© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Legal effects of documents
GENERAL PRINCIPLES​
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- Ordinarily express terms not overridden except by fraud, mistake or sham
"[218] Pankhania was a case involving joint ownership of property. The claimant sought an order for sale of a residential property registered in the joint names of himself and his aunt. The transfer to them contained an express declaration of trust to the effect that they were tenants in common in equal shares. The aunt claimed that there was a family understanding that she was to be the sole beneficial owner, and that the claimant was included as a joint purchaser only so that his salary could be taken into account for mortgage purposes. The Court of Appeal held that the existence of the express trust precluded any finding that there was a constructive trust of the kind discussed in Stack v Dowden [2007] UKHL 17. Patten LJ referred at [17] to the possibility of a declaration of trust being set aside for fraud, mistake or undue influence, but said that nothing of that kind had been alleged. There was no evidence that the express trust was inserted by mistake or that the parties intended to execute a transfer in different terms.
[219] Patten LJ also considered the concept of sham as described in Snook, saying “what is, I think, clear is that it must be shown both that the parties to the trust deed…never intended to create a trust and that they did intend to give that false impression to third parties or to the court”. In this case there was no deception, and the fact that the parties and their family subjectively intended something different was not sufficient to prevent the express trust taking effect simply on the basis that it did not accurately record what they intended to achieve ([22]). Mummery LJ agreed that there was no room for inserting a constructive trust in the absence of a vitiating factor such as fraud or mistake ([27]).
[220] We disagree with [HMRC] that Pankhania has no relevance because it concerns whether there was a trust rather than what its terms were: there was clearly a trust on both parties’ cases. In our view Pankhania illustrates the point made in Autoclenz that subjective intentions are not determinative, and that ordinarily the express terms of a document, whether a contract or a trust, are not to be overridden except in certain circumstances, in particular fraud, mistake or sham." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Trust discretion real even if not presently intended to be used
"[229] In response to a question from the Tribunal, [HMRC] accepted that in order to determine that there was a bare trust the witnesses would need to have believed that the discretions apparently conferred on the Trustee did not actually exist. But we have accepted the evidence of the witnesses that they understood that the Trustee had discretion as a matter of law, even if in practice their expectations were that those discretions would be exercised in a particular way. Similarly, in the case of the loans the parties would need to have believed that the provision purporting to allow the Trustee to require repayment was not effective and could not be enforced. Again, we have accepted the evidence of the witnesses that they did understand that repayment could be required, even though in practice there was no present intention to call in the loans. We agree with Mr Ewart that in the circumstances of this case it is hard to see how Mr Vallat’s submission could succeed in the absence of dishonesty." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Not to ignore contractual terms simply on the basis they were inserted to avoid statutory consequence
"[230] As already discussed, Lord Templeman in Antoniades and Arden LJ in Bankway relied on a different approach in reaching their conclusions, namely that the relevant provisions amounted to an attempt to contract out of a mandatory statutory scheme. Arden LJ referred at [43] to a number of other examples in different contexts, but concluded that the key question was what was the “substance and reality” of the transaction. [HMRC] submitted that the same principle applied to tax legislation: the parties could not avoid the tax consequences of their arrangements by inserting terms which were intended to avoid statutory consequences and which they did not seriously intend to have effect.
[231] We do not agree. [HMRC] was unable to refer us to any case where this approach has been applied to tax legislation. If it was correct then it is highly surprising that it has never been applied in any of the many tax avoidance cases that the tribunals and courts have decided in recent years. In principle, it is clearly possible for taxpayers to arrange their affairs so that they enter into transactions that give rise to less tax than other transactions they might have entered into, and in that sense it is incorrect to say that taxpayers may not “contract out” of tax legislation. Clearly tax legislation will be interpreted purposively, and as is well known a realistic view of the facts must be taken to see whether the particular statutory provisions in question apply. But this is what is generally referred to as the Ramsay approach. Importantly, and in the absence of sham, that approach respects the general legal effects of the transactions that the parties have entered into, even in circumstances where it is concluded on a purposive interpretation that the particular tax advantage sought by the taxpayer is not available." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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Construe contract against relevant background​​
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- Identifying what consideration is paid for may depend on context
"[117] Both parties referred to the Upper Tribunal decision in Sjumarken v HMRC [2017] STC 239 (“Sjumarken”). Both relied on paragraph 38 where Judges Berner and Falk (as she then was), having reviewed the authorities, found that it is clear that the question of what constitutes consideration, and what consideration is given for, depends “on the correct construction of the relevant agreement”.
[118] [The taxpayer] also relied on Sjumarken because at paragraphs 38 and 39 Aberdeen Construction Group Limited v IRC [1978] STC 127 (“ACG”) was described as the leading case and [the taxpayer] argues that it bears a close analogy with this case. Judges Berner and Falk explained that in ACG shares had been sold for £250,000 but subject to conditions. The most important of those conditions required the seller to waive a loan of £500,000. The House of Lords concluded that the shares had little value without the waiver so the price paid was for both the shares and for the waiver of the loan. That conclusion was reached by interpreting the contract “as any contract must be, against its background”.
[119] Judges Berner and Falk went on to cite with approval Lightman J at page 136 in Spectros International plc v Madden [1997] STC 114 (“Spectros”) where he said, under the heading “Principle”, that:-
“What is the relevant consideration may depend upon the terms and form of the transaction adopted by the parties. The parties to a proposed transaction frequently can achieve the same practical and economic result by different methods…. The law respects the freedom of the parties to a transaction to frame and formulate their agreement as they wish and to suit their own legitimate interests (taxation and otherwise) and, so long as the form adopted is genuine, and not a sham, honest, and not a fraud on someone else, and does not contravene some established principle of public policy, the court will give effect to the method adopted. But as a corollary to this freedom, where the parties have chosen one method, it is not open to them to invite the court to treat as adopted some other method because it is more advantageous to them, because it leads to the same practical and economic result and because it is the more obvious and sensible method to have adopted. If the question is raised what method has been adopted and the transaction is in writing, the answer must be found in the true construction of the document or documents read in the light of all the relevant circumstances. If the terms of the documents are clear, that is the end of the question. If however there is any doubt or ambiguity upon the language used read in its proper context, it may be possible to resolve that doubt or ambiguity by reference to the inherent probabilities of businessmen entering into the transaction in one form rather than another.”
[120] At paragraphs 41 and 42, they pointed out that that quotation had been cited with approval by Henderson J in Revenue and Customs Commissioners v Collins [2009] STC 1077 who had also referred to Lightman J’s summary of principles derived from ACG which included that:-“… any written contract must be read as a whole construed in the light of all relevant circumstances which include the value of the assets disposed of and business sense”.
[121] I have added emphasis because in his Skeleton Argument Mr Sykes had correctly pointed out that Chartbook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 is often cited as authority for the proposition that pre-contractual negotiations should not be taken into account for the purposes of contractual construction. He relied on Lord Hoffmann at paragraph 42 where he said:-
“42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.”
[122] He then went on to argue about that in the context of valuation but I am not concerned with that in this decision. The point I make is that when I consider the history, the Terms, the emails, the draft SPAs and the Open Issues I am doing so in order to consider all relevant circumstances." (Moore v. HMRC [2023] UKFTT 399 (TC), Judge Scott)​
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SHAM​​
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- Documents do not reflect the arrangement the parties intended to be bound by
"[120]...Ms Brown’s submission is that what Ms McCarthy put to Mr Northwood was that the documents were artificial, which is not the same as putting that it is a sham or dishonest, referring to Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63 at [67] where Arden LJ said:
“the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.”
[121] Both parties referred to the decision in Hockin. With regard to the issue of sham in that case, the UT stated:
“24. We agree with Mr Prosser that the FTT's finding of sham is a finding of fact and that we may interfere with it only on Edwards v Bairstow grounds (see Edwards v Bairstow [1956] AC 14 itself and the long line of authority following it). We are, however, conscious that a finding of sham, even if it does not imply dishonesty in the ordinary sense, necessarily requires the fact-finding tribunal to be satisfied of an intention to deceive or, at least, to make things appear other than as they are. This is a point to which we shall need to return; for the moment we merely observe that, because of this consideration, we have examined the detail of the FTT's findings with particular care.
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29. Mr Bremner is correct to say that the FTT did not make any finding of dishonesty; on the contrary, it described Mr Hardy, at [34], as "basically honest". We do not, however, and despite the note of caution we have sounded, consider that a finding of sham necessarily implies dishonesty. The pretence here was that 96 or 99 might have been spent on research, but the parties did not go further by pretending that it had in fact been spent on research. This was a tax avoidance, or deferral, scheme, and not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up. One might disapprove of what was done; but we do not consider it could be said to have crossed the threshold into dishonesty.”
[122] Ms Brown expressed great difficulty with the distinction between an intention to deceive and an intention to make things appear other than as they are. Ms Brown’s submission is that what was alleged and found in Hockin was that the document was drafted with an intention to make things appear other than as they were, namely that one of two things might happen when it was really only possible that one thing might happen, which is far from what is being alleged in this case. Ms Brown submits that Hockin found there to be two sorts of sham, an intention to deceive, which must require dishonesty, or an intention to make things appear other than they are and that can be described as not requiring dishonesty in the ordinary sense. Ms Brown contends that HMRC's case is clearly one of dishonesty. It is not a case of half concealment, which was the case in Hockin. Ms Brown submits that HMRC make a number of statements as to what the alleged real purpose of Mr Northwood's arrangements were, such as that the whole thing was a work of fiction, the only purpose of the arrangements was tax avoidance, the only person who was intended to benefit was Mr Northwood, contrary to the appearances of various documents such as the trust deed, Mr Northwood retained control of the funds at all relevant times and that the funds were never subject to the trust, were never held or intended to be held by anyone in a fiduciary capacity and remained Mr Northwood's property and in his control. This therefore is not an allegation that Mr Northwood said “well, we might do this or we might do that” when Mr Northwood clearly only intended to do one thing. The allegation, Ms Brown submits, is that Mr Northwood created documents to give one appearance and then did something completely different. Ms Brown contends that is an allegation of dishonesty and it is not open to the Tribunal to make a finding of dishonesty, because those allegations of dishonesty have neither been properly pleaded nor properly put to Mr Northwood in cross-examination.
[123] I have considered Ms Brown’s arguments regarding pleading sham at [42] to [49] above. I do not accept Ms Brown’s submission that the way in which HMRC have put their case requires proof of dishonesty. It is clear that HMRC do not consider Mr Northwood to have been honest. However, in my view, this case falls within the category described in Hockin as a pretence that does not cross the threshold into dishonesty. My finding is that the RT documentation was dressed up to achieve a tax benefit but this was “not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up”.
[124] I also do not agree that HMRC did not put the sham allegation to Mr Northwood in cross-examination. The questions put to Mr Northwood did not simply suggest the situation where parties made an agreement which was unfavourable to one of them, or artificial. The questions were put in the context of a situation where the parties intended some other arrangement. I therefore find that the allegations were put fairly and squarely to Mr Northwood and that he was given an opportunity to rebut them." (Northwood v. HMRC [2023] UKFTT 351 (TC), Judge Sukul)
"[201] In our view the sham principle, as explained in Snook, Hitch v Stone and now Brain Disorders, has no application in this case. The principle requires a common intention to create different rights and obligations from those set out in the documents, and an intention to give a false impression to third parties. We have found that the parties did not intend to create different legal rights or obligations, and did not intend to give a false impression. Our overall assessment of the evidence is that the relevant parties understood and intended that the trusts were discretionary trusts, and that the loan agreements documented loans which could be required to be repaid. The situation in this case is very different from that considered in Brain Disorders, where what was being disregarded as a sham was a provision which neither party intended to operate and which had been inserted to give an incorrect impression of the nature of the arrangements. We agree with Mr Ewart that in this case the parties purported to, and did, operate the terms of the discretionary trusts that HMRC seeks to strike down, and that loans were in fact made under the terms of the written loan agreements, which included provision under which repayment could be required by the Trustee." (Landid Property Limited v. HMRC [2017] UKFTT 692 (TC), Judge Falk)
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- Sham v. mislabelling
"[67] [HMRC counsel] submits that it was never part of HMRC's case that the Sale Agreement is a sham. But Mr Davey submits that there has been "mislabelling" of the Loan Agreement and the Sale Agreement, and [HMRC] referred me to the decision of the House of Lords in AG Securities v Vaughan and others; Antoniades v Villiers and another [1990] 1 AC 417...
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[71] I agree with [HMRC's] submissions that the Loan Agreement and the Sale Agreement have been mislabelled. There is an air of unreality about them read as separate agreements in the light of all the circumstances. I find that the true effect of the Sale Agreement and the Loan Agreement (when read together, and having taken account of the true intentions and actions of the parties), was that Mr Herbert agreed to sell the House to the Trustees, with completion to occur (and the consideration to be paid) on notice following his death.
[72] The true effect of the subsequent Deed of Assignment was that Mr Herbert gifted to his three children his benefit under the composite sale and loan agreement (namely the right of his estate to be paid the consideration on completion after his death)." (Shelford v. Revenue [2020] UKFTT 53 (TC), Judge Aleksander)
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- Not a sham even though some obligations undischarged
"[74] Whilst we understand the Respondents’ scepticism in this regard, given the events which have occurred, we do not agree that the documents give rise to rights and obligations in law which differ from their terms.
[75] We have found as a fact that the parties did intend the scheme documents to have the effects which they purported to have. We say that notwithstanding the fact that there are various obligations under the scheme documents which still remain undischarged or the fact that the events which have occurred are inconsistent with those obligations. As we have already said, we do not attribute those matters to any intention on the part of the parties that the documents should not have the effects which they purported to have. Moreover, no allegation of sham has been made.
[76] As such, we have concluded that the true legal effect of the scheme documents was in accordance with their form and that they gave rise to the rights and obligations set out in them.
[77] For instance, we think that it is incorrect to say that the position in relation to ownership of the Property was unaffected by the execution of the Sale Agreement. Mrs Elborne’s executors, when they received the sale proceeds of the Property from Mr and Mrs Machin, did not hold the sale proceeds for the Children as beneficiaries under the will. Instead, for reasons which we will rehearse in the section of this decision which follows, we believe that the sale proceeds, when they were received, were impressed with a constructive trust and held by the executors for the trustees of the Life Settlement. The Sale Agreement therefore had a meaningful and lasting legal effect." (Executors of Elborne v. HMRC [2023 UKFTT 626 (TC), Judge Beare)
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- Would be exceptional for a one man company carrying on a genuine business to be a sham
"[34] We cannot leave Lee's case without a comment on Lord Morris's observation that it had not been, nor could be, suggested that "the company was a sham or a mere simulacrum" (our emphasis), an observation that has been discussed in the later authorities to which we shall come. It is a difficult expression because a registered company has legal personality. However, we consider that Lord Morris was probably there using the words "sham" and "mere simulacrum" as synonyms for essentially the same idea and had in mind the limited types of case in which an individual (as in Lee's case) owns all the shares in a company and the courts have considered it right for policy reasons to "pierce the veil" of incorporation and treat the company as the alter ego of the controlling shareholder, that is to treat them as one. In such a case, any suggestion that the individual had a service contract with the company would not succeed.
[35] It appears to us that such circumstances, at least in a case in which the company is a genuine trading company, would be exceptional. No such question arises in these appeals, nor did it arise in the authorities to which we were referred. We propose therefore to say no more about it..." (Secretary of State for Business v. Neufeld [2009] EWCA Civ 280, Rimer, Rix, Toulson LJJ)
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- Careful scrutiny of whether employment contract with sole director/shareholder is a sham
"[35]...On the other hand, as Bottrill in this court makes clear, a preliminary question which may more commonly arise in a case in which a controlling shareholder claims to have a service contract with his own company will be whether the putative contract (rather than the company) is genuine or a sham. That is because the reality in such cases is that the controlling shareholder will have been the directing mind and will behind the purported creation of his own contract. That factor will be likely in many cases to require a careful scrutiny of the claim that a valid employment contract has been created.
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[37] In most cases in which there arises a question as to whether the claimed employment contract is a sham, there will be what purports to be a formal written contract, or at least a board minute or memorandum purporting to evidence or record the contract: a "shammer" is hardly likely to rest his case on the claim that his contract was an oral one. An inquiry into whether any purported contract does amount to a sham does not limit the court or tribunal to a consideration of the evidence as at the time of its making. It will usually also be highly material to see what the company on the one hand and the shareholder/director on the other have actually done under the purported contract: that will be likely to shed light on its genuineness or otherwise. In principle, however, a similar problem could arise where the alleged employment contract is an oral one, for it might be said in response that the basis on which such a contract is alleged is a mere pretence and is false. This court has recently considered the concept of a sham in an employment law context: Protectacoat Firthglow Ltd v. Miklos Szilagyi [2009] EWCA Civ 98." (Secretary of State for Business v. Neufeld [2009] EWCA Civ 280, Rimer, Rix, Toulson LJJ)
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