:

xiv. "Any inheritance tax due under Part 3 of the Inheritance Act 1984 arising from the making of any payment to any person pursuant to the order of Baron J dated 23 October 2009 in the ancillary relief proceedings."

30. Both the trustees and Miss Cade-Davies on behalf of the wife are completely satisfied that the compromise order includes the wife's IHT charge of £393,653.00 and absolves the trustees and wife of any future liability in respect of the same.

The Hearing in front of Moor J

31. Moor J was faced with the unenviable task of being asked to interpret Paragraph 3(c) of Baron J's order and to assess what if any, sum was now owing to the wife pursuant to that provision. Miss Cade-Davies advocated the application of a pro rata or 'proportionate' approach to the problem. This she submitted could be achieved in the following way:

i) Start with the figure of £2.29m (leaving out the wife's IHT charge which she sought to exclude in its entirety);

ii) By reference to the figures set out on the HMRC schedule deduct those categories of tax which Baron J had decided should not be borne or shared by the wife;

iii) Express the resulting total of tax to be deducted per Baron J's judgment, as percentage of the original claim of £2.29m;

iv) Apply the resulting percentage to the figure of £850,000.00 thereby producing a figure which can be deducted from £1.09m;

v) Award the wife 45% of the difference between the pro rata tax to be deducted and £1.09m as provided for in Paragraph 3(c).

32. In this way Miss Cade-Davies says, the difficulty occasioned by HMRC having declined to apportion the compromise figure is resolved; such a proportionate approach means, she submits, that on the one hand the wife has not taken responsibility for those taxes Baron J held should be the sole responsibility of the husband, but on the other she has received her share of the 'uplift' to which entitled as a result of the 'exit' tax (now the wife's IHT rather than CGT), from the sale of the property being less than the estimate of £1.09m.
33. Moor J, whilst seeing the force of the submission of Miss Cade-Davies remained uneasy that he did not know to what extent, if any, HMRC was accepting that the £850,000.00 was spread proportionately throughout the seven items on HMRC's schedule. The judge commented that HMRC may in fact have felt that they had a better claim in relation to certain categories than in respect of others. The judge concluded therefore by saying:

"[15] I recognise entirely that Mrs Justice Baron took the view that the wife should not have responsibility for the tipping income, the tax on it and the VAT on it, but I am quite unable to assess properly how to reflect that in the £850,000.00. I have come to the clear conclusion that the only way to construe this order is to take the tax at £850,000 figure. In doing so I have paid particular regard to the fact that this also includes a compromise of the potential £393,000 claim against the wife. However it does therefore mean that the applicant wife has the clear claim for £108,000 by way of additional payment. This is 45% of the difference between the £1,090,000 and the £850,000 compromise. I therefore make that determination."

34. Moor J therefore took a pragmatic approach whereby he made no deduction from the figure of £850,000 which had been agreed with HMRC to account for the tax which Baron J had held that the wife should not be responsible (in particular in relation to the tipping income), but neither did he include the newly assessed wife's IHT which would have depressed the sum to which she was entitled had it been included. It is against that methodology that the wife now appeals. Miss Cade-Davies' nine grounds of appeal filed on behalf of the wife can be condensed as follows:

i) The judge failed to implement the conclusion of Mrs Justice Baron that the appellant should not bear the burden of any tax in respect of tipping income or interest and penalties thereon, nor should she bear the penalties due on farm income.

ii) The judge failed to consider whether it was appropriate for the wife to bear the burden of the interest due on inheritance tax charges incurred in 1997 (pre-marriage) in circumstances where Baron J had found that the husband had been "below the radar so far as tax is concerned since about 1992".

iii) The judge placed undue weight on the potential liability to tax on the appellant's part of £393,653.00 in circumstances where she was unaware of such potential liability and where there was no evidence to support the assertion.

iv) In concluding that he did not know the motivational basis of HMRC's agreement to accept £850,000 in full and final settlement, the judge erred in failing to apportion the various claims made by HMRC as a percentage of the overall sum of which £850,000 which was compromised.

Interpretation of Baron J's Order

35. Miss Cade-Davies submits that, as no CGT was due, a strict application of the paragraph would result in the wife being due an additional £490,500 being 45% of £1.09m. Miss Cade-Davies does not however contend for such an interpretation as she unreservedly accepts that a faithful application of Baron J's intentions would lead to the application of the proportionate or pro rata approach set out above. Miss Cade-Davies accepts that, to give the wife 45% of £1.09m without any deduction for any of the tax due would not be a fair outcome to the trust and therefore the beneficiaries.
36. An alternative (and punitive) way of interpreting the clause, would be to conclude that as no CGT had been payable, paragraph 3(c) has therefore no role to play and the wife should receive no uplift, not even the £108,000 payable upon application of the judge's formula. Such an interpretation would mean that the wife would share the responsibility for the tax on the tipping income, including interest and penalties, together with the penalties due on the farm income which taxes were embedded but not particularised, in the compromise payment of £850,000.
37. Miss Cade-Davies submits that neither of these interpretations would result in a fair outcome and would each manifestly fail to reflect the outcome intended by Baron J. I agree.
38. The construction of a judicial order was considered by Lord Justice Patten in Re A (a child) [2014] EWCA Civ 871 in the context of an order wrongly requiring a party to prepare and serve a "Form E" in circumstances where the appropriate form would have been a "Form E1". Lord Justice Patten described as "absurd", the suggestion that the judge's order could be interpreted in any other way than that it required the filing of the appropriate form, namely a Form E1. In reaching that conclusion, he said at paragraph 32:

"As Lord Sumption said recently in Sans Souci Limited v VRL Services Limited [2012] UKPC 6:

The construction of a judicial order, like that of any other legal instrument, is a single coherent process. It depends on what the language of the order would convey, in the circumstances which the court made it, so far as those circumstances were before the court and patent to the parties. The reasons for making the order which are given by the court in its judgment are an overt and authoritative statement of the circumstances which it regarded as relevant. They are therefore always admissible to construe the order. In particular the interpretation of an order may be critically effected by knowing what the court considered to be the issue which its order was supposed to resolve."

39. As already noted, paragraph 3(c) in respect of which the wife seeks a declaration, says:

"In the event the capital gains tax payable upon sale of the said property is less than £1,090,000 the petitioner wife shall receive 45% of the difference of the actual capital gains tax payable and £1,090,000."

40. Once Baron J's intention as set out in her judgment is taken into account, namely that:

i) The wife was not to be responsible for the tipping income tax or the penalties in relation to the farm income;

ii) That the net value of the Farm was to determine the wife's overall settlement figure by way, if necessary, of a balancing payment to her when the tax position (then CGT and corporation tax), was resolved.

It becomes apparent that either of the 'strict' interpretations of the order would not only lead to an outcome which was not intended by Baron J but which would be unfair to one or other of the parties.

41. In my judgment the reasons given by Baron J for her treatment of the tax issues in the case are without doubt an "overt and authoritative statement of the circumstances which she regarded as relevant" and, as a consequence, as Lord Sumption said in Sans Souci Limited v VRL Services Limited, those reasons are admissible and indeed, in my view, essential, in order to construe the order.
42. The difficulties in interpreting the order in the present case have arisen out of the complex and unusual circumstances of the case, in particular the untimely death of Baron J. Ordinarily differences between the parties in respect of the interpretation of an order are easily and properly resolved either by negotiation between the parties (often assisted by reference to the recitals which often appear on the face of an order specifically as an aid to the interpretation of the order) or failing that, by way of an application for clarification of the order made to the trial judge.
43. When she had calculated the assets, Baron J's global approach had been that taxes appropriately due and owing to HMRC should be deducted from the schedule of assets before division. Miss Cade-Davies has faithfully sought to reflect that approach in the figures she has put before the court and she has rightly conceded that the absence of a liability for CGT consequent upon the death of the husband should not now result in the wife receiving 45% of £1.09m. Miss Cade-Davies submits that in the unusual circumstances of this case, Baron J's clearly expressed intentions should inform the court when construing the order, where as here, the order in question is no longer capable of implementation in the precise terms set out and drafted prior to the death of the husband.
44. I accept the approach put forward by Miss Cade-Davies to this extent; Baron J's clear intention was that the wife should not be liable for any part of the taxes in relation to tipping or the penalties which related to the farm income and I accept that a way should be found to achieve that result. I cannot however accept Miss Cade-Davies submission that the wife's IHT should be ignored for the purposes of calculating the uplift payable pursuant to Paragraph 3(c). With respect to Miss Cade-Davies her submissions on this topic are internally inconsistent as, if the proper approach of the court is to achieve an outcome consistent with the intention of the court, not only should the wife be relieved of responsibility of certain taxes but equally those taxes properly assessable upon the sale of the Farm, in whatever form, must also be taken into account before the uplift is calculated.
45. On a similar point HMRC's schedule includes historic IHT charges in relation to the Farm. On behalf of the wife it is suggested that interest in relation to these charges should not be deducted, although Miss Cade-Davies accepts the principal must be. In my judgment, just as Baron J found that as the family had benefitted from the legal farming income, the unpaid tax and interest, but not the penalties, should be deducted, in my judgment the same approach must apply to the interest outstanding on the historic IHT charges the family having had the benefit of the unpaid tax.

Conclusion

46. The judge, having felt unable to attribute any particular proportion of the compromise figure of £850,000 to any of the specific categories dealt with by Baron J, concluded that the only appropriate approach was to deduct in full the compromise figure of £850,000 from the estimate of CGT of £1.09m and, to give the wife 45% of the difference by way of uplift. (£108,000). Whilst sympathising with the difficulties faced by the judge, I respectfully disagree with that approach, which meant that the wife was paying part of the tax owed by the husband, from which Baron J held she should be protected, (albeit, at a lesser figure due to the compromise with the HMRC), whilst not bearing any direct responsibility for the 'exit' tax payable in relation to the Farm.
47. The fact that HMRC attached specific figures to each category of tax on the HMRC schedule allowed the court to transpose pro rata the same apportionment found on the HMRC schedule across to the compromise figure notwithstanding that they had declined specifically to apportion the £850,000 compromise figure across the various categories. In my judgment, the judge fell into error in speculating as to how confident HMRC may have felt about any particular figure found on the HMRC schedule and in therefore declining to attempt an apportionment exercise. Only by conducting such an exercise could the court hope to ensure that the wife was not rendered partially responsible for the consequences of her former husband's wholesale tax evasion.
48. Miss Cade-Davies has helpfully produced a number of worked scenarios to assist the court in determining the proper figure to which the wife is entitled to be paid by way of uplift, in the event that it accepts her basic approach.
49. It is not necessary for the purposes of this judgment to set out the calculations put before the court by Miss Cade-Davies, suffice to say that having deducted those taxes identified by Baron J together with interest on the historic IHT and the wife's IHT from the total of tax charges of £2.68m, an application of the proportionate approach set out by Miss Cade-Davies, together with Baron J's formula at Paragraph 3(c), results in the wife being due an uplift of £212,467, a little under double that ordered by the judge. Allowing for a payment on account of £108,000 (together with interest of £35,933.00), a further payment is due to the wife of £104,467.15 plus interest.
50. The appeal is accordingly allowed.

Lord Justice Briggs

51. I agree.

Lord Justice Patten

52. I also agree.