England and Wales High Court (Administrative Court) Decisions

1. The matters dealt with in this judgment are the actions brought by the Plaintiffs, respectively Hillsdown and HF Trustee, against the Inland Revenue for recovery of the sums totalling £7,374,800, and their application for judicial review of the Inland Revenue's decision not to refund those sums. The trial of the action was on the basis of agreed facts. In summary, the main question is whether these sums were due under section 601 of the Income & Taxes Act 1988 ("ICTA").

2. HF Trustee is the trustee of an approved pension scheme for the benefit of employees of Hillsdown. As the scheme had a substantial surplus it agreed to make two payments in 1989 and 1990 to Hillsdown. Tax was paid at the same time. Unfortunately the distributions to Hillsdown were later held by Knox J to have been in breach of trust. The sums distributed net of the tax paid had been returned to HF Trustee and the Plaintiffs seek the repayment of the tax paid from the Revenue. The Revenue, on the other hand, contend that the sums are still due as tax even though the relative distribution was invalid and has been reversed.

3. In the Statement of Claim the Plaintiffs allege that these sums were paid under a mistake of fact, that a valid payment had been made to Hillsdown out of the HF scheme, as defined below. If that payment had been valid there would have been a surplus out of which the HF Trustee could have made the payment to the employer. The Plaintiffs' claim in the action is therefore pleaded as a claim in restitution under the principle in Woolwich Equitable Building Society v IRC (No 2) [1993] AC 70; alternatively on the basis of a failure for consideration; alternatively on the basis that the Revenue has received the sums as a volunteer and therefore is a trustee of them for HF Trustee.

4. The law, in fact, has developed in an important respect since the claim was pleaded. In Kleinwort Benson v Lincoln City Council [1999] AC 153, the House of Lords decided that a claim can lie if the money is paid under a mistake of fact as well as those paid under a mistake of law. So any issue that there might have been, had the case been argued before that decision, as to whether this was a mistake of fact or not does not now matter. Moreover, as explained in the next paragraph, the argument has in the event focussed on the question of the construction of section 601.

5. The Revenue's primary contention is that the payments to Hillsdown triggered a charge to tax under section 601. However, it has also accepted that if, in the events which happened, the tax was not due it will repay the sums on the Woolwich principle. This approach has greatly simplified the issues.

6. I will now summarise the framework of the legislation. Section 601 imposes a tax equal to 40 per cent of the payment where:

7. Under section 592 of ICTA, certain tax privileges apply where a pension scheme is an exempt approved scheme. For instance, an employer can deduct a contribution made to it from its taxable profits and the income earned on investments belonging to the scheme is not subject to income tax. For the purposes of section 601:

8. Limited exceptions are available where, for example, the fund reimburses the employer for expenses which the administrator of the fund ought to pay and where the fund makes a loan of a specified description to the employer: see section 601(3)(c) and the Pension Scheme (Administration) Regulations 1987.

9. The application for judicial review arises in the following way. The Plaintiffs asked the Revenue to repay the tax as a matter of discretion. A letter dated 24th November 1997 from Mr McManus of the Pensions Schemes Office rejected this request. This is the decision which is the subject of the judicial review application. This application was launched before the decision in Kleinwort Benson v Lincoln City Council . The reasons given by Mr McManus were that (1) the primary duty of the Revenue is to collect tax and not to forgive or repay tax; (2) the taxpayer had made no mistake in paying the tax; (3) no mistakes were made by the Revenue and no representations were made or undertakings given by it that tax would be repaid. Later letters from the Revenue confirmed the decision and the reasons.

10. As I have mentioned, in the light of the Inland Revenue's approach in this matter, the principal question in the action is whether, other on a true construction of section 601 there was a payment to Hillsdown. The claim for restitution is not needed if the Revenue lose on the construction point; likewise, the application for judicial review does not arise if the Plaintiffs succeed on the construction point.

11. The full facts are set out in the agreed statement of facts, which I annex to this judgment. In summary:

12. Although Knox J decided the transaction as "void", Mr Oliver does not maintain that the transaction is void, only voidable.

13. It has been common ground in these proceedings that the meaning of the word "payment" depends on its context, and in this connection Mr Oliver referred me to Garforth Inspector of Taxes v Newsmith Stainless Ltd [1979] 1 WLR 409, in which it was held that the crediting of a sum to a director's account with his company was a "payment" to him for the purposes of PAYE. Thus, for instance, it will depend on the context whether the payment must be in cash or whether payments in kind are included, whether payments must be unconditional, and so on.

14. Starting from this proposition Mr Oliver's approach was essentially to argue for a purposive construction of the term "payment" in section 601. He submitted that the purpose of the relevant provisions of ICTA was to impose a tax on the employer if it received any benefit from the funds which had been extracted from a pension fund. The tax provisions assisted in the building up of a pension scheme. The income earned was tax-free. When monies were taken out of the scheme, section 601 in a rough and ready way reversed the benefit which the employer had received when the monies were paid into the scheme. In this case, however, the employer received no benefit from the pension fund. It had to hand the monies back. Indeed, the effect of the Revenue's contentions in the present case was that the tax was suffered by the pension fund since Knox J had held that Hillsdown should not be liable to return the tax if it was not recoverable from the Revenue. The monies would not therefore be available to benefit the beneficiaries under the scheme. The equitable interest in the monies had never moved to the employer. The transactions entered into by the pension schemes required as far as possible to be reversed, and the effect of the present situation was that the Revenue received a windfall. If there was a payment to the employer at a future date the tax would have to be paid again and so there would in fact have been tax paid twice on those monies leaving the pension scheme and reaching the hands of the employer. The payments of this case were not "payments" for the purposes of section 601 of ICTA because they were not valid and effectual payments; there was no real and unfettered transfer of worth.

15. The fundamental quality of "payment" under section 601 was, on Mr Oliver's submissions, that it had to be a real transfer of worth. In this connection he pointed to section 601(6)(a) as supporting his submission, but otherwise did not submit that there was any clear guidance in the section itself. Indeed he submitted that there was no indication either way in section 601 as a matter of language, although there was an assumption that it would be a valid payment. Mr Oliver preferred to rely on the policy behind section 601 (as described above) and upon the general principle laid down by the House of Lords in Paton v IRC [1938] AC 341. In that case the question was whether a borrower had paid interest to his bank when the latter had debited it to his account and added it to the debit balance due on the account. If the interest was "paid", the taxpayer was entitled to a repayment of tax. Lord Atkin said:

16. Lord Macmillan said:

17. Then later he said:

18. The crucial part of this passage is that payment should be a reality and not a fiction -- that is the court must look to the substance and not to the form of the payment. Mr Oliver gave two further illustrations. The first was Ridge Securities Ltd v IRC [1964] 1 WLR 479. Here the taxpayer companies had purported to pay interest on debentures, but these payments were ultra vires and void. It was held that the sums could not therefore be annual payments for the purposes of the Income Tax Act 1952.

19. The second case which Mr Oliver cited to me to illustrate the general principle that a payment must be a real one and not a notional one was Lee v IRC [1943] 25 TC 485, where the taxpayer had entered into a deed of covenant and made payments under it, but there was an understanding between him and the convenantee that she would return the amount paid, and she did in fact return the amount paid. Macnaghten J upheld the decision of the Special Commissioners that no payment had been made. Mr Oliver submitted that a payment must in general confer a right to retain the money which was unfettered.

20. Mr Oliver also submitted that his argument -- that the courts should have regard to the substance and not the form -- was consistent with the approach Ramsay v IRC [1982] AC 301, in which the House of Lords held that an artificial pre-ordained series of transactions designed for tax avoidance should be disregarded. Here too the payment had been a mere transitory receipt of funds with no genuine transfer of value.

21. Mr Oliver also relied on Article 1 of the First Protocol to the European Convention on Human Rights. This provides for the peaceful enjoyment of property but it is subject to the right of a State to pass laws to secure the payment of taxes. On Mr Oliver's submission, the effect of the Revenue's argument was that property belonging to the beneficiaries was appropriated by a public authority. Mr Oliver submitted that I should have regard to the United Kingdom's obligation as a matter of international law as a signatory to this Convention and construe section 601 with the presumption that Parliament intended to fulfil its obligations in that regard. The ECHR was part of the context from which the meaning of the word "payment" in section 601 could be deduced.

22. With respect to the interpretation of Article 1, Mr Oliver referred to the decision of the European Court of Human Rights in Gasus Dosier-Und Fordertachnik GmbH v Netherlands (1955) 20 ECHRR 403. In this case the court emphasised that there must be a "fair balance" between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. It also stressed that, in determining whether this requirement had been met, it recognised that the contracting State enjoys a wide margin of appreciation and that the court will respect the legislature's assessment in such matters unless it is devoid of reasonable foundation. These points were repeated in National Provincial Building Society v United Kingdom [1997] STC 1466. Mr Oliver's submission was, of course, that if section 601 had the effect of imposing a charge to tax even if the transactions were reversed then it achieved a disproportionate effect on the taxpayer. Mr Glick's submission that the test that the law was "devoid of reasonable foundation" was a very high test for the taxpayer to meet.

23. Mr Oliver also pointed out the consequences of the Revenue's argument. A payment could trigger a charge to tax even if it was made without any authority or if the trustee had been advised that the payment was a breach of trust and the parties had voluntarily restored the position to what it had been before the transaction. Unless regard was had to the nature of the payment, a charge to tax could be triggered where for instance the employer was the trustees' banker and monies were paid in the trustees' bank account in the usual way. Mr Glick thought that this particular example might be covered by one of the exemptions prescribed by regulations under section 601.

24. Mr Oliver relied on other cases where the courts had had to deal with the tax consequences of a transaction which had been set aside. He referred me to Spence v IRC (1941) TC 341. In an earlier case the House of Lords had set aside a sale of shares induced by fraudulent misrepresentation and ordered the defendant to account to the plaintiff for the dividends he had received (see Spence v Crawford [1939] 3 All ER 271. The Revenue repaid the tax paid by the defendant and sought to recover surtax on the dividends from the plaintiff. The Inner House of the Court of Session held that the dividends were properly included in the assessments made on the plaintiff for surtax. The Lord President (Lord Normand) held that as from the date the contract was reduced (which I understand to be the Scottish term for "set aside"):

25. If anything, the case of Spence v IRC is a stronger one than the present one because the seller had to take steps to set the contract aside, whereas in the present case the equitable interest in the payment remained at all times in the beneficiaries.

26. Mr Oliver distinguished Spence from the decision of the Court of Appeal in Morley-Clarke v Jones [1985] Ch 311. There the court in the exercise of powers conferred by the Matrimonial Causes Act 1973, had varied an order for maintenance with retrospective effect so that the maintenance was paid direct to the child and not to the former wife. It was held that the order making this variation retrospective could not alter the position for tax purposes. The maintenance had in fact been paid to the wife in the years in question. The question which arose was whether the payments should be treated as the income of the wife in the years to which the order for backdating applied. Oliver LJ distinguished Spence. He said:

27. Mustill LJ agreed and Buckley LJ delivered a concurring judgment. Buckley LJ pointed out that unlike the wife in Morley-Clarke, the defendant in Spence was never entitled to receive the dividends. Mr Oliver submitted that there was no question of the order of Knox J rewriting history in the present case. The equitable title had always been with the beneficiaries. Mr Glick agreed that Morley-Clarke was distinguishable on this basis.

28. I now turn to the Revenue's case. The Revenue contends that Knox J erred in law in holding that Hillsdown was a constructive trustee of the sums paid to it net of tax, but does not contend that anything turns on that point for the purposes of this case. The Plaintiffs say that Knox J was correct in holding that Hillsdown received monies from the HF Trustee as a constructive trustee. I do not think it is necessary to resolve that issue in this matter since both sides accept that at all times the equitable title in the sums paid in breach of trust remained in beneficiaries of the pension scheme. Mr Oliver, anticipating an argument by the Revenue, argued that no distinction should be drawn between the 60 per cent paid to Hillsdown and the 40 per cent paid to the Revenue. They were all part of one transaction. Mr Glick, however, did not suggest that there is any difference to be drawn between the payments to the employer and the payments to the Revenue. In fact the chargeable event, if any, is the payment to the employer, and so the question is whether there is a "payment" for the purposes was section 601.

29. The second payment was made to the employer gross and the employer accounted to the Revenue for the tax, when the tax ought to have been deducted from that which was paid and paid direct to the Revenue, but nothing is said to turn on this.

30. Mr Glick's approach is a very simple one. Monies had actually moved from the pension fund to the employer. That was the event, which under section 601, gave rise to a charge to tax under that section. The wording of the section was clear and unambiguous. It applies to any payment and not just where the surplus was being reduced in accordance with Schedule 22. Section 601(6)(i)(a) supported his construction because it suggests that any transfer is caught by the section; it does not stipulate that there has to be a transfer of the beneficial interest as well. There is no specific exception for payments that are not effective to pass the beneficial interest in the monies, but then of course there was no special provision in the taxing provisions in the Spence case either. Mr Glick accepted, however, on the basis of Spence that the court should look at the position in the light of the knowledge which it now has about the transaction, not as they were thought to be immediately after the payments were made to the employer.

31. Mr Glick further submits that, because on his submission the wording of the section is clear, there is no need to apply a purposive construction. I do not accept this because, as both sides accept, the word "payment" can have different meanings and the choice of the correct one depends on the context and since there is not clear linguistic guidance as to the meaning of "payment", the court is entitled to have regard to the context and purpose of the section (see per Lord Wilberforce in Ramsay [1982] AC 301 at 323). As to the purpose of section 601, Mr Glick submits that the purpose is to recoup the benefit given while the monies were within the fund when they could be accumulated free of tax and that the method is necessarily rough and ready, but this does not to my mind satisfactorily explain why the tax is, on his submissions, imposed even if, in reality, the monies do not leave the fund.

32. Mr Glick referred to Secretary of State v Harmon [1998] 1 WLR 163, where the issue was whether the word "paid" in the Child Support Act 1991 meant "actually paid" or "lawfully paid" as a further illustration of the proposition that the word "payment" takes its colour from the context.

33. Mr Glick submitted that, even if Mr Oliver's argument was correct, it was not every payment which was void or voidable which would fall outside the section. Some payments may be affirmed. Some payments may be irrecoverable because the recipient used them to pay off its debts and then became insolvent. Mr Glick submitted that a form of words to take out of section 601 payments which are made under void or voidable transaction in these circumstances would be very difficult to draft. I accept that may be so but what is in issue here is not how the problem could be solved by legislative drafting but whether there is some implicit principle in the concept of payment as construed by the courts which has this effect. The fact is that there are a large number of ways in which a transaction such as is referred to in section 601 could take place; the wording of the section is extremely general thus leaving an obvious role for judicial interpretation where it is difficult to apply the general words to unusual sets of facts.

34. In my judgment there is no reason in the present case why Parliament should seek in section 601 to tax a payment which was not effectively made, and indeed the policy of the sections would, as Mr Oliver submitted, suggest otherwise. So I turn to the wording of the section to see if there is anything in that section or the group of sections of which it forms part to indicate that when Parliament used the term "payment" in section 601 it was intending to catch not merely effective payments, but also a payment which, to use Lord Macmillan's words in Paton, was a fiction and not a fact. That construction is not dictated by the term "payment" on its own; as a matter of the ordinary use of language, Hillsdown did not receive "payment" from the pension fund. But, even apart from that, there are in my judgment indications in the sections that the payment had to be a real payment. For instance, tax is calculated on the amount of the payment if it is in cash. If the payment is in kind, it is paid on the value of the asset transferred. There is no reason to suppose that, save for some possible exceptions, the two types of payments to bear different rates of tax, and on that basis the payment, if in cash, would have to be a real payment. There may be some exceptions where, for instance, a loan is made which is not of the specified description. The Revenue says that in those circumstances tax is charged on the nominal amount of the loan, even if the nominal amount of the loan has to be repaid. I will assume that this construction is correct but express no view on it.

35. Likewise, section 601(6)(a) throws some light on the present problem. It uses the word "transfer" in relation to transfer of assets. This provision is not talking about a transfer of legal title. Not all assets require to be transferred by transfer of legal title and the subsection is dealing with all assets, whether or not falling within the description of assets that can only be transferred by following some special formality (like shares). Rather this provision is referring to a real transfer of an asset and the use of the word "other" before "transfer of money's worth" supports this conclusion.

36. Likewise, in section 596 one of the ways in which a surplus in an approved scheme can be reduced is by "making payments to an employer" (schedule 22, para 3(3)). A surplus could not be reduced by a payment which did not have the effect of transferring the equitable interest in the monies paid to the employer. This is also some indication that a payment under that schedule is a transaction which has substance, and the same meaning should apply to section 601. This point is not affected by the fact that section 601 applies to other payments as well as reduction of surplus under schedule 22 because it is still the same word "payment" which is being used and one is entitled to start from the basis that is being used consistently.

37. Further support for Mr Oliver's approach to "payment" is to be found in section 601(1) itself: the payment must be "out of" the fund. In my judgment, these words indicate that the payment must result in funds effectively leaving the fund as intended by the transaction (whether absolutely or for a period as in the case of a loan). The words "out of" are not apt to describe a payment which, contrary to the stated effect of the transaction, does not have the effect of changing the ownership of the monies paid and is in fact reversed. Likewise, under section 601, the payment must be made "to the employer" and this must mean in the employer's capacity as such and exclude the case where the employer merely receives the monies as a trustee arising under operation of law for the fund. Section 6(2) of ICTA provides that the charge to income does not apply to income of a company. There is an exception for income arising to it in "a fiduciary representative capacity". Mr Glick placed reliance on this but I do not consider that the absence of a in section 601 is significant because the word "payment" in section 601 of itself entails a payment of substance and not where the beneficial ownership remains with the payer. Moreover, in this case the trust is merely a legal mechanism to describe the obligations which arise under the recipient.

38. For all these reasons, in my judgment, the Plaintiffs succeed on the construction point. I do not consider that the court should attempt to find a comprehensive definition of "payment" for this purpose. It is enough to say that the purported payments were, on the facts of this case, without substance. No beneficial interest passed and they had to be returned to the HF Trustee. In those circumstances, applying the principle in Paton and similar cases, they were not really payments at all in the eyes of the law.

39. In the light of the conclusion that I have reached on this point, it is unnecessary for me to deal with Mr Oliver's submissions as to the effect of Article 1 of the First Protocol to the European Convention on Human Rights.

40. These claims arise only if, contrary to what I have just held, the Revenue is right as a matter of construction. I will, therefore, deal with them briefly.

41. It is pleaded that the tax paid to the Revenue had been paid on the mistaken basis that the payments due to the employer had been valid and effectual and that accordingly the tax should be repaid to the Plaintiffs.

42. I prefer Mr Glick's submissions on this point. The mistake, which the taxpayer made, was irrelevant. The mistake was not on this hypothesis as to the basis of liability but as to the reason for the transaction. Unless the mistake was as to the basis of liability, there can be no claim based on mistake against the Revenue.

43. It is also pleaded that there was a failure of consideration, but, if the tax was due, there was consideration in the form of a discharge of the liability due to the Revenue for that tax.

44. In argument, Mr Oliver further submitted that the Revenue had been unjustly enriched. He submitted that a cause of action would now lie for unjust enrichment if the Plaintiff could show that the defendant had been enriched at his expense and he referred to recent developments of the law in this field including the decision of the House of Lords in Banque Financiere de la Cite v Park [1998] 1 All ER 737. He submitted that the Revenue was unjustly enriched because the tax is in effect borne twice on the same monies. As Mr Glick points out, the enrichment was not unjust if the tax was due. Subject to the point that Article 1 of the First Protocol to the European Convention on Human Rights may apply, this is so even if the tax is paid when there is a second and successful attempt to transfer monies out of the fund to the employer.

45. It is common ground that the Revenue is amenable to judicial review. Mr Oliver referred me to Re Preston [1985] AC 835, and he accepted that the primary function of the Revenue was to collect tax due, not forgive taxes. However, he submitted that there were exceptional factors here which the Revenue had not taken into account. In particular, the Revenue should have taken account of the purpose of the sections, the fact that the Revenue had received a windfall and that the ultimate loss here will be borne by the beneficiaries since Knox J did not consider that Hillsdown should reimburse the pension fund unless it recovered the tax from the Revenue.

46. While the categories of unfairness are not closed, it is clear that in the present case the Revenue did not play any part in the decisions to make the payments. In my view, therefore, no grounds for judicial review have been shown. The fact that the FMC Trustee made a mistake as to the extent of their powers or that the HF Trustee made a mistake as to the assets belonging to the pension scheme are not factors which the Revenue were required to take into account since they were matters which solely concerned the taxpayer and gave rise to no legitimate expectation as to the action the Revenue would take.

47. Accordingly, I dismiss the application for judicial review.

48. The FMC Superannuation and Life Assurance Scheme ("the FMC Scheme") was an occupational pension scheme constituted on 1st July 1955, and regulated at the material times by a definitive trust deed and rules dated 24th July 1957 as subsequently amended, and whose members were employees of FMC Ltd and associated companies.

49. The HF Meat & Foods Processing Pension Scheme ("the HF Scheme") was a further occupational pension scheme constituted on 30th July 1982 (being known from then until April 1989 as the Lockwoods Foods Pension Scheme), and regulated at the material times by a definitive trust deed and rules dated 28th December 1984 (document 1). The members of the HF Scheme prior to April 1989 were senior employees (approximately 80 in number) of Hillsdown Ltd trading as Lockwoods Foods. On or about 6th April 1989 the membership of the HF Scheme was widened to include approximately 800 additional members who were employees of the First Plaintiff ("Hillsdown") or certain of its subsidiary companies.

50. Both the FMC Scheme and the HF Scheme were at all material times exempt approved schemes within the meaning of section 592 ICTA 1988 (or Chapter I of Part XIV).

51. The FMC group of companies was acquired by Hillsdown in 1983. On 1st December 1987 Hillsdown was substituted for FMC as the "Corporation" for the purposes of the FMC Scheme (document 2).

52. At the material times the trust deed and rules of the FMC Scheme were those set out in Schedule V to a deed dated 21st March 1983 (document 3, pages 154-234). Save in respect of a surplus arising upon the winding-up of the scheme, the said trust deed and rules contained no provision permitting any transfer of the assets of the scheme to any of the employers. Clause 14d (document 3, pages 163-164) thereof prohibited any amendment to the trust deed and rules which would result in such a transfer.

53. As at 5th April 1989 the net assets of the FMC Scheme amounted to approximately £32,397,916, and there were approximately 741 active members, 356 deferred pensioners and 1,180 persons in receipt of pensions in payment. On or about 5th June 1989 the Actuary to the FMC Scheme opined (document 4) that the Scheme had contained a surplus of £11,047,000 as at 6th April 1988, and that the projected surplus as at 6th April 1989 was £15 million. The payment of employer's contributions to the FMC Scheme had been suspended since 1st January 1985.

54. At no material time prior to 17th November 1989 was there a significant surplus in the HF Scheme.

55. From 1st May 1989, the trustee of the FMC Scheme was FMC Superannuation and Pension Scheme Trustees Ltd ("FMC Trustee"), (documents 9 and 19) whose directors were Messrs. Allan Hewitt, Colin Jay, Barry Legg and Sir Harry Solomon (document 5).

56. In April 1989 and thereafter until 5th June 1989 the trustees of the HF Scheme were Messrs Barry Hunt, Keith Lillington, Stephen Orchard and David Thompson. At all times since 5th June 1989 the trustee of the HF Scheme has been HF Meat and Food Processing Pension Scheme Trustees Ltd ("HF Trustee"), whose directors, at the material times, were Messrs Barry Hunt, Barry Legg and Harry Solomon.

57. On 4th May 1989 the Board of Directors of Hillsdown resolved (document 6), inter alia, that if a surplus should emerge at the next valuation of the FMC Scheme, it should be used-

58. On 4th May 1989 Hillsdown informed FMC Trustee (document 7) that it would not consider any improvement to benefits in the foreseeable future, that any surplus emerging from the current or future valuation would be used solely to reduce the company's contribution rate, and that if the surplus was such that a contribution holiday would not comply with Inland Revenue requirements, then other group companies would be adhered to the FMC Scheme and joined into the contribution holiday.

59. On 8th May 1989 Hillsdown invited FMC Trustee (document 8) to transfer the assets and liabilities of that scheme to the HF Scheme in connection with a reorganisation of pension scheme arrangements, and stated that if the trustees agreed to such a transfer, the Hillsdown would agree to introduce certain benefit improvements for active members and current and deferred pensioners of the FMC Scheme.

60. On 5th June 1989 FMC Trustee having received legal and actuarial advice, as set out in the minutes of the trustee's meetings dated 15th May 1989 (document 10) and 5th June 1989 (document 12) and in the undated four page report of their solicitors Messrs Ellison Westhorp (document 11), resolved to seek additional improvements in benefits in return for the transfer of assets and liabilities to the HF Scheme. On 4th September 1989 (document 17), following further correspondence between FMC Trustee and Hillsdown dated 28th June (document 13), 10th July (document 14), 14th July (document 15) and 9th August (document 16), and having concluded on the basis of their legal advice that Hillsdown was entitled to reduce the surplus by introducing new members, to the detriment of existing beneficiaries, FMC Trustee resolved to seek Hillsdown's agreement to the use of £1.5 million for the augmentation of benefits which the trustee's legal and actuarial advisers advised was a reasonable compromise. On 5th September 1989 representatives of FMC Trustee and of Hillsdown agreed that £1.3 million of the surplus in the FMC Scheme should be used for the improvement of benefits upon the trustees agreeing to the transfer of assets and liabilities to the HF Scheme (document 18).

61. On 27th October 1989 (documents 20 and 21) the proposed transfer of assets and liabilities was agreed by the Superannuation Funds Office of the Inland Revenue on the basis this did not affect the exiting approval of the scheme. Further, on or about 27th October 1989 (document 22) FMC Trustee resolved inter alia to exercise its power under the rules of the FMC Scheme so as to effect such transfer, subject to certain provisos.

62. On or about 17th November 1989 (document 23) the transfer of assets and liabilities from the FMC Scheme to the HF Scheme was purportedly effected pursuant to a transfer agreement of that date to which Hillsdown, FMC Trustee and HF Trustee were amongst the parties.

63. At the time of the agreement reached on 5th September 1989 it was the understanding of FMC Trustee, and of Hillsdown, that in the event of the assets and liabilities of the FMC Scheme being transferred to the HF Scheme, steps would be taken so as to permit Hillsdown or its associated companies to receive a payment of surplus from the HF Scheme. That was also the understanding of Hillsdown, FMC Trustee and HF Trustee when they entered into the transfer agreement of 17th November 1989. HF Trustee further understood that that was the basis upon which FMC Trustee and Hillsdown were prepared to agree that benefits for members and pensioners of the FMC Scheme should be improved, and that the assets and liabilities of the FMC Scheme should be transferred to the HF Scheme.

64. In giving effect to the agreement made on 5th September 1989 on the understanding set out in paragraph 16 above, Hillsdown and the HF Trustees acted in good faith in the belief that the agreement was one that the trustees of the FMC Scheme and the FMC Trustee could make and execute in the proper performance of their duties as such trustees.

65. By a deed dated 4th December 1989 (document 24) the trust deed and rules of the HF Scheme were amended so that if the founder (namely, Hillsdown) should decide to take action in accordance with Schedule 22 of the Income and Corporation Taxes Act 1988 to reduce the amount of the fund, then it should decide which of the permitted methods should be used to effect that reduction and that appropriate action should be taken accordingly, but that the administrator of the scheme (namely, Hillsdown) should determine the apportionment of any payment to be made out of the fund as between employers.

66. I. On or about 29th November 1989 (document 25) the Actuary of the HF Scheme reported to the HF Trustee with an actuarial valuation of the HF Scheme as at 17th November 1989 and following the purported transfer of assets and liabilities from the FMC Scheme. The Actuary valued the assets of the HF Scheme at £38,044,000 and its total past service liabilities at £17,650,000. He therefore concluded that the HF Scheme was funded on the prescribed basis at a level of 216%, which was in excess of the level of 105% above which HF Trustee was under a statutory requirement to propose remedial action or suffer a restriction on the tax exemption enjoyed by the HF Scheme.

67. By letter dated 29th November 1989 (document 26) the Actuary of the HF Scheme sought approval from the Surplus Unit of the Inland Revenue Superannuation Funds Office for action to reduce the apparent surplus in the HF Scheme by way of an immediate repayment to the employer of £5.52 million to be followed by further repayments in 1990 and 1991. Approval was refused on the ground that such a staged repayment was not permitted.

68. By letter dated 4th December 1989 (document 27) the Actuary to the HF Scheme informed the Surplus Unit that Hillsdown and HF Trustee had decided that there should be a single refund of £5.8 million on actuarial values, and by further letters dated 14th December 1989 (document 28) and 20th December 1989 (document 29) explained that this would involve a cash payment out of the fund of £5.48 million.

69. In the absence of the transfer of assets and liabilities from the FMC Scheme, the HF Scheme would not have been substantially in surplus in November or December 1989 and would not have possessed net assets sufficient to make a cash payment to any employer of £5.48 million or any similar amount. HF Trustee and Hillsdown believed that in consequence of the transfer agreement on 17th November 1989 there had been a valid and effective transfer of the assets and liabilities of the FMC Scheme, and that the surplus in the HF Scheme was as set out by the Actuary in his valuation. Absent such belief, HF Trustee and Hillsdown would not have decided to seek approval from the Surplus Unit for the course of action set out in the Actuary's aforementioned letters, and would not have implemented such a course of action.

70. By letter dated 21st December 1989 (document 30) the Inland Revenue Superannuation Funds Office agreed, inter alia, the payment of Hillsdown of such an amount as would reduce the actuarial value of the assets of the HF Scheme as at 17th November 1989 by £5.8 million. The said letter stated that the payment to Hillsdown would be subject to 40% tax which HF Trustee was required to deduct and account for to the Inland Revenue, and that (on the understanding that the amount actually payable would be £5.48 million) the tax due would amount to £2,192,000. A form PFS 1 and payslip were enclosed.

71. On 21st December 1989 HF Trustee drew cheques upon the account of the HF Scheme in favour of Hillsdown and various subsidiary companies (in the total sum of £3,288,000), and in favour of the Inland Revenue (in the sum of £2,192,000). The latter was sent to the Inland Revenue on or about 22nd December 1989 (document 31), along with the completed form PFS 1, and the cheque for £2,192,000 was presented for payment on or about that date.

72. On 5th April 1990 (document 32) the Actuary to the HF Scheme informed the Surplus Unit that HF Trustee and Hillsdown wished to have approval for an immediate further repayment to Hillsdown with an actuarial value of £13,711,000 and a cash value of £12,957,000. For the reasons set out in paragraph 21 above, neither HF Trustee nor Hillsdown would have sought approval for or implemented such a course of action but for the belief that there had been a valid and effective transfer of the assets and liabilities of the FMC Scheme, and that the surplus in the HF Scheme was as set out by the Actuary in his valuation.

73. By letter dated 3rd May 1990 (document 33) the Superannuation Funds Office agreed the proposed further payment. The said letter stated that the tax chargeable amount to £5,182,800, enclosed a form PFS 1 and payslip to accompany payment of that amount, and indicated that HF Trustee was required to deduct the tax and account for it to the Inland Revenue.

74. On or about 25th June 1990 HF Trustee drew a cheque upon the account of the HF Scheme in favour of Hillsdown (in the sum of £12,957,000), and on 6th July 1990 Hillsdown drew a cheque on its own account in favour of the Inland Revenue (in the sum of £5,182,000) (document 34). The completed form PFS 1 was dated 5th July 1990, and the cheque for £5,182,000 was presented for payment on or about 6th July 1990.

75. On or about 8th February 1993 a complaint was made to the Pensions Ombudsman, by a pensioner of the FMC Scheme, concerning the transfer of the assets and liabilities of that scheme to the HF Scheme. By a determination dated 11th October 1995 (document 35), and for the reasons stated therein, the Pensions Ombudsman decided to uphold the complaint to the extent there stated, and to grant certain remedies set out in the said determination. Inter alia, the Ombudsman ordered that Hillsdown should return to HF Trustee the gross sum of £18,437,000 which had been distributed out of the HF Scheme together with interest. No allowance was made for the tax element.

76. By letter dated 3rd November 1995 Hillsdown informed the Inland Revenue Pension Schemes Office of the Ombudsman's determination, and that the same was under appeal, and sought confirmation that, when Hillsdown repaid the amount received by it net of tax, the Revenue would repay to HF Trustee the tax deducted plus interest.

77. On 6th November 1995 Hillsdown appealed to the High Court against the decision of the Pensions Ombudsman. On 22nd April 1996 the Inland Revenue informed Hillsdown of its view that it would be premature to consider the question of repayment whilst the Ombudsman's determination was under appeal. On 3rd May 1996 Hillsdown informed the Inland Revenue of the dates when appeal was due to be heard.

78. On 12th July 1996 Knox J dismissed the appeal against the determination of the Pensions Ombudsman, save for varying the remedies granted by the Ombudsman, for the reasons given in his judgment reported at [1997] 1 All ER 862, and in a further judgment delivered on 31 July 1996. In particular, Knox J ordered that Hillsdown should only be required to account for the tax element of the sum distributed out of the HF Scheme to the extent that it was recoverable from the Revenue.

79. On 7th August 1996 the sum of £18,875,995 (representing the net sums paid to Hillsdown in 1989 and 1990 with the accrued interest) was repaid to Hillsdown to the HF Scheme's account (number 40098787) with Barclays Bank.

80. On 27th June 1997, following consideration of the said judgments, the Inland Revenue informed the solicitors for Hillsdown and HF Trustee that any claim for repayment of the monies paid over to it would be resisted.

81. MR OLIVER QC: My Lady, I perceive the consequence of that to be that there should be judgment for the Plaintiffs in the sum claimed. We would suggest that the appropriate course was, in fact, to enter judgment for the second Plaintiff (and that is the scheme trustees) for that sum, together with interest.

82. So far as a rate of interest is concerned, we feel that it is not really possible for us to claim more than the interests or rate different from that which Knox J specified that Hillsdown itself should pay in respect of the repayments made by it. Accordingly, we would seek a payment of interest at the judgment rate in force from time to time from the time of the payments to the Revenue until repayment.

83. The further logical consequence of your Ladyship's judgment is that the Plaintiffs should have their costs, at any rate, of the writ action. I would suggest to your Ladyship that if, and insofar as, there are additional costs incurred as a result of the application for judicial review, in the circumstances it was entirely appropriate to launch that claim as part and parcel of these proceedings as a whole and that, therefore, the costs Order should carry the costs of the judicial review as well.

84. MR GILLIS: My Lady, in terms of the Order that has been proposed, clearly it is correct that judgment should be entered in the amount claimed in the writ, and we are content that that should be in favour of the second Plaintiff.

85. MRS JUSTICE ARDEN: You mean the principal amount as £7 million?

86. MR GILLIS: The principal amount. Equally so, we are content with interest at the judgment rate.

87. On the question of costs, I could not resist an Order that the costs of the action should be paid on the standard basis. As regards the costs of the judicial review application, insofar as there are additional costs, we do submit that the Applicant in that application should pay the costs of the Respondent because the judicial review application proceeded upon a fundamentally different basis from the writ action. The judicial review action was put on the basis fundamentally that, even if the tax was due and payable, in the exercise of the discretion it should have been repaid. That application has failed. In those circumstances, we submit that the usual rule of costs follow the event should be applied and that the Applicant should pay the Respondent's costs of the judicial review application.

88. Would your Ladyship wish me to deal very briefly with the application for leave to appeal or would you wish to deal with the costs first?

89. MRS JUSTICE ARDEN: Yes, certainly. My provisional view is that you should have leave to appeal on the construction point subject to anything that Mr Oliver wants to argue. Are you seeking anything further?

90. MR GILLIS: My Lady, no. All I was going to say is that we would be content with that, although obviously the judgment will be considered carefully in-house, and it would be up to leading counsel to decide whether in actual fact the Revenue would wish to pursue.

91. MRS JUSTICE ARDEN: Of course. It is nowadays accepted that you should apply at this point in time to save coming back to court, so it is quite right to make the application now.

92. MR OLIVER QC: My Lady, so far as costs are concerned, it is a result of the formalities by which proceedings have to be instituted in this jurisdiction that there are, in fact, two sets of proceedings before your Ladyship rather than one. It is rare for the court actually, in an action in which a number of contentions are put forward and where the Plaintiff is successful in one of those contentions, for the Plaintiff to be deprived of those costs in respect of those additional or alternative contentions upon which the court finds it unnecessary to pronounce or which actually failed. Costs of issues Orders are sometimes made, but it is not the common practice. In my submission, the substance of this case is no different merely because, as a matter of formality, you have two different sets of proceedings which, in fact, have proceeded in tandem, having been heard together on one statement of facts and in, as it were, one package. In my submission, the costs should follow the event in respect of both sets of proceedings upon the normal basis, notwithstanding that you, in fact, have an additional piece of paper.

93. So far as leave to appeal is concerned, it is difficult for me to resist leave being granted to my learned friend on the basis of the Practice Direction that has been issued. All that I would ask is that we should have leave, by the same token, in the writ action to argue those points in respect of which your Ladyship has found that we have failed.

94. MRS JUSTICE ARDEN: The restitution points?

95. MR OLIVER QC: The restitution points. I would also ask for leave, as a matter of formality, in the judicial review proceedings in order to enable that to be pursued were the Revenue to be successful on the construction point.

96. Whilst I am on my feet, there is just one additional matter that I ought to raise. So far as concerns the judicial review proceedings, HF Trustee has indicated that it will consent to an application by Hillsdown that the difference in costs between the standard basis of costs and the indemnity basis of taxation be paid out of the scheme's assets.

97. MRS JUSTICE ARDEN: Does it need that Order? It is talking about HF Trustee's costs, is it?

98. MR OLIVER QC: My Lady, it is talking about Hillsdown's costs; the difference between Hillsdown's costs as recovered from the Revenue and Hillsdown's costs on an indemnity basis, or the whole of the costs if we do not get them from the Revenue. As I say, my primary contention is that the costs for the judicial review should, in fact, follow the event.

99. MRS JUSTICE ARDEN: Why are you suggesting that that should go into the Order if it is an arrangement between the two Plaintiffs, and presumably, the Administrator of the scheme has taken advice and formed a view about what he can agree to do in relation to Hillsdown's costs? It does not need to go into the Order, does it?

100. MR OLIVER QC: My Lady, I think everybody would feel more comfortable if it was in the Order, so that it was out in the open.

101. MRS JUSTICE ARDEN: True, but I have not heard any application for directions by HF Trustee, and the implication of being in the Order is that it is something that the court has approved.

102. MR OLIVER QC: My Lady, the proceedings have been brought for the benefit of a scheme and HF Trustee. They have been brought by Hillsdown in a context where Hillsdown effectively indicated to Knox J that it would use its best endeavours to recover such from the Revenue. They are proceedings in which Hillsdown itself has had no financial stake whatsoever. In those circumstances, I would say that it is perfectly clear, in fact, that it is proper, where the only beneficiary of victory in those proceedings is, in fact, the scheme itself, that the scheme should actually fund the costs of the litigation that has brought about that result.

103. MRS JUSTICE ARDEN: But did Knox J say anything about Hillsdown being indemnified? He imposed the obligation, but ----

104. MR OLIVER QC: He did not, I think, say specifically. Mr Giffin reminds me that we were apparently indemnified if we were required to bring proceedings by HF Trustee. In fact, they never had to require us to bring proceedings because we ----

105. MRS JUSTICE ARDEN: This is part of Knox J's Order, is it?

106. MR OLIVER QC: My Lady, I am told that it is. May I go to exhibit RJM1 in Tab 6 of the bundle of court documents? At page 40 of that there is the final Order of Knox J entered on 14th November 1996. If you go to page 41, at the foot of page 41 you will see that it is an Order that Hillsdown pay the sums in question, and then at (b):

107. At sub-paragraph (d) is monies paid pursuant to sub-paragraphs (a) and (b).

108. MRS JUSTICE ARDEN: But you have the indemnity written into this Order, so you do not need any further Order.

109. MR OLIVER QC: The only point is that, in fact, it was unnecessary for HF Trustee formally to direct the proceedings as (b) envisages because, in fact, Hillsdown did it without the need for a direction. Therefore, formally we are not covered by the Order because there was no direction. All that I am asking your Ladyship to do is, as it were, to bless in the circumstances as they, in fact, pertained, the bringing by Hillsdown of these proceedings for the benefit of HF Trustee, notwithstanding the absence of a formal direction by HF Trustee to Hillsdown to bring them.

110. MRS JUSTICE ARDEN: What exactly has happened on your side? Have the proceedings been conducted by HF Trustee using the name of Hillsdown, or what?

111. MR OLIVER QC: No, what happened is that Herbert Smith have acted for Hillsdown and Nabarro Nathanson have been acting for HF Trustee, although Herbert Smith are the solicitors on the record for HF Trustee in bringing the action simply because you cannot have two firms of solicitors on the same side -- on the Plaintiffs' side of the record. But HF Trustee has been taking its own separate and independent advice from Nabarro Nathanson.

112. MRS JUSTICE ARDEN: Through having common solicitors on the record, they have been acting in a coordinated way pursuant to a common strategy. I think what Knox J would have had in mind is that Hillsdown should not go off on its own and engage in litigation, but should do so in concert with HF Trustee.

113. MR OLIVER QC: Yes, which is exactly what has happened.

114. MRS JUSTICE ARDEN: Subject to anything that counsel, Mr Gillis, may want to say, I would be minded to give the necessary indication that you require, but there were other parties to this Order back in July 1996.

115. MR OLIVER QC: There were because there were the Pensions Ombudsman himself and Messrs Burt and Bothwell, who were the representatives of the beneficiaries.

116. MRS JUSTICE ARDEN: It seems to me that you should write to them, if I am going to make this Order, and tell them that the Order was varied because they were not here to make any submissions. I do not suppose that they will want to, but it is a matter of ensuring that ----

117. MR OLIVER QC: Would your Ladyship make the Order, have it lie in the office whilst we write to them and, in the event, there is no opposition to it, then the Order can be issued. If there is opposition to it, then we may have to come back and trouble your Ladyship.

118. MRS JUSTICE ARDEN: I hope there is not, but it would be right if they were informed. Let me hear Mr Gillis because he may have a different view about this matter.

119. MR GILLIS: My Lady, on that particular point our position is that the question of costs, as between Hillsdown and HF Trust, is fundamentally a matter for them. It certainly does seem to be the case that Knox J was indicating that Hillsdown should have the costs of pursuing the action from HF Trustee, but further than that, since the Revenue is not involved in the proceedings before Knox J, I do not think that the Revenue can sensibly add anything.

120. MRS JUSTICE ARDEN: Are you saying, if I am going to make an Order, that it should be made in the proceedings in which Knox J made his Order, and that I should treat those before me.

121. MR OLIVER QC: My Lady, I think that would be difficult for you to do.

122. MRS JUSTICE ARDEN: Yes, because it is gone; it is functus.

123. MR GILLIS: Therefore, I would have thought that if the Order is to be made, since it is in relation to the costs of this action and this application, it is an Order that should be made in this action and not in the action which was previously before Knox J.

124. I think maybe the only other thing that I should say is that it is not to be taken that the Revenue is suggesting that a payment from HF Trustee to Hillsdown Holdings may not give rise to a section 601 problem.

125. MRS JUSTICE ARDEN: I hope that point has been carefully noted.

126. MR GILLIS: Other than that, on the question of whether my learned friend should have leave to appeal on the other issues in the writ action, the Revenue would not oppose that. Clearly that makes sense.

127. As regards to the question of whether they should have leave to appeal on the judicial review action, my Lady, there the issue is whether my learned friend can satisfy you that he has a realistic prospect of success, because the recent Practice Direction has indicated that if the first instance judge is in doubt as to whether that threshold is satisfied, leave to appeal should be refused. The question there is, is there were realistic prospect of success, the Court of Appeal would conclude that it was an abuse of power not to repay a sum of tax that was properly paid?

128. My Lady, in our submission, my learned friend does not meet that threshold. It is, so far as anyone can tell, a wholly academic question because both sides before you have accepted that the matter turns upon the question of construction and the Revenue has accepted that if the tax is not payable, there is a restitutionary right to repay it.

129. MRS JUSTICE ARDEN: Yes, but Mr Oliver wants it in his armoury in case the court holds that the tax was payable.

130. MR GILLIS: One understands that and, therefore, it moves to the question of, is there a sufficient prospect of success? We would say no. I have had my say on costs, so maybe I should say nothing else, unless I am invited to.

131. MRS JUSTICE ARDEN: Very well, I will make the Order for the principal and interest as claimed in the Statement of Claim and agreed in this hearing. In relation to interest, interest is to be at the judgment rate in force from time to time from payment to the Revenue until repayment.

132. On the question of costs there were, in fact, two sets of proceedings heard at the same time. One is the writ action and one is the judicial review proceedings. The position is that the Plaintiffs won in the action and, therefore, the costs must follow the event in relation to that matter.

133. Mr Oliver wants a special form of Order in relation to the judicial review proceedings, namely the costs of the action shall include any additional costs of the judicial review. He cites in support of this the fact that it is rare to deprive the Plaintiff of costs of issues and these are only really two sets of proceedings for formalistic reasons rather than as a matter of substance.

134. As I see it, however, they are separate proceedings. The court does not generally deprive a party of costs of issues. That is so when there is a single action, but then there is considerable difficulty often in determining the costs of issues. It seems to me that in the judicial review proceedings the costs should also follow the event, and the event has been that the Revenue won in relation to those.

135. Moving on, I have been asked to make a special Order in relation to the costs of Hillsdown, namely that the difference between the costs recovered by Hillsdown on a standard basis and its costs on an indemnity basis be paid by HF Trustee. I am content to make this Order because it is, to my mind, consistent with the Order made by Knox J on 31st July 1996. The only difference is that there has not been a formal direction by HF Trustee to Hillsdown to bring the proceedings.

136. I then move to the question of leave to appeal. I have already indicated that, subject to counsel's submissions, leave to appeal should be granted on a construction point, and I grant that leave. The leave to appeal on the other issues in the writ action, namely the restitution points was not opposed by Mr Gillis, and as they are relatively self-contained and are connected with the construction point, it seems to me right that those matters should be the subject of leave to appeal also.

137. The judicial review proceedings are of a very different nature and they are based upon the decision of the Revenue not to make a repayment as a matter of discretion. I think it was accepted that this issue only arises if the Revenue are successful on construction and, therefore, successful in their appeal on that point. Mr Oliver submits that he should have leave to appeal. Mr Gillis submits that there is no realistic prospect of success because the court would have to find an abuse of power and he submits that they did not pass that threshold. As I see it, this is a rather different situation from the construction point. There are recent authorities on the high test to be met by a taxpayer if he wishes to successfully judicially review a decision of the Revenue, and, in my view, leave to appeal on that matter should be refused.

138. MR OLIVER QC: I think the only point that remains is, as a result of your Ladyship's Order on costs in the judicial review proceedings, of course the Order as between HF Trustee and Hillsdown should be that HF Trustee pays to Hillsdown the whole of its costs of the judicial review.

139. MRS JUSTICE ARDEN: Yes, I am working on the basis that obviously HF Trustee was duly advised in bringing both sets of proceedings for the reasons that were submitted in argument.

140. MRS JUSTICE ARDEN: That is why I was satisfied to make that Order.

141. MR OLIVER QC: I am obliged. Your Ladyship has not actually expressly said so, but I understand it to be on the basis that that part of the Order should lie in the office pending notification of the other parties to the proceedings before Knox J?

142. MRS JUSTICE ARDEN: Yes. Shall we allow three weeks for that or would that be too long?

143. MR OLIVER QC: I should have thought that three weeks would be perfectly adequate. Yes, I am told two weeks is adequate.

144. MRS JUSTICE ARDEN: Is there any problem with that, Mr Gillis?

145. MRS JUSTICE ARDEN: I am much obliged. Would it be possible to submit a Minute of Order signed by junior counsel on both sides, because the Order about Hillsdown's costs was intricate. I appreciate that the Revenue is not, as it were, concerned in the wording of that, but no doubt would like to see the Minute before it comes to me.

146. MR GILLIS: My Lady, certainly.

147. MRS JUSTICE ARDEN: Thank you very much