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Cite as: [2002] STC 910, [2002] ScotCS 349

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Ali Fayed & Ors v. Advocate General [2002] ScotCS 349 (31 May 2002)

OUTER HOUSE, COURT OF SESSION

OPINION

THE LORD JUSTICE CLERK

in the Petition of

(First) MOHAMED ABDEL MONEIM ALI FAYED;

(Second) ALI ALI FAYED; and

(Third) SALAH ELDIN ALI FAYED

Petitioners;

against

The Right Honourable LYNDA CLARK QC, MP, The Advocate General for Scotland, representing the Commissioners of Inland Revenue

Respondent:

For judicial review of a decision by the Commissioners of Inland Revenue not to abide by the terms of the agreement, dated 22 and 28 April 1997, between the petitioners and the Commissioners of Inland Revenue and to require the petitioners to complete Tax Returns for the years of assessment from 6 April 2000 to 5 April 2003 inclusive without reference to the agreement, as intimated to the petitioners by two letters dated 2 June 2000

________________

For the petitioners: Jones QC, S P L Wolffe : Maclay, Murray & Spens, Solicitors

For the respondents: Hodge QC, Paterson : Solicitor to the Inland Revenue

31 May 2002

Introduction
[1] This is a petition for judicial review of a decision by the Commissioners of Inland Revenue (the respondents) not to abide by the terms of an agreement dated 22 and 28 April 1997 between the petitioners and the Commissioners and to require the petitioners to complete tax returns for the years of assessment from 6 April 2000 to 5 April 2003 inclusive without reference to that agreement. The decision complained of was intimated to the petitioners by two letters dated 2 June 2000.

[2] The petitioners are brothers. The first petitioner is resident in London, the second is resident in the United States of America and the third is resident in Switzerland. The first and second petitioners are directors of various companies in the Harrods group. The late Emad Fayed was the son of the first petitioner. He died in 1997. I shall refer to the petitioners and Emad as "the family members."

[3] The first petitioner is a United Kingdom taxpayer and is regarded by the respondents for tax purposes as being resident and ordinarily resident in the United Kingdom. Until at least 5 April 2000, if not thereafter, he was regarded by the respondents as not being domiciled in the United Kingdom.

[4] If an individual is regarded by the respondents as being resident and ordinarily resident, but not domiciled, in the United Kingdom, he is chargeable to income tax and to capital gains tax on United Kingdom source income and capital gains in the normal way. He is chargeable to income tax and capital gains tax on foreign source income and capital gains on what is known as the "remittance basis."

[5] The second and third petitioners are regarded by the respondents for tax purposes as being neither resident nor ordinarily resident nor domiciled in the United Kingdom. They therefore have only potential liabilities in respect of United Kingdom source income and gains in terms of section 10 of the Taxation of Chargeable Gains Act 1992.

Forward tax agreements
[6] The agreement to which this petition relates is a forward tax agreement. It is the third such agreement that the parties have made.

[7] If an individual such as the first petitioner is chargeable to income tax and capital gains tax on foreign source income and capital gains on a remittance basis, it is open to him to avoid a charge to tax on foreign remittances by putting in place appropriate arrangements. The purpose of such arrangements is to ensure that remittances received in the United Kingdom originate in a fund consisting exclusively of capital and therefore do not constitute income or capital gains.

[8] Such arrangements involve the segregation of capital and the income and capital gains derived from it, and the careful planning of the source from which the foreign remittances are made to the United Kingdom. They require the keeping of detailed records and the engagement of professional advice. There is always the risk of their being challenged by the respondents. For the respondents, the investigation of an individual's foreign remittances may be time-consuming and expensive; and after such investigation the arrangements may prove to be immune from challenge.

[9] In several cases involving wealthy individuals the respondents have dealt with the problem of foreign remittances by entering into forward tax agreements. Under a forward tax agreement the individual agrees with the respondents to pay specified annual sums in respect of specified future years of assessment. These sums are accepted by the respondents in lieu of any income tax and capital gains tax to which that individual might otherwise have been liable by reason of his having received foreign remittances, or constructive remittances, in the United Kingdom.

[10] The respondents have been making such agreements since the early 1980s, if not before.

The 1985 agreement
[11] In the autumn of 1984, Mr Peter Stribblehill, an Investigator in the respondents' Special Office in Solihull, began an investigation into the residence and domicile of all four family members and the amount, if any, of their liabilities to United Kingdom tax.

[12] His first formal enquiry was made in a letter dated 16 November 1984 to Peat Marwick Mitchell & Co (PMM), the accountants acting for the family members. In this letter he sought information with a view to establishing the tax status of the family members. By letter dated 28 November 1984 PMM replied to the effect, inter alia, that the first petitioner had not filed United Kingdom tax returns as no income arose to him in the United Kingdom; and that he was resident in Dubai. For much of the next year Mr Stribblehill continued with persistent enquiries, in correspondence and at meetings with PMM, regarding the family members' financial affairs and their residence and domicile.

[13] The genesis of the agreement to which this action relates can be traced to one of the early meetings between Mr Stribblehill and PMM held on 16 May 1985. At that meeting, Mr Sargent of PMM said that it would be quite possible for the family members to plan their affairs so that they brought only capital into the United Kingdom; that they had very substantial amounts of capital available, principally in Switzerland; that they could make all the appropriate arrangements to ensure that there was no liability to United Kingdom taxation in future years even if they were resident in the United Kingdom; that, against that, they appreciated that they perhaps had some obligation to the United Kingdom authorities and that in addition they did not want the trouble of having to arrange their affairs precisely. In these circumstances they wondered if it would be possible for a round sum figure of tax to be paid for future years' liabilities subject to reviews, taking into account both inflation and the level of their United Kingdom involvement, from time to time. This would mean that the family members were accepting that they were remitting to the United Kingdom a mixture of both capital and income and that they would accept, for the purpose of United Kingdom taxation, that the amount of income that those remittances included was equivalent to a sum grossed up from the amount of tax which they agreed to pay. Mr Stribblehill said inter alia that he had always intended that his enquiries should be two-fold, namely to consider the future tax affairs of the family members and to ensure that some proper scheme was arranged to deal with their future liabilities. However, he regarded it as also being most important to look carefully into the past years.

[14] I need not go into the detail of the ensuing negotiations; but there are two important features that I should mention. The first is that, as one of their earliest lines of enquiry, the respondents carefully considered the question of the residence and domicile of each of the family members. For that purpose by letter dated 12 March 1985 Mr Stribblehill submitted to PMM forms to be completed in respect of each member giving information on those questions. In that letter, Mr Stribblehill specified his requirements in detail. By letter dated 20 September 1985, PMM submitted further information on domicile. They asserted that all four family members were domiciled in Egypt; that the first, second and third petitioners had visited the United Kingdom on numerous occasions over the past ten years, but that these visits had not exceeded three months per annum on average; and that they expected the first and second petitioners to visit the United Kingdom more frequently, in the medium term at least, as a result of recent investments in the United Kingdom. On 23 September 1985 Mr Stribblehill telephoned Mrs Winder of the respondents' Claims Branch. Mrs Winder informed him that it would be in order for his file to note that the family members were to be accepted as being non-UK domiciled. On 26 September 1985 Mr Stribblehill wrote to PMM confirming that the respondents regarded all four family members as not being domiciled within the United Kingdom throughout the period covered by his enquiries. At that stage, as was confirmed by Mr Stribblehill in a letter to PMM dated 2 October 1985, the respondents considered the family members to be resident in the United Kingdom solely by reason of the accommodation available to them here.

[15] The second important feature of the negotiations related to the family members' foreign source income. During the negotiations PMM represented that substantial funds had been remitted to the United Kingdom, but that the Swiss bank from which they had been remitted had been instructed that any such remittances should come from capital sources only. PMM also represented that all remittances into the United Kingdom had been channelled solely through an account with the Midland Bank in the name of the first petitioner. In due course PMM provided documentation from the Swiss bank confirming that the remittances had come from a capital account and a schedule of the substantial payments received by the Midland Bank from abroad into an account held in the name of the first petitioner during the six years to 5 April 1985. In addition the second petitioner gave a statement dated 4 October 1985, and signed by him on behalf of all four family members, to the effect inter alia that the only personal assets owned by them in the United Kingdom were personal chattels such as furnishings, clothes, jewellery and motor cars.

[16] Notwithstanding this, PMM sought to negotiate a settlement. In a letter dated 27 June 1985, they said that the family members recognised that in the past their administrative arrangements might not have been so tightly drawn as to enable them to be absolutely sure that no income funds had been received in the United Kingdom.

[17] The outcome of the negotiations was that by an exchange of letters dated 7 and 8 November 1985 the family members and the respondents agreed that the family members would make a payment of £2.55 million, allocated as to £637,000 for each of them, as income tax in respect of the 13 years of assessment from 1973-1974 to 1985-1986 inclusive. £150,000 of that payment related to the year 1985-1986. This agreement appears to have been arrived at on the basis that one third of the remittances then disclosed by the family members would be treated as remittances of income. In addition, it was agreed that in the tax years from 1985-1986 onwards the family members would declare annual incomes sufficient to give rise to a specified total annual tax payment. For the first year that payment was £150,000 in total. In the subsequent years it was indexed from that sum.

[18] The respondents did not seek legal advice before accepting the proposals in respect of future years.

[19] When the 1985 forward tax agreement was entered into, Mr Stribblehill considered that the family members complied with his requests for information to what he regarded as a satisfactory level.

[20] This agreement was acted on in the years of assessment up to and including 1990-1991.

[21] On the making of this and the subsequent agreements to which I shall refer, it was no longer necessary for the family members to make appropriate arrangements with a view to avoiding the payment of United Kingdom tax on their foreign remittances.

Further consideration of the questions of domicile and residence - 1985-1990
[22] On the making of the 1985 agreement, it would be clear to the respondents' officials, in my opinion, that the first petitioner intended not to acquire a domicile of choice within the United Kingdom.

[23] The matter was taken further at the end of 1985 when the first petitioner's advisers raised the question of his acquiring United Kingdom citizenship. On 23 December 1985 Mr Sargent of PMM telephoned Mr Stribblehill to say that the brothers had it in mind to take out United Kingdom citizenship and that he had advised them that that was unlikely to affect their domicile status. Mr Stribblehill took the matter up with Mrs Winder of the Claims Branch. She advised him that United Kingdom citizenship would have no effect on the first petitioner's domicile. Mr Stribblehill then conveyed this advice to Mr Sargent and that particular matter came to an end.

[24] On 28 September 1990 KPMG Peat Marwick McLintock (KPMG) submitted a letter of offer to enter into a new agreement. In this letter they said that only the first and second were "currently regarded as resident and ordinarily resident in the United Kingdom for tax purposes" but that the letter covered the position of all four family members over the period to which the letter referred. By letter of the same date Mr Geoffrey Monk of the respondents' London Enquiry Branch affirmed that in the past the family members had been regarded as being resident in the United Kingdom by reason only of the availability of accommodation. He also intimated that it was accepted that the family members were not then, and never had been, domiciled in the United Kingdom.

[25] By letter dated 13 December 1995 Mr Philip Keeping of the respondents' Special Compliance Office (SCO), London, confirmed that on the basis of information supplied by Mr Sargent of KPMG regarding the second petitioner's intended move to the USA, the second petitioner would be regarded as being neither resident nor ordinarily resident in the United Kingdom with effect from the day after his departure. By letter dated 18 December 1995 KPMG wrote to Mr Keeping confirming that he had acknowledged that the third petitioner and the late Emad Fayed were not regarded as being resident in the United Kingdom. In the same letter it was confirmed that the first petitioner would continue to be resident and ordinarily resident in the United Kingdom during the six tax years commencing 1997-1998.

[26] By then the respondents had further information that had a bearing on the domicile of the first petitioner, namely the findings of the Department of Trade and Industry investigation into the House of Fraser takeover.

[27] At that stage the first petitioner had submitted annual tax returns since the 1985 agreement. In each of these returns he had certified that he was not domiciled in the United Kingdom. The first petitioner was not challenged by the respondents on that point in any of these years.

Other issues 1985-1990
[28] Between 1985 and 1990 there continued to be issues between the family members and the respondents regarding various companies with which the family members were connected, the properties owned by those companies in the UK, the possible occupation and use of such properties by the family members and, later, certain liabilities of the family members for legal fees that had been met by House of Fraser in connection with the Lonrho affair. These questions were still in issue in 1997 at the time of the decision now complained of.

The 1990 agreements

The back duty settlement
[29] In about 1988 the first petitioner gave evidence to the Department of Trade and Industry inquiry into the House of Fraser takeover in which he disclosed the existence of accounts in the names of the petitioners with the Royal Bank of Scotland. These accounts were identified in the DTI Report as the conduit through which funds had been channelled to finance the purchase of House of Fraser shares. At a meeting on 25 November 1988, Mr David Hugo and Mr Monk of the Enquiry Branch told Mr White and Mr Allen of PMM that they wished to set aside the 1985 agreement.

[30] At a meeting on 26 May 1989 attended by Mr Monk and by Mr Worsley of the respondents' Special Compliance Office (SCO) and by representatives of PMM and Herbert Smith, solicitors for the family members, Mr Mayes, counsel for the family members, disclosed that through no fault of theirs and entirely through the fault of the Midland Bank, the information previously given about their remittances into the United Kingdom was inaccurate. Considerably larger sums had been remitted to the United Kingdom and passed through the Midland Bank account than had previously been disclosed to the respondents. Mr Mayes said that enquiries to date suggested that no personal remittances had been transacted via the Royal Bank of Scotland accounts. The last point was never resolved.

[31] On 11 June 1990 there was a meeting between Mr Monk, Mr Worsley and representatives of KPMG and of Herbert Smith. Mr Worsley said that it was undesirable to attempt to concoct some form of ad hoc agreement whereby the Al-Fayeds agreed to pay a certain amount each year on the basis that the Revenue would not pursue enquiries annually on the question whether overseas remittances represented a taxable source of income. He regarded that as tantamount to providing the Al-Fayeds with an open ended agreement, which could not anticipate future changes in the clients' circumstances.

[32] There followed negotiations that resulted in the making of two formal offers to the respondents both dated 28 September 1990.

[33] The first offer (the back duty offer) was submitted by Herbert Smith. It was an offer to pay £31,118,744 to cover all of the family members' personal liabilities, and those of certain companies with which they were associated (the Companies), for the tax years up to 5 April 1990. No apportionment between personal and corporate liabilities was agreed. The offer was made by Herbert Smith "in consideration of no assessments being made and no proceedings of whatsoever nature being taken against our clients or the Companies in respect of duties, penalties or interest to which they may have become liable under the Taxes Acts in respect of any fiscal year up to and including the year ended 5 April 1990, or in respect of any accounting period for which accounts have been submitted to the Inland Revenue for periods ending on or before 31 December 1989." By letter dated 28 September 1990, Mr Hugo accepted the offer on behalf of the respondents.

[34] Various factual questions surrounding that agreement are in dispute; but they are not of direct relevance to the present case.

[35] Throughout the negotiations no information was provided to vouch the disputed matters of fact relating to the level of remittances and to the extent to which those remittances were personal or corporate. In addition, no information was provided as to the level of remittances between 1985/86 and 1989/90.

(b) The forward tax agreement
[36] The second offer (the forward tax agreement offer) was submitted by KPMG. It was an offer by the family members to pay a sum of £200,000 in respect of each of the tax years 1991-1992 to 1996-1997 inclusive, in full and final settlement of income tax or capital gains tax to which the family members might become liable by reason of remittances, or of constructive remittances, to the United Kingdom of funds from outside the United Kingdom which were assessable or might be assessable on them personally, either singularly or jointly. This letter (para 11) recorded the understanding that during the tax year 1996/1997 discussions would be held with the respondents for the purpose of negotiating a continuation of the agreement for a further six years on such terms as would then be appropriate. By letter dated 28 September 1990, Mr Hugo accepted that offer. The offer and acceptance constituted the 1990 forward tax agreement (the 1990 agreement). As part of that agreement, the respondents accepted that only the first and second petitioners were currently regarded for tax purposes as resident and ordinarily resident in the United Kingdom. In a further letter to KPMG of the same date Mr Monk said inter alia "It is also accepted that your clients are not presently, and never have been, domiciled within the United Kingdom."

[37] The respondents did not seek legal advice before entering into the 1990 agreement.

[38] The family members made all payments specified in the 1990 forward tax agreement on or before the due dates.

The review of benefits - 1993
[39] At a meeting on 10 September 1993, attended by Mr Keeping and Mr Monk of the respondents' SCO and Mr White and Mr Sargent of KPMG, the respondents were given copies of a document entitled "Review of Benefits." The purpose of that document was stated to be to identify the assets and facilities enjoyed by the petitioners in the United Kingdom and to detail the method by which the costs of these were met both directly and indirectly. This exercise was later to become an issue in the negotiations leading to the 1997 agreement.

The emergence of misgivings among the respondents' senior staff
[40] On 5 December 1995, there was a meeting at the office of SCO, London Those present at the meeting were Mr Francis Brannigan, Controller of SCO, Mr Denis Parrett, Deputy Controller, Mr Monk and Mr Keeping, Mr White and Mr Sargent of KPMG, and Mr Peter Whiteman QC. Mr White referred to paragraph 11 of the KPMG letter of 28 September 1990 (supra) and asked that the agreement be renewed. Mr Brannigan and Mr Monk reacted cautiously. Mr Whiteman said that there appeared to be an issue of principle that the Revenue needed to address. Mr Monk agreed and said that this was a matter for the Senior Management Team to review.

[41] By letter dated 18 December 1995 KPMG wrote to Mr Keeping requesting a continuation of the arrangements made under 1990 agreement on broadly similar conditions. They said, inter alia, "As we indicated at our meeting on 5 December we wish to seek your acceptance of a continuation of the agreement entered into on 29 (sic) September 1990 in relation to Mohammed Al Fayed. We would propose that the conditions of a continued agreement should be broadly similar to those of the existing agreement, but if you have concerns about particular aspects we would be happy to discuss with you any amendments you proposed."

[42] This request caused the respondents' officials to reconsider whether the 1990 agreement should be continued.

[43] On 15 January 1996 Mr Keeping sent a memorandum via Mr Monk to Mr Brannigan referring to KPMG's request. In this memorandum Mr Keeping narrated that the 1990 arrangements had worked well and had been honoured by both sides; but he raised with Mr Brannigan the question whether "as a matter of policy" such arrangements should continue. Copies of the original offers made on behalf of the petitioners and certain subsequent correspondence were attached to the memorandum. In a covering memorandum to Mr Brannigan, Mr Monk raised the question whether, as a matter of general policy, the Senior Management Team saw it as appropriate for such arrangements to be renewed. Before passing these memoranda to Mr Brannigan, Mr Parrett added the following note "This does not take us much further and will depend on the view that we should not have these agreements in an SA (sc. self assessment) environment."

[44] On 7 February 1996, Mr McGuigan, Group Leader SCO London, wrote to Mr Parrett requesting a policy decision on a case in which an offer had been made to the respondents to enter into a forward tax agreement. This was not the present case. The policy decision that Mr McGuigan requested was "whether such an arrangement is acceptable in today's climate particularly with the imminent introduction of self assessment." In the course of this letter Mr McGuigan rehearsed the practical arguments for and against such agreements. He said inter alia:

"2 A deal was done to agree an offer which would cover tax on income remittances and benefits without the need to specifically quantify the amounts of income involved.

The deal was to cover not only past years but future years to 1995-6...
It has to be said no real investigation work was done but given the difficulties associated with such cases, difficulties which in fact remain, coupled with the taxpayer's age, he is now [x], I can understand why such an agreement was attractive to the investigator ...

As I said at subparagraph 4, there are certain difficulties associated with cases of this type. The capital/income argument is always a difficult one to resolve particularly if, as here, the taxpayer is clearly very wealthy. Also on the benefit side the ownership of UK properties by an offshore company and the shadow director arguments which inevitably flow from such arrangements are still settled by horse trading as opposed to on any strict statutory basis. There are still no cases before the court testing this issue.
If it was correct to accept the first agreement then in principle we can offer no objection to acceptance of this new one ...

I do accept however that there are dangers in accepting such offers. The opportunities they present to wealthy taxpayers like [x] to bring into the UK large amounts of untaxed income remittances under cover of the agreement may be too good for him to miss. We take a chance.
Perhaps the acid test is to consider what we may achieve if we were to mount a full scale review of [x] affairs. There is no doubt he is well represented and we could expect a robust defence of his initial statements that what is remitted to the UK is out of capital. We may have difficulty proving that it is not ... "

[45] Mr Parrett wrote on this "This is another forward contract offer. It also involves [x] who has signed the letter of 15 December. We are likely to get more of these, therefore we need early advice on whether they can be accepted." He then passed Mr McGuigan's communication to Mr Brannigan.

Mr Matheson's policy advice
[46] On 14 March 1996 Mr Brannigan minuted Mr Steve Matheson CB, then Deputy Chairman and Director General of the Board of Inland Revenue. Mr Matheson had Board level responsibility for policy and technical matters. Mr Brannigan sought Mr Matheson's view on the question whether forward contracts were still considered by the Revenue to be acceptable. This minute is in the following terms:

"FORWARD CONTRACTS

I mentioned to you yesterday that there have been over the years a number of cases in SCO where settlements have been arrived at which include arrangements for future years. The taxpayers involved are normally wealthy, often prominent or sensitive foreigners, who are resident but not domiciled in this country. They are thus, in addition to their UK sources of income, liable for tax on remittances of income or chargeable gains from abroad - but not remittances of capital.

To avoid annual examination by the Revenue of their worldwide financial affairs, to avoid distortion of their already complicated financial arrangements and to save expensive professional fees they have been willing to enter into agreements to pay large round sum annual amounts (£100K - £200K) as an approximation of their annual liability on any remitted income (without the need to precisely quantify that, if any).

... The advantage to the Revenue was that under those arrangements the Exchequer was getting large amounts of money whereas in their absence

we would have very great practical difficulties in actually trying to establish what the reality was and
in any case the individuals in question are so wealthy that they could organise their affairs so that all remittances are non taxable capital.

The arrangements have generally worked without problems but some are now coming up for renewal (some have built in the prospect of a 5 year review, others are to run indefinitely "except for a significant change in our clients' circumstances").

The question which arises is are there (sic) arrangements still deemed acceptable in the age of Self Assessment, Taxpayers Charter, Codes of Practice and the Adjudicator? It is a difficult question to answer and my first response which I put to Roger White (KPMG) and Peter Whiteman (Counsel) in one case was that they were not.

However, having seen 2 more cases and recognising the difficulties of

distinguishing cases with differently worded agreements,
appearing to renege on Agreements entered into, and,
the very real practical problems of how we would go about trying to deal with these cases in the absence of agreements,

I am now inclined to the view that

we should renegotiate these existing agreements coming up for renewal on a basis which most realistically reflects the underlying current circumstances, but within the spirit of the original and
we desist from entering into such agreements in any new cases.

I should be grateful for your views on this question and enclose some papers which will give a flavour of the cases I have referred to."

The case referred to by Mr Brannigan, involving Mr White and Mr Whiteman, is the petitioners' case. The papers that Mr Brannigan sent to Mr Matheson were the minute of the meeting of 5 December 1995 and two documents relating to cases known as C and G.

[47] By memorandum dated 27 March 1996 Mr Matheson replied as follows:

"FORWARD CONTRACTS

Thank you for your minute of 14 March.

I have been unable to locate any registered papers in Head Office dealing with these cases (or, indeed, with the principle). Mr Cleave might look to the Solicitor's Office Registry. I would like to have an audit trail and I am having these papers registered as a start ...

On reflection, I think I am a little more relaxed than you are although I understand your concern. The basic position is clear, I think. Certain taxpayers resident but not domiciled in the UK have such significant capital abroad that, with careful advice, they could and would so arrange their affairs that only capital was omitted (sic) to the UK to sustain them and their dependants in the lifestyle they are accustomed to. We could audit that process, at a cost, but with very uncertain chances (if any) of successful challenge. To minimise cost and inconvenience all round arrangements have been made for the equivalent of annual voluntary settlements in lieu of specifically unquantified but estimated liability.

I, myself, see no difficulty in that, now or under self-assessment. Under SA I assume that these people would not get a return anyway. If they did we would presumably work on the basis that we had predetermined their annual taxable "income" for a period of years and that would feature in the return.

The difficulty I have is that not all forward contracts seem to be on the same basis (indefinite, five years reviewable, change of circumstances trigger etc).

Unless Mr Cleave sees any problems I have overlooked, my inclination is that we should not seek to overturn existing agreements although we should be prepared to review and re-negotiate as appropriate. For new cases in the future, if there are any, I think we should probe the circumstances to establish resident but not domiciled status, continue to probe and make some judgement on, as you do, the level of risk we are looking at and the prospects for successful challenge and then negotiate a settlement as appropriate. I do not think any new agreements should be open-ended but should be subject to review in the light of a change of circumstances or of the law and, in any event, at regular intervals. Five years seems to be the norm established and I would not dissent from that."

Mr Cleave, who is referred to in the memorandum, was at that time the Solicitor of Inland Revenue. Mr Matheson's memorandum was copied to Mr Cleave. There is no evidence that Mr Cleave demurred to this approach.

[48] In the result Mr Parrett sent a memorandum dated 22 April 1996 to Mr Keeping as follows:

"Generally you can go ahead and negotiate another 5 year contract provided that it is not open ended and fulfils what the Revenue thinks is reasonable in all the circumstances.

You are entitled to review any particular matters you believe should be reviewed before the contract is signed up."

[49] In these discussions within the senior management of the respondents, the misgivings related to the question whether such agreements had become inappropriate by reason of other developments in the world of taxation. They did not relate to any circumstance that was special to any individual taxpayer and, in particular, to any of the family members in this case. In their consideration of the proposed agreement in 1995-1996 the respondents were concerned with the question whether in principle agreements of this nature continued to be acceptable in the regime of self-assessment.

The 1997 agreement

The negotiations leading to it
[50] On 14 May 1996 Mr Keeping wrote to KPMG stating inter alia the following:

"RE: THE AL FAYEDS

" ... It may be possible to negotiate a further contract but before any serious consideration can be given to this I must ask you to let me have a full report on the current position regarding all potential liabilities referred to in the last agreement with supporting documentary evidence.

Please also set out your proposals so that these can be considered further."

On receipt of Mr Keeping's letter Mr Sargent telephoned him to discuss what information he required. Mr Keeping indicated that what he required was an updated report on benefits in kind. Mr Sargent followed this up with a letter dated 3 June 1996 in which he said -

"We understand that you require an updated report of benefits in kind, (the original report was dated October 1991 and a copy was provided to you at a meeting on 10 September 1993) ... We will arrange to carry out this update as soon as possible ... So far as the agreement is concerned you will know from earlier discussions that it was regarded as advantageous to both parties for an annual tax payment to be made in lieu of the Al Fayeds organising and monitoring their affairs differently. This continues to be the case."

By letter dated 10 September 1996 Mr Sargent said

"I refer to our letter dated 3rd June 1996 and now enclose an updated report on benefits in kind ... As previously indicated we wish, on behalf of our clients, to discuss with you a continuation of the 1990 agreement as envisaged in paragraph 11 of our letter dated 29th (sic) September 1990 ... "

The updated report submitted by Mr Sargent dealt with various potential benefits such as the use of properties in the UK, the use of aircraft and yachts, payments of legal fees and the like.

[51] In the negotiations and correspondence leading to the 1997 agreement, the petitioners supplied all of the information that they were asked to provide by the respondents' officials. The respondents' officials did not suggest otherwise. The respondents themselves did not pursue any further lines of enquiry or demand any further specific information from KPMG other than that to which I have referred. In effect the only contemporary information available to the respondents at that time was the updated report on benefits in kind.

(ii) The conclusion of the agreement

[52] On or about 14 January 1997, Mr Sargent wrote to Mr Martin Whitehead of SCO London enclosing a draft forward tax agreement covering the years of assessment 1997-1998 to 2002-2003 inclusive in the sum of £240,000 per annum. On 10 February 1997 Mr Whitehead confirmed by telephone that the draft agreement was acceptable. By letter to Mr Whitehead dated 11 February 1997 Mr Sargent submitted a finalised offer. By letter dated 22 April 1997, Mr Sargent sent a further copy to Mr Whitehead. On 28 April 1997 Mr Whitehead endorsed his acceptance on a copy of the letter of 22 April. That letter and the acceptance constitute the 1997 agreement.

[53] Both sides saw the 1997 agreement as a continuation, in updated form, of the 1990 agreement. As with the previous agreements, the respondents did not seek legal advice before entering into it. The respondents did not carry out any detailed calculation on up-to-date information by which they could judge whether the offer of £240,000 per annum was realistic at that date. It represented merely an indexation of the 1985 and 1990 figures to take account of inflation.

(iii) The 1997 agreement
[54] The letter and acceptance constituting the agreement are in the following terms:

"The Commissioners of Inland Revenue

c/o Inland Revenue

Special Compliance Office (London)

Angel Court

199 Borough High Street

London SE1 1H2

22 April 1997

Dear Sirs

Re: Mohammed Al-Fayed, Ali, Salah and Emad Fayed

We act for Mohamed Al-Fayed, Ali, Salah and Emad Fayed ("our clients"). We are instructed to make an offer to the Commissioners of Inland Revenue containing the following terms which will become a binding agreement (hereinafter called "the Agreement") if that offer is accepted in the manner hereinafter indicated.

1. Mohamed Al-Fayed, Ali, Salah and Emad Fayed will be treated by the Inland Revenue as not domiciled for all Years of Assessment covered by this Agreement. Only Mohamed Al-Fayed of our clients is currently regarded by the Inland Revenue as resident and ordinarily resident in the United Kingdom for tax purposes, but this letter covers the position for each of them over the period referred to below.

2. Following recent discussions between representatives of our clients and Officers of the Inland Revenue, we are authorised to offer the payment of the sum of £240,000 in respect of each of the Years of Assessment ended 5th April, 1998 to 2003 inclusive in full and final settlement of income tax or capital gains tax (and interest and penalties thereon) to which they become liable by reason of the receipt of foreign source income or capital gains including remittances, or constructive remittances, to the United Kingdom of funds or other assets from outside the United Kingdom which are assessable or may be assessable on them personally either singularly or jointly and in particular but without prejudice to the generality of the foregoing which are assessable or may be assessable:

a. under Case IV, V or VI of Schedule D (as defined in Section 18(3) ICTA 1988), or

b. under Case III of Schedule E (as defined in Section 19(1) ICTA 1988), or

c. under Sections 1 and 12 and Chapter II of Part III TCGA 1992 in respect of any chargeable gains arising on the disposal, or part disposal, of any asset as defined in Section 21(1) TCGA 1992 situated outside the United Kingdom by our clients, but only where the proceeds of the disposal, or part disposal, of the asset in question do not exceed £15 million.

For the purposes of this subparagraph:

i. the provisions of Section 275 TCGA 1992 shall apply.

ii. the disposal, or part disposal, of an asset shall be considered to arise in any of the circumstances detailed in Chapter II of Part II of TCGA 1992.

3. The payment in paragraph 2 above will also cover any assessment to tax in respect of emoluments chargeable to income tax under Schedule E by virtue of Section 154 ICTA 1988 where it can be shown that the provision of services or supplies etc., was habitually provided to our clients prior to 6th April, 1990. This is on the understanding that the cost of services or supplies etc., was then reimbursed to the company providing the particular services or supplies, if that was the practice prior to 6th April, 1990, and continues to be reimbursed.

4. It is agreed that the Inland Revenue may not pursue an appeal before the Commissioners against an assessment of emoluments under Sections 145 and 146 ICTA 1988 against our clients unless and until a decision is reached by the Appeal Commissioners, albeit subject to further appeal, in favour of the Inland Revenue in another case involving similar circumstances. In such circumstances our clients will be informed of the result of that other decision by the Inland Revenue and they will have the option within twelve months of the date of that notification to reimburse to the relevant company concerned amounts equivalent to the assessable benefit which might then be regarded as arising so that no liability arises subsequent to 5th April, 1997. Only if our clients do not exercise that option will the Inland Revenue be able to pursue the appeal against emoluments chargeable by virtue of the said Sections 145 and 146.

5. Each payment of £240,000 will be made on or before 31st January in each of the Years of Assessment ended 5th April, 1998 to 2003 inclusive.

6. If at any time any of the said payments or any part thereof shall be in arrears and unpaid by the day specified herein then interest shall be payable upon the said payments or any balance thereof as remains unpaid at such rates as may from time to time be prescribed by the Taxes Act for interest on overdue income tax from that day until the date of payment.

7. If following demand being made by the Inland Revenue the payment or part of the payment referred to in paragraph 5 above shall remain unpaid 30 days after the due date for payment, the Commissioners of Inland Revenue shall be at liberty to seek recovery of such sum from our clients under this Agreement as may then remain due and unpaid together with any interest that shall have accrued thereon pursuant to paragraph 6 above.

8. In the event that the Commissioners of Inland Revenue do not recover from our clients under this Agreement such sum as may then remain unpaid together with any interest that shall have accrued thereon pursuant to paragraph 6 above within six months of the date on which the Commissioners of Inland Revenue notify our clients that they are seeking to recover any sum from our clients pursuant to paragraph 7 above, then the Commissioners of Inland Revenue shall be at liberty to treat this Agreement as repudiated by our clients, in which event such assessments may be made on them and such other proceedings brought against them as may be necessary to recover duties, interest and penalties thought to be outstanding. Save as aforesaid this Agreement shall be irrevocable.

9. Our clients will complete Tax Returns for the Years of Assessment ended 5th April, 1998 to 2003 inclusive as follows. The sections of the Tax Returns requiring details of foreign source income and capital gains, including the legislation referred to in paragraph 2 above, will be completed "as per the Agreement dated ." All other sections of such Tax Returns referring to income and capital gains not covered by this Agreement will be completed as required an any such income and capital gains not covered by this Agreement will be assessable in the normal way.

10. By accepting the terms of this Agreement, the Commissioners of Inland Revenue accept for all Years of Assessment referred to in paragraph 2 above the Mohamed Al-Fayed shall be treated as resident but not domiciled for all United Kingdom taxation purposes, including all Double Taxation Agreements to which the United Kingdom is a signatory and inheritance tax. The same treatment will apply to any other of our clients who is resident in the United Kingdom in any Year of Assessment. Subject to paragraphs 7 and 8 above, the only other circumstances which would arise to vary or terminate this Agreement would be the death of either Mohammed Al-Fayed or Ali Fayed or the departure of Mohamed Al-Fayed from the United Kingdom so that he thereafter ceased to be resident in the United Kingdom. The variation in the event of the death of Mohamed Al-Fayed or Ali Fayed would be a one-half reduction in the amount of the payment referred to in paragraph 2 above. On the death of the survivor of Mohamed Al-Fayed and Ali Fayed, this Agreement will terminate. The departure of Mohamed Al-Fayed from the United Kingdom so that he thereafter ceased to be resident in the United Kingdom, would result in the termination of this Agreement if Ali Fayed was not resident in the United Kingdom at the date of such departure. If Ali Fayed was so resident, the variation in this Agreement would be a one-half reduction in the amount referred to in paragraph 2 above. For the year(s) of death or departure, the amount payable would be calculated on a pro rata basis being the proportion that the number of days for which the variation applies in any Year of Assessment bears to the number of days of that Year of Assessment. Mohamed Al-Fayed accepts that until he gives notice of departure under this Agreement, he is considered to be resident and ordinarily resident in the United Kingdom.

11. Reference in this Agreement to a statutory provision means that provision as it may be amended or re-enacted from time to time and includes a reference to any provision replacing such provision, and references to a named tax include a reference to any tax replacing such tax.

12. It is understood that during the year ended 5th April, 2003 discussions will be held with an Officer of the Inland Revenue for the purpose of negotiating a continuation of this Agreement for a further six years on such terms as are then appropriate in respect of foreign source income and capital gains including remittances for Years of Assessment ending after 5th April, 2003. Such revised terms shall take account of the provisions of this Agreement and any subsequent changes to existing taxation legislation enacted by future Finance Acts.

13. The Agreement made in September 1990 covering foreign source income and capital gains including remittances to the United Kingdom in the six years ending 5th April, 1997 is unaffected by this officer and remains in full force and effect for the year ended 5th April, 1997.

Being duly authorised to enter into this Agreement on behalf of our clients, we make the formal offer set out in this letter to the Commissioners of Inland Revenue.

(Sgd) KPMG

I am duly authorised by the Commissioners of Inland Revenue and accept this offer on behalf of the said Commissioners.

(Sgd) M R Whitehead

28 April 1997"

(iv) The main points of the 1997 agreement
[55] The essentials of the agreement were that the respondents agreed to treat the family members as not being domiciled in the United Kingdom for the years of assessment 1997-1998 to 2002-2003 inclusive (cl. 1) and the family members agreed to pay £240,000 in respect of each of the years of assessment from 1997-1998 to 2002-2003 inclusive "in full and final settlement of income tax or capital gains tax (and interest and penalties thereon) to which they become liable by reason of the receipt of foreign source income or capital gains, including remittances, or constructive remittances, to the United Kingdom" (cl. 2). The payment of £240,000 also covered assessment to income tax in respect of emoluments chargeable under Schedule E by virtue of sections 145, 146 and 154 of the Income and Corporation Taxes Act 1988 (cll. 3-4). Each payment had to be made on or before 31 January in each of the relevant years of assessment (cl. 5). In the event that a payment remained owing for a specified length of time, the respondents were entitled to treat the agreement as repudiated. Otherwise, the agreement was expressed to be irrevocable (cl. 8). The family members were to complete the sections of the Tax Returns for the relevant years requiring details of foreign source income and capital gains by inserting the phrase "as per the agreement dated 28 April 1997." All other sections of the returns referring to income and capital gains not covered by the agreement were to be completed as required and any such income and capital gains were to be assessable in the normal way (cl. 9). Apart from the right to treat the agreement as repudiated under clause 8, the only other circumstances in which the agreement could be varied or terminated were expressed to be (a) the death of the first or the second petitioner or (b) the departure of the first petitioner from the United Kingdom so that he ceased to be resident here (cl. 10). Discussions were to be held with an officer of the respondents during the final year of the agreement for the purpose of negotiating a continuation of the agreement for a further six years on such terms as were then appropriate (cl. 12). The agreement did not provide for its being suspended by either side for any reason.

[56] The provision in clause 1 that the family members would be treated by the respondents as not domiciled in the United Kingdom for the period of the agreement was an innovation on the previous agreements and was not the subject of discussion or negotiation between the parties.

[57] Moreover, unlike the previous agreements, the 1997 agreement covered the liability of the family members to assessment under Case VI of Schedule D (as defined in the Income and Corporation Taxes Act 1988), that is to say assessment for United Kingdom - source income and gains. This too appears not to have been the subject of discussion or negotiation. There is no evidence that the respondents attempted to calculate the current or recent amounts of such liabilities at the time of the agreement, at any rate so far as the second and third petitioners were concerned

The effects of the 1997 agreement
[58] The 1997 agreement was understood by both sides to be an alternative solution to the petitioners' putting in place appropriate arrangements. The conclusion of the 1997 agreement therefore relieved the petitioners of the need to make such arrangements, to take professional advice in relation to them and to maintain detailed records of their foreign remittances. The petitioners duly paid the contractual sums in each of the years of assessment ended 5 April 1998 and 5 April 1999. These sums were accepted by the respondents. The petitioners also paid the contractual sums in respect of the year ended 5 April 2000, but the basis on which that sum was paid and accepted remains uncertain. In the tax years 1997-1998 to 1999-2000 the first petitioner declared no income or capital gains from any United Kingdom source.

[59] If the petitioners now had to put appropriate arrangements in place, the process might take some time to complete. If remittances were made to the United Kingdom before such arrangements were made, that would create a liability to United Kingdom tax that could have been avoided if appropriate arrangements had been in place. Since the amounts of the petitioners' foreign remittances since 1985 have not been disclosed, the effect of the decision complained of cannot be calculated at this stage.

The events leading to the decision complained of
[60] In the second half of 1999 three events occurred that were to lead in due course to the decision complained of.

The "Who Owns Scotland?" project
[61] On 2 July 1999, Mr W S Lockyer, Inspector of Taxes, Wick wrote to Mr Alan Carmichael of SCO, Edinburgh to notify him of the progress of an investigation by Wick Office into the ownership of certain Scottish estates. This was the Who Owns Scotland? project. In this letter, Mr Lockyer gave certain information that the investigation had brought to light concerning the affairs of the Al Fayed family. Liaison continued between Wick office and SCO Edinburgh on the matter during the rest of 1999.

The Williams/Whitehead letter of 9 August 1999
[62] On 9 August 1999, Mr Jim Williams, Principal Inspector at Glasgow Large Business Office (LBO), who was case director for the Harrods Group, wrote to Mr Whitehead with a view to co-ordinating his work with that of SCO. He raised with him certain significant matters relating to the first petitioner, who appeared to be the ultimate controller of the Harrods Group. Mr. Williams and Mr. Whitehead liaised thereafter on the subject of the first petitioner's tax affairs.

The Neil Hamilton libel action
[63] On 15 November 1999 the trial began in the High Court in London of a libel action brought against the first petitioner by the former Member of Parliament Mr Neil Hamilton. The first petitioner gave evidence at the trial. His evidence suggested that he had access to large sums of cash and had given presents of cash to employees. This evidence was widely reported in the press and was followed with interest by the respondents' senior staff.

Mr Whitehead's initiative
[64] It seems fairly clear that by the end of 1999 there was a general feeling among the senior management of SCO that they did not have a complete picture of the first petitioner's financial affairs and that the 1997 agreement should be terminated if that were possible.

[65] On 11 January 2000 in a telephone conversation with Mr Carmichael, Mr Whitehead said that he would write to the petitioners' agents "having first cleared it with his deputy director". His intention, according to a note of the conversation, was to tell KPMG that "all bets were off". He identified that technical aspects had been raised by Glasgow LBO and Mr Lockyer, necessitating a joint exercise by LBO and SCO.

[66] On the same day Mr Whitehead sent an e-mail to Mr Williams of LBO in the following terms:

"Sorry for delay. I am awaiting a transcript of the civil action which was recently concluded in our friend's favour. His statements under oath about his petty (!) cash expenditure will allow me to rescind the agreement that has been in place for far too long ... My DD has verbally agreed to my proposed course of action and I will copy my letter bringing the agreement to an end to you ... "

[67] From then on the respondents' senior staff repeatedly expressed the wish to withdraw from the agreement, both at meetings and in internal communications, and they prepared to bring it to an end.

[68] The facts that I have set out show that the wish to terminate the agreement was first evinced at a time when the respondents' senior staff had no clear factual basis on which to be rid of the agreement and when the legal point on which the decision letters were based had not yet occurred to them.

[69] On 27 January 2000, in accordance with clause 5 of the 1997 agreement, KPMG wrote to the respondents on behalf of the petitioners enclosing a cheque for £240,000. This was the payment due under the 1997 agreement for the year 1999-2000. This cheque was not cashed.

[70] By then it had been decided that the case would be transferred to SCO Edinburgh.

[71] On 7 March 2000 Mr Whitehead wrote to KPMG inter alia as follows:

" ... I have been concerned that the agreement dated 28 April 1997 requires review, inter alia, in the light of your client's recent civil action which was well reported in the press and highlighted his ready access to extremely large sums of cash. For that reason the agreement is suspended ... In the meantime I return the cheque for £240,000 which accompanied your letter.

I shall refer to this as "the suspension letter." This was the first formal intimation to the petitioners that the respondents were minded to go back on the 1997 agreement. The petitioners' advisers had had no opportunity to make representations on the matter.

[72] On the same day Mr Whitehead wrote to Mr Hartlib, his Deputy Director, identifying five areas of concern, namely (1) the beneficial occupation of the Surrey and Highland estates; (2) ready access to large sums of cash; (3) ready access to Harrods' Bankers Drafts; (4) legal fees, and (5) use of flats at the Hyde Park residence. Only the second of these was mentioned in the suspension letter.

[73] Mr Whitehead did not take legal advice from Solicitor's Office or from counsel. It appears that he had no clear idea in his mind as to what "suspension" of the agreement meant. Before he sent the suspension letter he had told Mr Williams in the e-mail of 11 January 2000 of his intention of "bringing the agreement to an end." But in a letter to McGuigan dated 29 January 2000 he represented that the agreement had merely been "put on hold," whatever that meant. He appears not to have considered what effect the purported suspension would have on the petitioners' ability to take emergency measures to protect their position by making appropriate arrangements.

[74] On 9 March 2000 Mr Murray of KPMG wrote to the respondents requesting an urgent meeting. Within the following week, the files in the case were transferred from SCO London to SCO Edinburgh.

[75] Since the decision to suspend the agreement had not been properly thought out and had not proceeded on an informed view of the respondents' legal position, it is not surprising that the officials of SCO who thereafter assumed responsibility for the case came under immediate pressure to find a convincing justification for what had been done. It is my impression that throughout March, April and May 2002, much of the effort of SCO Edinburgh was taken up by an attempt to frame a coherent response to KPMG's requests for an explanation.

[76] On 13 and 14 March 2000 Mr Carmichael telephoned the respondents' Solicitor's Office to discuss whether there was a basis on which the respondents might be able to get out of the 1997 agreement. He was advised that the line to take was that the 1997 agreement was founded on a report that had a basic mistake.

[77] On 20 March 2000, at the request of KPMG, a meeting was held at SCO Edinburgh. Mr Murray of KPMG said that both the 1990 and the 1997 agreements appeared to have been entered into by both sides in the expectation that the agreements would resolve the treatment of remittances for the periods covered. Mr Murray commented that the petitioners were entitled to rely on the agreements and would not therefore have maintained the records nor undertaken the analysis and planning of remittances that they would otherwise have done. He asked the respondents to state their intentions for taking the matter forward. The respondents' representatives did not answer this question.

[78] Although the meeting was inconclusive, it clearly emerged that the respondents were intent on withdrawing from the 1997 agreement and that the reason for their doing so was the information that had come to light during the Neil Hamilton libel trial. It was also clear that the petitioners' advisers were prepared to seek judicial review of the suspension of the agreement. The respondents' officials said that they wished to take further legal advice on the matter and to have further time to review the papers. They undertook to clarify their view of the current status of the 1997 agreement by the week commencing 17 April 2000; to review the matter fully, and to return to KPMG with "proposals for taking the position forward."

[79] On 28 March 2000 Mr Murray wrote to Mr McGuigan to follow up that discussion. He put two questions to Mr McGuigan in the following terms:

"As the agreement itself nowhere provides that it can be 'suspended' and indeed never uses the word suspension, what did Mr Whitehead intend to convey by the statement 'the agreement is suspended?'

If, on the other hand, Mr Whitehead was unilaterally purporting either to vary or to terminate the agreement, what is the legal basis for any such action in the light of the clear terms of the 1997 agreement which state that it is both binding and irrevocable."

Mr Murray also commented on the reason given Mr Whitehead for the suspension of the agreement in the following terms:

"... We fail to understand what relevance 'withdrawals of cash' can have to a binding agreement which substitutes the payment of fixed annual amounts to the Inland Revenue in lieu of the normal tax charge based on remittances. Your explanation of why the Inland Revenue believes that there is such a connection would be much appreciated."

[80] It is a further indication of the emergency that Mr Whitehead's letter had caused that Mr McGuigan did not reply in writing with straight answers to Mr Murray's questions. Instead, on 29 March 2000 he telephoned Mr Murray and told him that a great deal of work would be required on the part of the Revenue and that he would require up to Easter to formulate a response to Mr Murray's request.

[81] Mr Whitehead's initiative precipitated the registration of a SCO Edinburgh investigation, which, but for the suspension letter, would have occurred only after more detailed enquiries and advice. Indirectly, it also precipitated the decision of 2 June 2000 with which these proceedings are concerned.

SCO's reconsideration of the matter
[82] On 30 March 2000 Mr Carmichael prepared a Registration Report which was counter-signed by Mr McGuigan. The Registration Report marked the first formal step in the process of an SCO investigation into the affairs of the first petitioner. In view of the suspension letter, the report came rather late in the day. It makes clear that it was only then that a decision was made by SCO to buy a transcript of the libel trial. This transcript was to be closely scrutinised. It also makes clear that SCO would be "seeking actively not to renew this agreement".

[83] It is unnecessary to quote from the report in detail. It is sufficient to say that it makes clear that, but for the suspension letter, the case would have been approached in a different way. As Mr McGuigan comments, he would have preferred to have had the benefit of a full review of the first petitioner's papers by SCO London, the opinion of the Solicitor and of counsel, and a detailed examination of the trial transcript.

Counsel's opinion
[84] During April and May the respondents temporised in response to repeated requests from Mr Murray for a further meeting while they awaited the advice of counsel. On 10 April, counsel advised that while the respondents could not refuse to abide by the 1997 agreement on the ground that it was entered into under essential error induced by misrepresentation, the agreement might nonetheless be ultra vires of the respondents. The respondents then sought further advice from counsel.

[85] On 13 April 2000 Mr Pegler, Deputy Director of SCO, in a letter to Mr Middleton, expressed his own misgivings about the suspension letter. He said "I do not know why we sent out our letter of suspension when we did, but that is another matter altogether ... " He then set out the approach to the problem, which was to obtain counsel's advice on whether it was possible to "extricate" the department from the 1997 agreement.

[86] The respondents were aware that KPMG acted for other taxpayers with whom forward tax agreements had been concluded. The significance of that was not lost on Mr Pegler, who advised Mr Middleton as follows "We cannot deal with [the petitioners'] case in isolation as apparently KPMG are aware of other cases involving forward agreements negotiated with officers of SCO. It would therefore be naïve to seek to break Mohammed Al-Fayed's forward agreement in isolation without assessing the efficacy of others. Otherwise we would face an allegation that we were dealing with Mohammed Al-Fayed unfairly."

[87] On 10 May the respondents received counsel's opinion. It was to the effect that the 1997 agreement was ultra vires of the respondents.

[88] On 17 May 2000, at a meeting of the SCO management team, it was noted that generally it was felt that forward contracts should be few and far between and restricted to situations such as transfer pricing where it was sometimes necessary to agree apportionments for future years.

[89] Thereafter the respondents' officials prepared several drafts of a letter resiling from the 1997 agreement.

The decision complained of
[90] On 30 May 2000 Messrs D J Freeman, Solicitors, London, wrote a letter before action on behalf of the petitioners stating that the purported suspension of the 1997 agreement was unlawful because it was unfair and an abuse of power and because the respondents had failed to give any or adequate reasons for the suspension. They notified the respondents that unless the respondents confirmed in writing by close of business on 2 June 2000 that the 1997 agreement remained in full force and effect and that the respondents would abide by its terms, the appropriate relief would be sought through the courts. Mr McGuigan acknowledged receipt of the letter that day.

[91] By letter dated 2 June 2000 Mr McGuigan replied to D J Freeman in inter alia the following terms:

"I am advised that the letter of agreement is not enforceable because it is ultra vires. The agreement takes no account of the possibility of there being a false factual basis for the contract. Also it does not allow for any changes in the facts or circumstances for any unexpired years or for changes in future legislation. I should also make it plain the agreement is ultra vires because it does not reflect as it should the performance by the Revenue of its statutory duties and care and management powers to assess and collect tax. Accordingly, the letter dated 7 March 2000 can be disregarded in respect of its reference to the suspension of the agreement. The agreement is not and never has been binding in law.

In view of the history of the arrangements the Inland Revenue do not believe that it would be appropriate to re-open the back years in respect of liability to income tax and capital gains tax on foreign source income and capital gains prior to 5 April 2000. Accordingly, in this connection I would be grateful if you could arrange for your client to forward to me a cheque for £240,000 made payable to Inland Revenue in respect of the year to 5 April 2000.

For the years from 6 April 2000 onwards Tax Returns will have to be completed in accordance with the family's statutory responsibilities, and without reference to the agreement ... "

[92] On the same day there was a meeting in Edinburgh between Mr Murray and Mr Thomson of KPMG and Mr McGuigan and Mr Carmichael. At that meeting Mr Carmichael handed to Mr Murray a letter addressed to KPMG in terms similar to those of the letter of the same date sent to D J Freeman.

[93] These two letters intimate the decision now complained of. I shall refer to them as the Decision Letters.

The aftermath of the Decision Letters
[94] The meeting held in Edinburgh on 2 June 2000 was inconclusive. In the course of the meeting the KPMG representatives asked the respondents' representatives why they could not let the agreement run its course. The answer given was that SCO had been advised that the agreement was ultra vires. The SCO representatives indicated that they wished KPMG to return to them the cheque for £240,000 that Mr Whitehead had rejected. Mr Carmichael informed the KPMG representatives that the respondents now wished to conduct an in-depth review of the 1998-1999 personal tax returns and that S9A notices would be handed to the relevant family members shortly. Mr Carmichael commented that in view of the Neil Hamilton libel trial he would like to undertake a full review of the finances of the family and consider whether any reviews were necessary regarding the tax residence position of family members and their interests, and to identify any businesses that were controlled and managed from the United Kingdom by family members. The SCO representatives explained this last point by referring to statements that had been made during the libel trial and in the course of the first petitioner's application for United Kingdom nationality which indicated that certain overseas businesses might be controlled and managed from the United Kingdom.

[95] The SCO representatives also notified the KPMG representatives that SCO would be co-ordinating their enquiries with those that were proposed by LBO. The latter would be enquiring into transfer pricing; the provision of services between the United Kingdom and offshore companies; funding; review of activities of mainstream group trading companies; non-grouped companies; cross-border finance; some specific offshore companies, of which Cylena SA and Alpha were mentioned; the background to Fulham Football Club, and what Mr Williams of LBO had termed an "overall risk assessment".

[96] At the date of this meeting, eight other forward tax agreements were in existence, none of which has been brought to an end by the respondents. I understand however that in the light of this case, the respondents have instituted a review of all forward tax agreements presently in force.

[97] On 8 June D J Freeman sent a further letter before action which stated inter alia the following:

"We note that the Revenue has executed a volte face. Originally in its letter of 7 March 2000 it purported to suspend the letter of agreement: suspension could of course only operate in relation to an agreement that was ex hypothesi valid. When challenged as to the basis upon which such suspension would be justified in terms of law, the Revenue now asserts inconsistently that the agreement was never valid in the first place ...

We note from your letter that you intend to investigate our clients and that of 'any individual, companies or organisations connected with them' ... We are concerned that the scope and timing of this decision, particularly in the context of your conduct in relation to the letter of agreement, is evidence of a wider abuse of power by the Revenue in relation to our clients and is oppressive ..."

With this letter D J Freeman enclosed a cheque for £240,000 for the year to 5 April 2000 pursuant to the 1997 agreement and on the basis that the 1997 agreement remained in full force and effect.

[98] On 9 June 2000 the respondents' Solicitor's Office replied to D J Freeman reiterating the respondents' position as set out in the letters of 2 June 2000 and indicating that they intended to cash the cheque, but not on the basis set out in D J Freeman's letter of 8 June. On 16 June 2000 D J Freeman wrote to the Solicitor's Office noting that the respondent's position remained that the agreement was ultra vires and repeating that the cheque for £240,000 was provided on the basis set out in their letter of 8 June.

The remedies sought
[99] The petitioners seek declarator that the respondents are obliged to abide by the 1997 agreement; reduction of the decision intimated in the letters of 2 June 2000; declarator that the continuing failure of the respondents to hold themselves bound by the 1997 agreement is incompatible with the petitioners' Convention rights; such further order or decree as may seem to the court to be just and reasonable in all the circumstances of the case; and the expenses of the application.

The relevant legislation
[100] The Inland Revenue Regulation Act 1890 (the 1890 Act) provides inter alia as follows:

"1(1) It shall be lawful for Her Majesty the Queen to appoint persons to be Commissioners for the collection and management of inland revenue, and the Commissioners shall hold office during Her Majesty's pleasure.

The Commissioners shall have all necessary powers for carrying into execution every Act of Parliament relating to inland revenue, and shall in the exercise of their duty be subject to the authority, direction, and control of the Treasury, and shall obey all orders and instructions which have been or may be issued to them in that behalf by the Treasury ...

... 13(1) The Commissioners shall collect and cause to be collected every part of inland revenue, and all money under their care and management, and shall keep distinct accounts thereof at their chief office ...

... 39. In this Act, unless the context otherwise requires, -

"Inland Revenue" means the revenue of the United Kingdom collected or imposed as stamp duties, taxes, and duties of excise, and placed under the care and management of the Commissioners, and any part thereof ... "

[101] The Taxes Management Act 1970 (the 1970 Act) provides inter alia as follows:

"1(1) Income tax, corporation tax and capital gains tax shall be under the care and management of the Commissioners of Inland Revenue (in this Act referred to as "the Board"), and the definition of "inland revenue" in section 39 of the Inland Revenue Regulation Act 1890 shall have effect accordingly.

The Board shall appoint inspectors and collectors of taxes who shall act under the direction of the Board ... "

The cases for the parties
For the petitioners
[102] The petitioners contend that (1) it was intra vires of the respondents to enter into the 1997 agreement; that it therefore remains binding, and that the decision complained of constitutes a breach of it; (2) esto the 1997 agreement was ultra vires of the respondents, because (i) the respondents in making the decision complained misdirected themselves in law; (ii) the decision was so unfair as to amount to an abuse of power; (iii) the decision deprived the petitioners of benefits or advantages which they had enjoyed and had legitimately expected to continue to enjoy; (iv) no rational ground for the withdrawal of such benefits or advantages was communicated to the petitioners; (v) no opportunity was given to them to comment; (vi) the decision was made in pursuance of an ulterior or improper purpose; (vii) in making it the respondents had regard to an irrelevant consideration or failed to have regard to a relevant consideration; and (viii) the decision was one that no reasonable authority in the position of the respondents could have made; and (3) for a variety of reasons the decision complained of infringes the petitioners' Convention rights.

For the respondents
[103] The respondents accept that if the 1997 agreement was intra vires, the petition must be granted. They contend however that the agreement was ultra vires. They argue that the idea that they should accept a sum proffered annually for a period of years on the basis that the taxpayer could so organise his affairs as to have no tax liability is wholly irrelevant to the exercise of their statutory duty. On the view that the agreement was ultra vires, they argue that considerations of abuse of power, legitimate expectation and so on are irrelevant. Finally, they argue that Convention rights do not apply in this case; but that, if they do, they have not been infringed.

The questions for decision
[104] There are two principal questions to be decided in this case. The first is whether the respondents acted ultra vires in entering into the 1997 Agreement. The parties agree that if the 1997 Agreement was not ultra vires, the respondents are in breach of it and this petition must be granted.

[105] But if the agreement was ultra vires of the respondents, a second question then arises, namely whether the petition should nonetheless be granted (a) because the respondents retained a discretion to abide by the agreement: (b) because the decision constituted an abuse of power; and/or (c) because it infringed the petitioners' Convention rights.

Decision
(1) The ultra vires question
[106] In my opinion, the forward tax agreement to which this case relates was ultra vires of the respondents.

(a) General principles
[107] The central submission for the petitioners has been directed to a largely undisputed body of authority as to the scope of the respondents' discretion in the exercise of their duties of care and management. The conclusion to be drawn from that body of authority is that, in general, the respondents have a wide discretion in the exercise of those duties and that the court will interfere only where the discretion has been exercised unreasonably or illegally. The parties agree in particular that in the everyday performance of their duties under section 13(1) of the 1890 Act (supra), the respondents have to balance the duty to collect "every part of inland revenue" with their general duties under the 1890 and 1970 Acts. This exercise involves inter alia the making of judgments as to the best deployment of their resources in maximising the collection of tax that is known to be due, and the making of judgments as to the extent of the information that the respondents can reasonably hope to obtain in their investigation of the affairs of taxpayers or potential taxpayers (R v IRC ex p National Federation of Self-Employed [1982] AC 617, Lord Wilberforce at pp. 631-5 IRC v Nuttall [1990] STC 194, Ralph Gibson LJ at 203a-b).

[108] The making of back duty settlements is an everyday example of the exercise of the respondents' discretion as to care and management. The essence of all such settlements and agreements is the element of compromise. They involve a decision by the Revenue to settle for less than the tax which may be due, or which it knows to be due (IRC v Nuttall, supra, Parker LJ at pp. 198 and 202). The Fleet Street Casuals case is a good example. In that case the respondents were held to have acted within the scope of their lawful discretion when to secure acceptance by a trade union of a special arrangement that would ensure that, for the future, tax would either be deducted at source or would be properly assessed, the Revenue agreed to refrain from investigations into tax lost in certain previous years (R v IRC ex p National Federation of Self-Employed, supra). The terms on which such an agreement is concluded are a matter for negotiation and for the judgment of the respondents. That will depend in each case on the facts. In looking at the terms on which such agreements are concluded, it is not for the court to substitute its own judgment for that of the respondents. The decision to enter into such an agreement will therefore not be invalidated by the court merely because it appears to the court to have been unwise from the Revenue's point of view (supra, Lord Diplock at 637E).

[109] The court will interfere in such a case if the respondents have exercised their discretion unreasonably in the Wednesbury sense of that expression (R v IRC ex p National Federation of Self-Employed, supra, Lord Diplock at 637); and in its consideration of that question, the respondents' judgment is not to be lightly cast aside (R v IRC ex p MFK Underwriting Agencies Ltd [1990] 1 WLR 1545, Bingham LJ at 1568e-g). It is a matter for the respondents to decide as to the extent of the information that they can reasonably expect to obtain; and on that basis to decide whether or not to enter into such an agreement and, if so, on what terms (cf IRC v Nuttall, Ralph Gibson LJ at p. 203 B-C, Bingham LJ at p. 205a-d). Provided that the decision is made in good faith in pursuance of proper care and management purposes and solely for "good management" reasons (R v IRC ex p National Federation of Self-Employed, supra, Lord Diplock at p 637 C-E), it will be intra vires.

(b) The nature of the 1997 agreement

[110] The petitioners rely on this line of authority for the submission that the making of the 1997 agreement was, in the circumstances, within the scope of the respondents' discretion. In my opinion, that submission misses the point. The primary question in this case does not relate to the scope of the respondents' discretion. It relates to the logically prior question whether in entering into this agreement the respondents carried out an act of collection and management of inland revenue at all.

[111] Counsel for the respondents carefully refrained from arguing that a forward tax agreement is by its nature ultra vires. They confined themselves to the proposition that the 1997 agreement was ultra vires because the respondents entered into it on an inadequate basis of information and because it lacked a sufficient provision for review or termination on the occurrence of a material change of circumstances. However, the respondents' submission, despite these constraints, has raised more fundamental questions that cannot, in my view, be avoided in this case.

[112] In my opinion the starting point is in the provisions of sections 1 and 13 of the 1890 Act and section 1 of the 1970 Act. These provisions show that the respondents are appointed "for the collection and management of inland revenue" (1890 Act s. 1(1)) and that it is their duty to "collect and cause to be collected every part of inland revenue, and all money under their care and management" (ibid, s. 13(1)). For the purpose of these provisions, "inland revenue" means "the revenue of the United Kingdom collected or imposed as stamp duties, taxes, and duties of excise and placed under the care and management of the commissioners, and any part thereof ... " This definition is imported into the 1970 Act (s. 1(1)) in relation to income tax, corporation tax and capital gains tax, which are put under the care and management of the respondents by that Act.

[113] Back duty cases and similar cases involve the collection of "inland revenue" as statutorily defined. When the respondents agree to settle a claim for unpaid taxes falling within the statutory definition, they are in general exercising their functions under the provisions which I have quoted. Such settlements relate to a liability known to have been incurred and involve the collection of tax that is lawfully due. One can readily understand that the respondents could agree with a taxpayer to compromise in relation to the amount of the taxpayer's undisputed liability to tax in circumstances where the respondents would find it difficult accurately to assess the extent of the liability at economic cost or within reasonable time. In the Fleet Street Casuals case there was no dispute that there was a liability to tax on the part of the individuals concerned.

[114] Likewise, it can be said to be within the proper scope of care and management for the respondents to give advance guidance as to the tax treatment of a proposed transaction where all the relevant circumstances attending the transaction are fully disclosed, even if that guidance involves the Revenue's foregoing tax that might arguably be payable on a proper construction of the legislation (R v IRC ex p MFK Underwriting Agencies Ltd, supra, Bingham LJ at p. 1569 D-E). In such a case, the respondents formally state their position to the taxpayer on a question as to a liability to make a payment falling within the definition of "inland revenue." They do so on the understanding that the taxpayer will carry out the proposed transaction in accordance with his representations to the respondents (R v IRC ex p MFK Underwriting Agencies Ltd, supra; R v IRC ex p Matrix Securities Ltd, [1994] 1 WLR 334).

[115] In my view, the forward tax agreement to which this action relates cannot be equiparated with such settlements or such guidance. A forward tax agreement is entered into on a wholly different basis. On the threat that the other party may avoid any liability to pay United Kingdom tax at all, the respondents accept a payment of a fixed sum that entitles the other party to receive foreign remittances in the United Kingdom of any amount, and even if they represent income or capital gains, during the period of the agreement.

[116] It is therefore a contract by which the respondents renounce their right and duty to investigate the true financial and other circumstances of the other party during the period of the agreement, and in particular renounce their right and duty to investigate the amount and source of the foreign remittances received by him.

[117] The sum paid by the other party can fairly be described as a premium paid in consideration of his not undergoing the process of assessment but, instead, having the opportunity to receive unmonitored foreign remittances in the United Kingdom, whatever the source and whatever the amount of tax to which those remittances would otherwise have given rise. The receipt by the respondents of such a payment is unrelated to any disclosed amount of income or gains. It cannot, in my view, be characterised as a collection of inland revenue.

[118] In my opinion the respondents do not have power to enter into agreements for the payment of money to them by an individual on the basis that that individual could so organise his affairs as not to incur any liability to United Kingdom tax.

[119] In my view, the making of a forward tax agreement is not a proper exercise of the respondents' duties of care and management. The respondents are constrained by their statutory duties. They are not in a commercial market place operating an extra-statutory system of levying money on the basis that if that money were not paid, there would be a possibility that they could lawfully assess the individual to tax. To put the whole matter in another way, the respondents' duty to collect tax lawfully due arises only where transactions have occurred that create a liability to tax (R v Sampson and Others ex p Lansing Bagnall Ltd (1986) 61 TC 112, Balcombe LJ at p. 127).

[120] In my opinion, it cannot be a proper exercise of the respondents' statutory powers and duties for them to make an agreement with an individual by which he can in effect operate outside the tax system on the basis that he has it in his power to avoid any liability to tax on his foreign remittances.

[121] The 1997 agreement does not involve the taxation of taxable transactions. It involves the payment of fixed annual sums in respect of future taxable transactions, that the respondents know will occur, where the annual sums are unrelated to the amounts of those future transactions. Furthermore, since the agreement covered income tax, which is an annual tax, I consider that the respondents were not entitled to accept a sum ascribed in part to income tax liabilities that would otherwise fall to be assessed in future years (cf. R v IRC ex p Preston, supra, Lord Templeman at p. 862B).

[122] I agree with senior counsel for the respondents that the respondents entered into the contract blind and contracted to remain blind during its currency.

[123] By means of the 1997 agreement the family members were given carte blanche to receive foreign remittances within the United Kingdom of any amount in exchange for payment to the respondents of the contractual sum. In effect, by entering into that agreement, the respondents bound themselves to refrain, if circumstances should give rise to a liability to United Kingdom tax on foreign remittances on the part of any of the petitioners, from making an assessment and collecting the tax due.

[124] Both sides in this case accept that the respondents have a duty of fairness as between taxpayers. In my view, it is a consequence of the 1997 agreement that the petitioners are given the liberty, in respect of foreign remittances and Case VI liability, of paying a fixed sum regardless of the amount of the taxable transactions. That, in my view, is a clear example of unfairness. In a true sense, the petitioners thereby become a privileged group who are not so much taxed by law as untaxed by concession (Vestey v IRC (Nos. 1 and 2), [1980] AC 1143, Lord Wilberforce at p.1173, quoting Walton J at first instance).

[125] The idea that the respondents should accept a sum of money for future years on that basis is, in my view, entirely irrelevant to the respondents' statutory powers. Unless the individual actually makes arrangements that have that result, it is the duty of the respondents to assess him to tax on the basis of his actual receipts of foreign remittances, or constructive remittances, in the United Kingdom.

[126] If, on the other hand, the individual does make appropriate arrangements, and thereby avoids any liability to United Kingdom tax on foreign source income or gains, it is no part of the respondents' duty to take issue with that. In that event, there is no tax due in respect of which the respondents are entitled to claim or to receive any sum of money.

[127] I am confirmed in this opinion by the fact that in 1997 the respondents had no clear idea as to the extent of the family members' foreign remittances into the United Kingdom at that time, or for that matter in the years covered by the previous agreement. The sum agreed was simply an indexation of the figure agreed in the original forward tax agreement.

[128] I am further confirmed in my opinion on this point by the fact that the second and third petitioners were neither domiciled nor resident in the United Kingdom and were therefore persons whose only liability to United Kingdom taxation would be on United Kingdom - source income and gains, but who had contractual liability for the whole amount of the annual payment under the agreement, that sum being unallocated as between the individual family members.

(c) Adequacy of factual information
[129] The respondents have also argued that the 1997 agreement was ultra vires by reason of the fact that they entered into it with inadequate factual information on two matters, namely the extent of the family members' foreign remittances and the domicile of the first petitioner. This question is to some extent an aspect of the general question that I have just discussed. However, it does raise additional considerations that have a bearing on the validity of the agreement.

[130] It is clear that when they entered into the 1997 agreement the respondents had no idea, however approximate, of the amount of the family members' foreign remittances during the years of the 1990 agreement which was then coming to an end. As matters stood in September 1997, Mr Stribblehill's exercise in 1984-1985 had been the only thorough and systematic investigation into the family members' financial affairs; and even that exercise had failed to discover the full picture.

[131] It cannot be said in this case that the petitioners withheld information from the respondents in the sense in which that topic was discussed in R v IRC ex .p Preston ([1985] AC 835) and in R v IRC ex p Matrix Securities ([1994] 1 WLR 334). The failure in this case was a failure by the respondents to require and pursue information

[132] It is my impression that by 1997 the respondents' senior management were more concerned with the policy questions affecting such agreements than with the fundamental question of their legality or with the facts regarding the current financial affairs of the family members.

[133] Counsel for the petitioners has submitted that the agreement was based on a recognition by the respondents that the family members had it in their power to make appropriate arrangements to ensure that all such remittances were not subject to United Kingdom tax. Therefore, he argued, the amount of the remittances received during the currency of the 1990 agreement was a consideration that was irrelevant to the making of the 1997 agreement and had no bearing on its validity.

[134] I accept that in 1997 the amounts of the family members' current and recent foreign remittances were unrelated to the amount of the contractual sum in the sense that those amounts, if disclosed, would not necessarily have indicated to the respondents what amounts would be remitted in the years from 1997 if no further agreement were to be made.

[135] However, I do not accept that the respondents' lack of information on the question of the family members' actual remittances has no bearing on the validity of the agreement. On the contrary, I regard that lack of information on the respondents' part as confirming my conclusion that in making the 1997 agreement the respondents were in effect stepping outside the taxation system in the sense that I have described. The annual sum agreed in the 1997 agreement was merely the indexed value of a sum agreed in the original agreement of 1985. It was not based on any objective calculation of the tax risk. It was little short of a random figure accepted as an alternative to the possibility of there being appropriate arrangements that would avoid any liability to tax at all. That, in my view, is an important reason why the agreement was invalid.

[136] Junior counsel for the respondents submitted that the respondents had no information on the domicile of the first petitioner at the date of the agreement; but senior counsel accepted that they did have such information in the form of the declaration by the first petitioner on his latest tax return. In my view, the respondents' information went further than that.

[137] The question of the first petitioner's domicile was one of the first to occur to the respondents' officials. They knew that the first petitioner did not have a domicile of origin in the United Kingdom; but that if he acquired a domicile of choice within the United Kingdom, he would at once be liable to United Kingdom taxation on all income and gains world-wide, a calamitous result that the family members' strategy was designed to avoid. The question of domicile was one to which their officials returned more than once. I have set out the history of the respondents' investigations into domicile in 1985 and thereafter.

[138] On the whole matter, having regard to the early enquiries of Mr Stribblehill, the PMM enquiry as to United Kingdom citizenship, the representation by KPMG as to the residence and ordinary residence of the family members, with its implication of non-domicile, and the terms of the tax returns, and taking into account the shared understanding of the first petitioner and the respondents that his entire strategy depended upon his not acquiring a domicile of choice, I consider that the respondents cannot be said to have failed in any respect in their consideration of the question of his domicile at the date of the agreement.

[139] On the contrary, I consider that they were quite correct in proceeding as they did on the basis that at April 1997 the first petitioner was not domiciled in the United Kingdom. But there remains of course the question whether they were entitled to agree to treat him as not domiciled in the United Kingdom for the duration of the 1997 agreement. That raises different considerations.

(d) No mechanism for review or termination on a material change of circumstances
[140] The respondents have argued that it was ultra vires of them to enter into an agreement that was to endure for the contractual period regardless of any material change of circumstances that might occur during that period other than the death of the first or second petitioners or the departure of the first petitioner from the United Kingdom (cl.10). Counsel for the petitioners has argued, however, that since the whole basis of the agreement was that it was an alternative to the making by the petitioners of appropriate arrangements to avoid any liability, the agreement was not one upon which any material change of circumstances could have effect during the contractual period.

[141] In my opinion, the absence of any mechanism for review of the agreement upon the occurrence of a material change of circumstances is merely an aspect of the general feature of this agreement that it stood outside the scope of the respondents' statutory functions. If a material change of circumstances were to occur, for example supervening legislation affecting the subject matter of the agreement or the acquisition by the first petitioner of a domicile in the United Kingdom, the continuance of the agreement would take the parties even further outwith the taxation system.

[142] Counsel for the petitioners has argued that since the family members' avowed strategy was to avoid the acquisition of a domicile within the United Kingdom, and since they were in receipt of the best professional advice, the lack of any provision regarding a change in the domicile of any of the family members was a consideration of no significance in this case. I do not accept this submission. The possibility that the first petitioner might acquire a domicile of choice in the United Kingdom during the currency of the agreement was by no means fanciful. Although the first petitioner's strategy was to avoid that result, the question of his not acquiring a domicile of choice in the United Kingdom did not depend on his own say-so. That was a question which, in case of dispute, the courts would have to decide upon an objective assessment of all of the circumstances (Ross v Ross 1930 SC (HL) 1, Lord Buckmaster at p. 6; IRC v Bullock [1976] 3 All ER 353, Buckley LJ at pp. 358-360). In view of the first petitioner's continued residence in the United Kingdom, his increasing involvement in business enterprises within the United Kingdom, and his repeated applications for United Kingdom citizenship, there was a distinct possibility that the first petitioner's links with the United Kingdom would become progressively closer. On any objective assessment of the facts made at the date of the 1997 agreement, the possibility of his being held to have acquired a domicile of choice in the United Kingdom at some time during the period for which the agreement was to run could not be ruled out. For that reason, in my view, the failure of the agreement to provide for termination in such an event rendered it invalid.

[143] However, in my opinion that is not the central issue on this point. This aspect of the case raises a question of principle. In my view, the agreement was ultra vires in principle by reason inter alia of the fact that it bound the respondents to an agreement that throughout its contractual currency the first petitioner would be regarded as domiciled outwith the United Kingdom, even if the acquisition of a domicile in the United Kingdom during that period were to alter fundamentally the nature of the first petitioner's liability to United Kingdom tax. The respondents therefore bound themselves to an agreement which, in that event, would become contrary to law. For that reason alone, in my view, the agreement was ultra vires (cf. Gresham Life Ass. Society v AG, [1916] 1 Ch. 228, Astbury J at 239-240).

(2) If the respondents acted ultra vires, are the petitioners nevertheless entitled to the remedy that they seek?

(a) The question of the respondents' discretion
[144] If I am right in my conclusion that the agreement was ultra vires of the respondents, the next question is whether the respondents nonetheless retained a discretion to abide by it.

[145] The documents show that the respondents considered that if they had acted ultra vires, that was an end of the matter. They did not consider whether it was nonetheless open to them to see the agreement out.

[146] In my opinion, it follows from my conclusion on the ultra vires question that the respondents did not fulfil their statutory duties when they entered into the 1997 agreement. It follows, in my view, that those duties remain in force and that they remain to be implemented by the respondents. On that view, it cannot be said that the respondents have retained a discretion to abide by the terms of the agreement. If they were to do so, they would be continuing in a state of non-compliance with their statutory duties (cf. R v IRC ex p Preston [1983] STC 257 (at first instance), Woolf J at 264C).

[147] If a public body carries out a forbidden act, the question of discretion does not enter into the matter. The respondents have cited two cases of that kind in each of which a body or person having a duty to collect statutory tolls was held to have no discretion to waive payment of them in any individual case (York Corporation v Henry Leetham & Sons Ltd [1924] 1 Ch 557; Balfour v Sharp (1833) 11 S 784).

[148] I am further of the opinion that if the respondents acted ultra vires in entering into the agreement, the conclusion of the agreement cannot be said to have created on the part of the petitioners any legitimate expectation that the respondents would abide by it, notwithstanding its illegality, for the entire contractual duration. This point also arises in relation to the question of abuse of power.

(b) Abuse of power
[149] I am further of the opinion that the termination of the agreement cannot be seen as an abuse of power on the part of the respondents.

[150] Counsel agree that in general a body such as the respondents may exercise a power so unfairly as to be said to have abused it; that the abuse may take the form of a breach of a legitimate expectation, whether substantive or procedural; that if the exercise of the power involves an abuse of it, it is objectionable on the basis that it is unlawful; and that the issue is governed by an overall test of fairness, it being a matter for consideration in the circumstances of each individual case whether the unfairness amounts to an abuse of power (cf. R v IRC ex p National Federation of Self-Employed, supra, Lord Wilberforce at 632; Lord Scarman at 650-652; R v IRC ex p Preston, supra, Lord Scarman at 851G-852H; Lord Templeman at 864G).

[151] In my view, concepts such as legitimate expectation, which might earlier have been regarded as delineating specific categories of cases in which the court will grant judicial review (CCSU v Minister for Civil Service [1985] AC 374), are nowadays to be regarded simply as aspects of an overall doctrine that public bodies must act fairly in the decisions that they make and that to act unfairly in making such decisions is an abuse of power. Unfairness may be held to exist even where the decision is within the scope of the authority's powers and is an apparently rational decision when looked at from that authority's standpoint (cf. R v North and East Devon Health Authority ex p Coughlan [2002] QB 213). The question of fairness will depend on the facts in each individual case (R v IRC ex p Unilever plc [1996] STC 681, Simon Brown LJ at 695).

[152] But since I have reached the conclusion that the agreement was ultra vires of the respondents, I consider that it cannot be unfair to the petitioners to be deprived of the benefits resulting from it. The respondents have put this point in other ways; for example by arguing that if a statutory body has no power to act in a certain way, it cannot be an abuse of power for it to desist from doing so; that a taxpayer can have no legitimate expectation that he will benefit from an ultra vires act of the respondents; and that the court cannot in effect compel a statutory body to exceed its powers.

[153] In support of these propositions the respondents have distinguished a number of cases in which abuse of power has been considered in the context of an admittedly lawful act. For example, in R v IRC ex p Unilever plc (1996 STC 681), after accepting late claims for loss relief on 20 occasions over a period of more than 30 years, the Revenue, without prior notice to the taxpayer, refused to accept a late claim. That was so unfair to the taxpayer as to be an abuse of power; but it was an abuse of an admittedly legitimate power. In R v North and East Devon Health Authority ex p Coughlan (supra), the promise by the public authority which gave rise to the applicant's legitimate expectation was one that that body had been entitled to make.

[154] The proposition was established in R v AG ex p ICI ([1990] 60 TC 1) that a taxpayer can have no legitimate expectation that he will be entitled to an ultra vires relaxation of a statutory requirement (ibid, Lord Oliver of Aylmerton at 64 G-H; R v IRC ex p MFK Underwriting Agents Ltd, supra, Bingham LJ at p. 1569 B-C, Judge J at 1573H). The underlying principle is that a public authority cannot validly act outwith its statutory powers. If it does, it is the duty of the authority to desist from doing so and it cannot, in my view, be obliged to continue to act ultra vires in consideration of the expectations of another party. The law protects only those expectations that are legitimate. Where the actions of a public body are ultra vires, the idea of legitimate expectation, substantive or procedural, can have no place.

[155] As a further aspect of abuse of power counsel for the petitioners have submitted that the petitioners have been prejudiced by the fact that the agreement was terminated without notice. Counsel for the respondents accept in principle that even if the agreement was ultra vires the petitioners should not be prejudiced by the lack of notice. The question is whether I can hold that such prejudice exists.

[156] Counsel for the petitioners have argued that such prejudice is bound to be the result of termination without notice. I do not agree. In my view, the question of prejudice is premature. It was open to the petitioners to place before the court detailed evidence vouching the nature and extent of the prejudice that they allege. As it is, there is no such evidence. I accept that in all probability the petitioners, or one or other of them, may have entered into transactions in the period between 6 April 2000 and 2 June 2000, and that they, or one or other of them, may have made commitments before 2 June 2000 which had effect thereafter. When the petitioners have made tax returns on the appropriate statutory basis, when the facts are fully known and when the respondents have made such assessments, if any, as they consider appropriate, the respondents will retain a discretion to avoid such prejudice to the petitioners and to mitigate their position suitably. If their treatment of that matter at that stage is not satisfactory to the petitioners, the petitioners will have a right of recourse to the court. However, I cannot say on the information before me that the petitioners have suffered or must inevitably suffer material prejudice as a result of the decision complained of.

(c) Convention rights
[157] Since I have held that the 1997 agreement was ultra vires of the respondents, a distinct point arises as to the applicability of the Human Rights Act 1998 (the 1998 Act).

[158] It is agreed that if the Act applies, the petitioners' rights under the 1997 agreement are a "possession" falling within Article 1 of the First Protocol (Human Rights Act 1998; Association of General Practitioners v Denmark 62 DR 226 (No 12947/87); Presssos Compania Naviera SA v Belgium (1995) 21 EHRR 301) and that even if the agreement was ultra vires, the decision letter deprived the petitioners of that possession (Pine Valley Developments Ltd v Ireland (1992) 14 EHRR 319).

[159] The petitioners submit that the deprivation of their possession was not carried out in pursuit of a legitimate aim and that the decision was disproportionate to the aim pursued. The respondents deny both of these propositions; but they argue in limine that the 1998 Act does not apply.

[160] The Act came into force on 2 October 2000 (Human Rights Act 1998 Commencement (No.2) Order 2000 [S.I. No. 1851]). It does not have retrospective effect (R v DPP ex p Kebeline [1999] 4 All ER 801, Lord Hobhouse at 858 c-f).

[161] Counsel for the petitioners argued that the 1998 Act applied because, although the decision complained of was taken before the Act came into force, the agreement itself fell to be implemented over a period of years thereafter. Therefore the petitioners' contractual rights would have been exercised each time they submitted a tax return in terms of the agreement. On this view, acts of deprivation of the petitioners' property would occur in the years 2000-2001 to 2002-2003.

[162] I do not accept this argument. In my view, the effect of the decision was to deprive the petitioners there and then of the opportunity to act in terms of the agreement. The termination of the ultra vires agreement took effect on 2 June 2000. Thereafter the petitioners could not submit tax returns in the remaining years in accordance with the agreement. In my opinion, if the decision complained of had constituted a breach of any rights of the petitioners, the breach occurred on the date of the decision. What has happened and what will happen in the remaining years of the contractual period are not breaches of the Convention, but merely the consequences of the anterior breach committed before Convention rights applied. If the petitioners had had a remedy of damages for breach of contract in respect of the termination of the agreement, that remedy would have been enforceable on or after 2 June 2000 in respect of the entire period of the agreement, even though the claim in respect of future years remained to be quantified (cp. Dunlop v McGowans, 1980 SC (HL) 73, Lord Keith at p. 81).

[163] I conclude therefore that the alleged wrong of which the petitioners complain, if it occurred at all, occurred prior to the coming into force of the 1998 Act and accordingly that the provisions of that Act, and of the Convention, on which the petitioners have relied do not apply in this case.

Interlocutor
[164] I shall sustain pleas in law 2, 3, 4 and 5 for the respondents in terms of senior counsel's motion; I shall repel the pleas for the petitioners, pleas 1 and 6 not having been insisted in, and refuse the Petition.