Tax Murders in the Building

Introduction

A few weeks ago, I flew into Heathrow and met up with someone in central London as I was passing through (to East Anglia as it happens).

I found myself having a coffee on a lovely late Summer’s Day in Hanover Square. This is when I took the picture of Vogue House above.

As it happens, Vogue House was sold by Conde Nast earlier this year[1].

However, as well as being home to people who I assume to be exactly the same as Edina and Patsy, Vogue House, or 1 Hanover Square, was once home to a murkier past.

It was the home to one of the first industrial scale tax avoidance outfits, Rossminster.

The age of Rossminster

Who were Rossminster?

Well tax fans, Rossminster, under the leadership of Roy Tucker and Ron Plummer (who had met at Arthur Andersen), became one of the most infamous tax avoidance firms in the UK during. Their natural habitat being Mayfair of the 1970s and early 1980s.

At a time when tax rates in the UK were extraordinarily high—reaching up to 83% for income and an eye-watering 98% on investment income—demand for tax planning strategies surged.

The exiled rock star was becoming a bit of a cliché (and catchy name for an album).

Why were Rossminster’s services in demand?

The 1970s was a time of economic stagnation, soaring inflation, and financial distress in the UK.

Successive governments increased tax rates, particularly on the wealthy, to combat the fiscal deficits caused by economic crises.

Further, Denis Healy had made good on his promise to prompt ‘howls of anguish’ and to ‘make the pips squeak of the rich.

The tax regime was punishing individuals faced an income tax rate that topped out at 83%, and for those with investment income, the effective marginal rate could reach 98%.

These sky-high rates sparked a surge in demand for ways to legally minimise tax liabilities. Rossminster were happy to oblige and capitalised on this demand by developing a series of highly aggressive tax avoidance schemes that pushed the boundaries of the law.

Rossminster were by no means the first of such firms. However, they quickly became the go-to firm for those looking to navigate what they perceived to be the increasingly hostile tax environment. Anecdotally, we are told of people queuing around the block to sign up for Rossminster’s schemes. Indeed, at least commercially, a number of their schemes were a success, signing up many clients.

However, it wasn’t long before Tucker and Plummer’s clients were clogging up both the Inland Revenue’s (as they were then) to-do lists and, later, backing up in the courts.

With that in mind, it is perhaps the ‘what happened next?’ that is the most interesting part of the Rossminster story.

Go on then, I’ll share it with you.

The Dawn Raids by HMRC

The turning point for Rossminster came in the very late 1970s.

As I’ve said, their schemes were by this time already clogging up the Special Commissioners and other courts. The Revenue were in need of Dyno-rod.

Prompted by a ‘whistle-blower’ the Revenue attempted to construct a criminal case against the firm.

On Friday 13 July 1979, the Revenue coordinated a 7am raid on multiple private and office addresses connected with the firm.

This included the offices of Rossminster – including Hanover Square – the personal residences of Tucker and Plummer and also the Tory MP – Tom Benyon who had connections with the firm (along with Peter Rees – he of the Rees Rules).

The Revenue pretty much seized any document they could lay their hands on at the Hanover Square offices – transporting them around a mile down the road to their own offices at Melbourne House

However, never a bunch to take things lying down, Rossminster launched an attack on two fronts. Firstly, the issued a claim for damages for seizing documents beyond those that would aid a fraud investigation.

More significantly, they also launched a Judicial Review into the issue of the search warrants, arguing that the Revenue had exceeded its powers (and without evidence of tax fraud). Indeed, the first time I ever heard of Rossminster, I confess, was in a public law lecture!

Although the Judge’s granted leave to appeal, the High Court was ultimately satisfied with the way that the tax authority behaved and dismissed Rossminster’s complaints.

But that was only the start of the drama.

An appeal was made by Rossminster to the Court of Appeal which was presided over by the inimitable Lord Denning. A Judge who, let’s just say, had form when it came to ruling in favour of the man in the street against the ‘abuses of the state’.

In typical style, Denning said:

“As far as my knowledge of history goes, there has been no search like it – and no seizure like it – in England since April 30 1763…”

Denning here was referring to the case of John Wilkes who was elected as MP for Aylesbury in 1757. In 1763 he had published a satirical pamphlet called ‘The North Briton’. We might think it as an early Private Eye magazine.

However, his attacks on the Government led to his arrest under a general warrant (one which did not name him specifically, just anyone who it was felt necessary to arrest if connected with the North Briton). The ensuing controversy aroused by the affair led to them being no longer used for the arrest of persons.

Clearly, the powers used by the Revenue irked Denning, particularly around the fact that the warrant was not particularised, including did not specify the offence they were suspect of:

“It may be said that honest people need not fear that it will never be used against them; that tax inspectors can be trusted, only to use it in the case of big, bad frauds. This is an attractive argument, but I would reject it. Once great power is granted, there is a danger of it being abused… it is the duty of the courts to construe the statute as to see that it encroaches as little as possible upon the liberties of the people of England”.

As such, Denning denounced the powers as being too Draconian and he would restrict them.

This meant that the Revenue’s fraud investigation was effectively suspended after just one month.

However, the respite was short lived when, despite eliciting a good deal of sympathy, and equal criticism of the Revenue, the Law Lords overturned Denning’s judgement in the Court of Appeal.

During the period between the Denning decision and the Law Lord’s upholding the Revenue’s appeal, files had been returned to Rossminster. This included Tucker’s diaries.

Remarkably, and perhaps somewhat conveniently, these were accidentally thrown away by Tucker’s secretary.

Ultimately, Tucker would receive a £1,000 fine for contempt of court over the diaries.

This was as good as it got for the Revenue when it came to the fraud case, which ultimately fell apart.

Rossminster continues to unravel

Despite the Revenue’s fraud case falling down, the saga had played out slowly and in public and, perhaps unsurprisingly, the Rossminster business was toast.

Further, things were looking no better for the pipeline of Rossminster scheme users that were hitting the Courts.

Tax fans might just have heard of the case of a Lincolnshire farming company called W T Ramsay Ltd. And probably not as a result of their prize marrows[2].

The Ramsay family were clients of Rossminster and used one of their schemes, the Exempt Debt Scheme, to create a Capital Gains Tax loss of £175,000. The details of the scheme were perhaps somewhat convoluted – and unimportant for these purposes – but the aim was quite straightforward. Create the aforementioned capital loss and offset it against the gain in respect of which Plummer and Tucker had been engaged.

The scheme had completed in March 1973, and it was not until 8 Years later, in March 1981, that Lord Wilberforce found himself looking at the scheme.

Perhaps it was fitting that a specialist in international airspace law, would preside over such a stratospheric tax case.

Lord Wilberforce quickly picked out two significant features:

• First, there was the “clear and stated intention that once started, each scheme shall proceed through the various steps to the end”; and
• Secondly, the source of the money involved. Much of it was provided by a loan form a finance house with only the customer’s security.

As Wilberforce reiterated “It is candidly, if inevitably, admitted that the whole and only purpose of each scheme was the avoidance of tax”.

The Revenue had asked him to take a new approach and “to treat [the preordained steps] as fiscally, a nullity, not producing either a gain or loss.”

For those who are not familiar with the development of judicial interpretation in this space – those with reasonably fulfilling lives – this differed from the traditional approach. Wilberforce helpfully addressed each of the significant decisions in this area as he went.

Famously, Lord Clyde, in the Ayrshire Pullman case[3], involving an entrepreneurial Scottish bus company boss, stated:

 “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel in to his stores…………The Inland Revenue is not slow to take every advantage which is open to it under the taxing statutes for depleting the taxpayer’s pocket. And the taxpayer is in like manner, entitled to be astute to prevent, so far as he honestly can the depletion of his means by the Revenue.” 

Indeed, Wilberforce agreed stating that “A subject is entitled to arrange his affairs so as to reduce his liability to tax. The fact that the motive for a transaction may be to avoid tax, does not invalidate it unless a particular enactment so provides”.

Next up was the Duke of Westminster[4] and his Dukeness’ gardeners to whom, in order to get a tax deduction, he paid them under deed of covenant rather than by salary. The Duke was a diamond geezer, like that.

Here, by a majority of four to one, the Lords decided that the courts could not disregard the form of the transaction and substitute their own view of substance, unless it was alleged and proved that the form was a sham and was not intended to be given legal effect. The court had clung on to the traditional view that the legal form of the arrangements trumped the substance.

Wilberforce addressed the so-called Westminster doctrine by stating that the ‘form over substance’ argument had its limits. It did not compel the courts to look at a document or a transaction with “blinkers, isolated from any context to which it properly belongs”.

However, Wilberforce was not the first one to look at the courts approach with a critical eye. Indeed, Lord Templeman, some of the cases before he was Lord Templeman, was always up for a joust with the tax avoider.

Indeed, in 1975, Templeman had ruled on the Julie Christie case[5]. The scheme was convoluted, to say the least, but its objective was to turn Christie’s significant earnings into capital receipts for tax purposes. As would be the case now, saving significant tax in the process.

Templeman J, with a sharp turn of phrase, described the position as follows:

‘The trick in the present case is that the £475,000 disappeared. It did not belong to anybody when the performance began, and it did not belong to anyone when the performance ended. It was invented by Miss Christie’s advisers for the purpose of performing a circle of payments…If it were not for the trick with £475,000, no-one would suggest that the moneys received by the taxpayer company were capital. Once the trick is exposed the moneys are seen to be what they are, namely annual profits or gains.’

Of course, Wilberforce would also be aware that Templeman had also turned his acerbic wit on the W T Ramsay case in the earlier Court of Appeal case. Templeman observed:

“…yet another circular game in which the taxpayer and a few hired performers act out the play; nothing happens save that the Houdini taxpayer appears to escape from the manacles of tax … The object of the performance is to create the illusion that something has happened, that Hamlet has been killed and that Bottom did don an ass’s head so that tax advantages could be claimed as if something had happened…The critics are mistakenly informed that the play is based on a classic masterpiece called “The Duke of Westminster”.”

Templeman had also unfurled his tax avoidance wrecking ball in a case called Rawling:

“In my judgement the taxation consequences follow the effect of the contract. So far as the taxpayer is concerned, he was bound to make neither a gain nor a loss, and therefore made neither a non-chargeable gain nor a deductible loss… He began with nothing, by contract he gained nothing, and lost nothing and ended with nothing. The effect of the contract was that he paid [a fee] for an argument which proves to be worth nothing.”

Wilberforce successfully distinguished set the Ramsay matter aside from Westminster by deeming that “The Westminster case did not involve a disappearing trick or a fake price”.

He had also been involved in a case (Chinn v Collins[6]) which involved a contingent interest scheme promoted by Rothschilds. This was another pre-ordained tax avoidance scheme – again designed to save CGT.

The Law Lords had ruled this was a tax avoidance scheme and didn’t work. As it was pre-ordained, the scheme could be looked at as a whole. However, the decision was a narrow one.

In Ramsay, Wilberforce was being asked to develop a much broader principle. A significant reason for this was the deluge of cases that the courts were facing – many of which had their origins in Hanover Square.

So, it was left to Wilberforce to create the Dyno-rod. Wilberforce did not disappoint:

“While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still… To force the courts to adopt, a step-by-step, dissecting approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process.

In terms of the Ramsay case Wilberforce ruled that “The true view, regarding the scheme as a whole, is to find that there was neither a gain nor loss, and so I conclude.”

With that, the prospects of the vast majority of Rossminster schemes were in the bin.

Wilberforce told the commissioners he did not expect to see any more tax schemes for a while.

Of course, although the story ends at this point for Rossminster, Ramsay was not, perhaps remarkably, the final word on judicial interpretation when it comes to tax avoidance. That is perhaps left to Arrowtown[7].  Here, judgement after judgement in the House of Lords was distilled into one elegant approach in that the courts simply look at the facts ‘realistically’ and apply the statutory tax law ‘purposively’.

Despite that, there were plenty of other firms that were happy to pick up the baton from the likes of Rossminster well into the 2010’s. There would be plenty more tax murders in buildings for a while to come.

Conclusion

Of course, Hanover Square is not the only building to be inextricably linked to tax avoidance.

More recently, for example, the former Chelsea Barracks was purchased by Project Blue, a subsidiary of the Qatari government. The transaction was subject to long running litigation around the SDLT scheme used during its purchase.

Of course, as I have said above, there were many others who stepped into the vacuum created by the Rossminster implosion.

There is something captivating about Rossminster and Hanover Square. It’s links with a time when popular culture was singing about “taxman’s taken all my dough” and “should five percent appear too small, be thankful I don’t take it all”.

But Rossminster had it all. Dodgy schemes, celebrity clients, dawn raids and a botched fraud investigation. The big beasts of the legal system. Farmers, bus drivers and a grand old Duke’s gardeners.

Guy Ritchie, if you’re reading, and want to make the film Tax Murders in the Building, I’m on board for the script.

I’ll be waiting by the phone.

 

[1] I had intended to write this article then but, well, you know.

[2] They were market gardeners, so they could have had prize marrows. Prove me wrong.

[3] Ayrshire Pullman Motor Services and Ritchie v IRC [1929] 14 TC 754

[4] IRC v Duke of Westminster [1936] 19 TC 490

[5] Black Nominees Ltd v Nicol [1975] 50TC229

[6] Chinn v Collins (HMIT)(1980) 54 TC 311

[7] Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46