HM Inspector of Taxes v Hitch & Ors

A transaction is a sham where the parties share a subjective intention to create rights and obligations different from those which their acts or documents appear to create, and intend to give third parties a false impression. The court may consider external and circumstantial evidence, including subsequent conduct. Artificiality, uncommercial terms, later variations, or partial performance do not by themselves prevent a finding of sham.

A composite instrument may be sham only in a divisible part. The common intention requirement does not require every party to the whole instrument to participate where it implements separate transactions. On an appeal by case stated, the court may correct an omitted factual inference where the tribunal's other findings permit only one reasonable conclusion.

The taxpayers owned Abbey Farm and entered arrangements intended to dispose of its land through companies controlled by a tax-planning solicitor. The Special Commissioners held that a 1984 agreement granting a long lease to Conteglade, a related assignment, and recitals in a later deed were shams. They found that the solicitor and his companies acted as agent and banker for the family under a wider, undisclosed financial arrangement.

Jonathan Parker J allowed the taxpayers' appeal by way of case stated under section 56 of the Taxes Management Act 1970. He concluded that the Commissioners' finding was unreasonable and that they had made no finding that clause 2 of the 1984 deed, concerning the green land, was a sham.

The Revenue appealed. The central issues were whether the Commissioners' finding was reviewable, whether a composite deed could be sham only in part, and whether the Court of Appeal could supply the omitted finding about clause 2.

1. Appeal allowed unanimously. Lady Justice Arden, with whom Sir Martin Nourse and Lord Justice Kay agreed, held that the Special Commissioners were entitled to infer that the 1984 agreement did not express the parties' true arrangement. Their conclusion was therefore not unreasonable under Edwards v Bairstow [1956] AC 14.

2. The applicable sham test was that in Snook v London & West Riding Investments Ltd [1967] 2 QB 786. The inquiry is subjective and may use external evidence, including the parties' later conduct. An artificial or uncommercial arrangement, or a later departure from its terms, does not itself make it a sham. Nor does partial performance preclude a sham where the performed terms also form part of the true arrangement.

3. On the Commissioners' findings, the family had an immediate entitlement to sale proceeds and the solicitor was their agent and banker. Benefits provided to family members, the unexplained 10 per cent fee, the absence of consideration for releases of land, and the parties' conduct were capable of supporting the conclusion that an undisclosed arrangement superseded the ostensible lease and annuity arrangements.

4. The Commissioners had made no express finding about the 1984 deed. However, an omission to draw an inference is reviewable on the same basis as drawing one. Where, in light of the findings already made, only one conclusion could reasonably have been reached, the appellate court could supply that conclusion rather than remit the matter.

5. A single instrument may be sham in a divisible part. The common-intention requirement does not require every party to a document implementing separate transactions to be party to the sham. Thus clause 2 of the deed, concerning Conteglade and the green land, was capable of being sham although clause 1, involving Crest and the red land, was valid.

6. There was no evidence that the parties had abandoned the sham arrangement before executing the deed. The only reasonable finding was that clause 2 was sham for the same reasons as the 1984 agreement. Subsequent conveyances did not prevent good title passing because the relevant parties joined in them. The case stated and assessments were remitted to the Special Commissioners, with costs to the Revenue here and below.

• Court of Appeal (Civil Division) — allowed the Revenue's appeal and held that the Special Commissioners should have found clause 2 of the 1984 deed to be a sham.
• High Court, Chancery Division (Revenue) — Jonathan Parker J allowed the taxpayers' appeal by case stated and set aside the Special Commissioners' conclusion.
• Special Commissioners — held that the 1984 agreement, the assignment, and specified recitals in the 1984 deed were shams, and discharged alternative assessments.