England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Rolls Building 7 Rolls Building, Fetter Lane London EC4A 1NL
		Thursday, 22 May 2014

1. MR JUSTICE NUGEE: I have before me an application which is the trial of a claim for rectification. I use the word 'trial' in a loose sense because the defendant has admitted the claim and does not appear and no witnesses have been called and indeed there are before me no witness statements.
2. The brief facts are these. I take some of these facts from a statement of agreed facts which has been put before the First-tier Tribunal by HMRC which I was told by Mr Hackett he had no reason to believe was not an accurate reflection of the facts. The claimant, Alway Sheet Metal Limited, established a trust in 1998, and that was done by a deed of trust dated 12 May 1998 made between the claimant and a trust company known as Capco Trust Jersey Limited, who is still the trustee and is the defendant. The deed on its coversheet describes the trust as "Alway Sheet Metal Limited Pre-retirement Employee Benefits Trust" and in the body it contains one recital as follows:

"Whereas the founder [Alway Sheet Metal Limited] intends to provide the sum of One Hundred Pounds and other property to the Original Trustees to be held for the benefit of the employees of the Founder and other persons in the manner hereinafter appearing."

3. There is then set out in the body of the deed what are effectively discretionary trusts. That is in clauses 2 and 3, clause 2 containing a wide power of appointment as follows:

"Subject to Clause 12 hereof the Trustees shall hold the Trust Fund and the income thereof UPON TRUST for all or any one or more exclusively of the others or other of the Beneficiaries in such shares and with such trusts and subject to such powers and provisions as the Trustees shall in their absolute discretion during the Trust Period by any deed or deeds revocable or irrevocable appoint."

4. And clause 3 provides that in default of appointment there are wide discretionary powers over income and capital which the trustees can apply for the benefit of any of the beneficiaries. And there is also a power of amendment.
5. The Beneficiaries are a defined term and they are defined in clause 1.4 as follows:

"...the present, past and future employees from time to time of the Founder and the wives husbands widows widowers children step-children and remoter issue of such employees and the spouses and former spouses (whether or not remarried) of such children and remoter issue..."

6. And 'Beneficiary' has a corresponding meaning, "provided that no Excluded Person shall be a Beneficiary" and Excluded Persons are defined to mean the persons in schedule 2. That is a sort list of Excluded Persons consisting of the Founder itself, any person connected with the Founder, any participator in the Founder and any person connected with any such participator, "connected with" being defined by reference to the Income and Corporation Taxes Act 1998.
7. On its face this deed was clearly intended to provide benefits among others for employees. Indeed, from the name of the trust, The Employee Benefits Trust, from the recital which refers to the property being held for the benefit of the employees of the Founder and other persons, and from the definition of Beneficiaries, where the first class of Beneficiaries is present, past and future employees from time to time of the Founder and the remainder of the Beneficiaries are members of their families, anybody reading this deed would have had not the slightest doubt that the purpose of the deed was to enable the Founder through the medium of the trust to provide benefits to its employees and their families. However, I should say that it appears from the statement of agreed facts that having established that, between 1998 and 1999 Alway Sheet Metal Limited made a number of contributions to the trust over and above the initial contribution of £100 amounting to a total of some half a million pounds and it claimed a deduction of £490,000, presumably a deduction against its profits for the purpose of Corporation Tax. The statement of facts not in dispute goes on to say that the trust made payments out and then lists a number of payments all dated 15 March 1999 which come to a total of some £7,300 with individuals named as beneficiaries and all being said to be by way of bonuses. The inference that I would draw is that it is likely that some or all of those were employees but I have no evidence to that effect and it is not necessary for me to reach any conclusion on that.
8. The purpose of setting up the trust was presumably designed to secure some tax advantage or other, but the effect of it appears to have been that as a result of a decision of the House of Lords called MacDonald v Dextra Accessories Ltd [2005] UKHL 47 the payments to the employees' benefit trust were probably not deductible against Corporation Tax because they were caught by section 43 of the Finance Act 1989. I say probably because I do not have the revenue before me and there is pending an appeal to the First-tier Tribunal against assessments to Corporation Tax which no doubt turn on that question and I am not be taken as prejudging that question. What, however, I can see from the decision of the House of Lords in Dextra Accessories was that in that case, which also concerned an employee benefit trust, the House of Lords held that the payments to the trustees were held by the trustee with a view to them becoming relevant emoluments. That meant that they were potential emoluments within the meaning of section 43(11) and the consequence of that, if they were not paid out before the end of the period of nine months after the end of the period of account, was that they would not be deductible when paid to the trust. That appears to have come as something of a surprise to the professionals who promoted these schemes. I say that because there is another reported case from the First-tier Tribunal called Boyer Allan Investment Service Ltd v HMRC [2012] UKFTT 558 (TC) in which the Tribunal deals in some detail with the evidence as to the views of practitioners when such trusts were set up as to whether they would be impacted by section 43, and their conclusion was that most people did not think that section 43 was a significant risk.
9. The decision in MacDonald v Dextra Accessories Ltd was dated 7 July 2005. In this case a further deed was executed on 5 October 2005 by Alway Sheet Metal and the Trustee and it recited at recital 2 that the Founder and the Trustees wished to rectify the Definitive Trust Deed so as to give effect to the Founder's intention in establishing the trusts of the Definitive Trust Deed, and then in clause 1:

"The Parties by mutual consent (as is evidenced by their respective execution of this Deed) hereby declare that the Definitive Trust Deed is rectified and (if and to the extent necessary) and amended as follows, as on and from the date of the Definitive Trust Deed."

10. It then inserts a new clause, A1, headed "Overriding Limitation on Trustee Powers". Clause 1 of A1 provides:

"1. Notwithstanding anything express or implied elsewhere in this Deed, the Trustee shall not have power to pay or apply any of the trust estate in the provision of any 'emolument', as that term is defined in the Income and Corporation Taxes Act 1988.

2. Notwithstanding anything express or implied elsewhere in this Deed, the Trustee shall not have power to pay or apply any of the trust estate in such manner as would constitute as 'potential emoluments' any sums contributed by the Founder to the trust hereof and the term 'potential emoluments' shall have the meaning set out in Section 43 Finance Act 1989.

3. The class of beneficiaries of the trust hereof shall not include, as from 1 November 2002, any employee or former employee of the Founder (but shall continue to include spouses, dependents and remoter descendants of such descriptions of person)."

11. I am now asked to rectify the original 1998 deed in line with the 2005 deed on the basis that it was the intention of the Trustee and the Founder in 1998 that the 1998 deed should be in the form in which it was amended or rectified by the 2005 deed. The entirety of the evidence before me, apart from the statement of facts not in dispute which I have referred to, consists of the fact that the declaration of trust was made on 3 July 1998 and the fact that the deed of amendment was made on 5 October 2005, together with a statement of truth annexed to the brief Particulars of Claim. The entirety of the Particulars of Claim reads as follows:

"1. The claimant is the founder of a remuneration trust entered into with the defendant dated 12 May 1998.

2. On 5 October 2005 the claimant and the defendant executed the deed of amendment and rectification. The deed was agreed to and signed by both parties.

[Paragraph 3 deals with a subsequent deed of amendment which is not relevant to this part of the application.]

4. HMRC seeks to challenge the legal status of the deed of amendment and rectification at a tribunal hearing.

5. The claimant seeks a declaration that the trust deed dated 12 May 1998 was amended as at the original date of that deed and that it is valid."

Both the claimant and the defendant are ad idem as to the necessity and legal effect of the original trust deed and each deed of amendment."

12. The statement of truth is then signed by a person in the claimant's firm of solicitors. The defendant, as I have said, has filed a notice of admission and does not contest the claim.
13. Mr Hackett, who appears for the claimant, submits to me that that evidence is sufficient for me to be satisfied as to the intentions of the parties in 1998 and to grant the rectification as sought. I am not so persuaded, as I have made clear in the course of argument. Rectification is a remedy which, as Lord Evershed MR said in Whiteside v Whiteside [1950] 1 Ch 65 at 71, is traditionally regarded as one which must be "cautiously watched and jealously exercised" and it is well established, and Mr Hackett does not take any issue with this, that a high standard of proof is required by the court before being satisfied that rectification should be granted. It is for that reason that the practice of a court is not to grant rectification by consent or in default but only on being persuaded by evidence which has to reach what in some of the older cases is called a standard of strong, irrefragable evidence, but I believe the most common modern phrase is "convincing proof", which I think one will find in a case called Thomas Bates & Son Ltd v Wyndham 's (Lingerie) Ltd [1981] 1 All ER 1077. The reason why convincing proof is required is because, ex hypothesi, the very fact of having executed a contract or deed or other instrument in the form in which it was originally put forward and signed is usually quite powerful evidence that that is what the parties intended to do.
14. In the present case I regard the inference from the form of the 1998 deed that at the time of establishing the trust in 1998 both the Founder and the Trustee intended it to be available to pay benefits to employees as really overwhelming. It is inconceivable that the parties would have executed something called an employee benefits trust containing the provisions which I have referred to if it was no part of the intention of the parties that the trust could be used to provide benefits to employees. I would certainly need some very persuasive evidence as to how a deed in that form could be executed if it was genuinely the intention that no employees should be capable of being benefitted, but as I read the decision of the House of Lords in MacDonald v Dextra Accessories Ltd, the setting up of an employee benefit trust which is capable of being used to provide benefits to employees is something which makes the payments to the trustees potential emoluments, potential emoluments being defined as amounts or benefits reserved in the accounts of an employer (which does not apply) or held by an intermediary with a view to their becoming relevant emoluments. What Lord Hoffman said, upholding the decision of the Court of Appeal, is that the funds in that case were held with a view to becoming relevant emoluments if they were held on terms which allowed a realistic possibility that they would become relevant emoluments, and then Lord Hoffman said:

"In the ordinary use of language, the whole of the funds were potential emoluments. They could be used to pay emoluments."

15. It seems to me therefore that, on the face of it, setting up a trust under which the whole of the fund could be used to pay remuneration to employees is something which means that the entirety of the funds were potential emoluments. It is not in those circumstances sufficient in my judgment to point to the wording of the 2005 deed which says that the trustees should not have power to pay or apply any of the trust estate in such manner as would constitute as potential emoluments any sums contributed by the founder to the trusts, without explaining how that intention can be squared with what on the face of it was a perfectly plain intention in 1998 to provide funds which could be used to provide benefits to employees; and I do not regard the fact that a statement of truth has been signed by the claimant's solicitor to Particulars of Claim, which contain no factual allegations as to the actual intentions of the parties in 1998, as taking the matter any further.
16. For these reasons it is not in my judgment established to the necessary level of convincing proof that the actual intentions of the Founder, Alway Sheet Metal Limited, and the Trustee in 1998 was as set out in the 2005 deed. The inference I draw from the 2005 deed is that the parties thought that it would be beneficial to execute a deed as if the original intention had been one which enabled the payments to be deductible for Corporation Tax purposes. That is an understandable desire to have, but I am not prepared to draw the inference simply from the form of that deed that that was the actual intention in 1998. I will therefore dismiss the claim for rectification.