QUEENs BENCH DIVISION
REGINA v. INLAND REVENUE COMMISSIONERS, Ex parte
M.F.K. UNDERWRITING AGENTS LTD. and Others
See Law Reports version at  1 W.L.R. 1545
COUNSEL: Jonathan Sumption Q.C., Colin Rimer Q.C., David Milne Q.C., David Pannick and Charles Flint for the applicants.
Michael Beloff Q.C., Alan Moses, Nicholas Warren and Alison Fosterfor the Inland Revenue Commissioners.
SOLICITORS: Ashurst Morris Crisp; Carter Faber; Barlow Lyde & Gilbert; Titmuss Sainer & Webb; Clyde & Co.; Solicitor of Inland Revenue.
JUDGES: Bingham L.J. and Judge J.
DATES: 1989 May 3, 4, 5; July 7
Application for judicial review.
[*1548] Cur. adv. vult.
7 July. The following judgments were read.
BINGHAM L.J. In the ordinary course of their business Lloyds underwriters receive payments of premium from which in due course claims must be paid. There is necessarily a time lag after premiums are received before claims are made and established. For a period of two years after the close of an underwriting year underwriters are accordingly required to hold funds representing premium payments in trust funds for the potential benefit of policy-holders.
Premium income received in United States dollars is required to be held in U.S. dollar accounts or invested in U.S. dollar securities. Premium income received in Canadian dollars is subject to a similar requirement, the account or investment being in Canadian dollars. Premium income received in all other currencies, including sterling, is held in a sterling account or invested in sterling securities.
Since the premium income received by Lloyds syndicates is very large, it naturally follows that large funds become available for investment in the respective trust funds. Prudence requires that in investing these funds certain principles be observed. First, the fund must be readily accessible in case they are needed to meet claims. Long dated securities, unless readily marketable, will not provide the necessary liquidity. Secondly, the fund must, for the protection of policy-holders, be protected against devaluation through inflation. Thirdly, and for the same reason, investments must be secure and not speculative. There is also another, entirely legitimate, consideration. Such parts of the trust funds as are not needed to pay claims or meet expenses are available for distribution to members of the syndicates. The proceeds of the trust fund investments then become taxable in members hands. It is in the interest of members that their tax liability on these proceeds should be minimised. Throughout the period with which this case is concerned the rate of tax charged on income in this country was higher than the effective rate charged on capital gains. So it was advantageous to syndicate members, if the result could be achieved whilst observing the investment principles described above, so to invest the trust funds that they yielded capital gains rather than income.
Investment of the sterling trust funds presented no problem. Index-linked gilt-edged stocks were available which were readily marketable, protected against inflation and secure. While the low coupon interest payable on such stocks was treated as income for tax purposes, there was never any doubt but that the indexation uplift in the redemption [*1549] value of the stock was to be treated as capital and any gain taxed as a capital gain.
Until April 1986 no similar index-linked security denominated in American or Canadian dollars was available for the investment of the American and Canadian dollar trust funds. Changes in United Kingdom legislation had made pressing the need for such a medium of investment. It had been the practice to buy American and Canadian interest-bearing securities early in the interest period and sell them at an increased price with the benefit of accrued interest shortly before the interest date, the price difference being taxed as a capital gain; but the Finance Act 1985 in sections 73 to 75 provided that accrued interest should be charged to income tax in the hands of the transferor and not to capital gains tax. The Finance Act 1984 (section 36 and Schedule 9) provided that where securities (deep discount securities) bore low or zero rates of interest but were issued at a corresponding discount to the redemption value, the gain realised on sale as well as redemption became chargeable to income tax and not, as previously, capital gains tax.
Other fiscal changes made at the same time served to increase the attractiveness of index-linked bonds to members of Lloyds syndicates or, more accurately, their managing underwriting agents and investment advisers. Section 68 of the Finance Act 1985 gave indexation relief against capital gains tax in respect of assets held for less than one year. This was of particular value to Lloyds syndicates, which are formally dissolved and re-formed at the end of each calendar year, the assets of the old syndicate being transferred to the new. Furthermore, the provisions governing indexation relief had the effect of reducing or even eliminating the charge to capital gains tax on the indexation uplift reflected in the sale price or redemption value of the securities. An express exemption in section 36(2)(b) of the Finance Act 1984 provided that this indexation uplift was not chargeable to income tax as a deep discount under the section. Nor was it chargeable to income tax apart from section 36 of the Finance Act 1984 unless it was in reality interest, that is, a reward for the use of money rather than compensation for depreciation in its value. Index-linked securities denominated in American or Canadian dollars would provide an attractive medium of investment of the respective trust funds if - and the condition must be emphasised - the indexation uplift reflected in the sale price or redemption value of the securities was taxable here as a capital gain and not as income.
Between April 1986 and October 1988 some 62 issues of index-linked bonds were made, mostly in American but some in Canadian dollars. They were widely bought by Lloyds underwriting agents on behalf of their sydnicates, the total investment being said to be some £2 billion. Others unconnected with the Lloyds market also invested, but on a smaller scale.
There are before the court five applications for judicial review made by Lloyds underwriting agents and syndicates. The facts differ somewhat from case to case but in each the central complaint is the same. In each case the agents bought American or Canadian index-linked bonds on (it is said) an indication, assurance or representation by the Inland Revenue that the indexation uplift reflected in the sale price or redemption value of the bond would be taxed as a capital gain and not as income. By a decision communicated on the 27 October 1988 the Inland Revenue resolved that (save in the case of three specific issues of bonds, which I shall identify) the indexation element should properly be taxed as [*1550] income, and assessments in accordance with that decision have since been made. The applicants attack the revenues decision, and the assessments based upon it, as being unfair, inconsistent and discriminatory and so an abuse of power.
In addition to the five applications before the court there are some 29 other applications to similar effect. The five present applications have been selected by consent as raising the legal and factual issues which must be determined to dispose of all 34 applications, but the other 29 applicants have not formally agreed to be bound by the outcome of these five applications. We are told that in all 34 applications some £60m. of tax is at stake.
It is common ground that we are not in these applications concerned to decide the correct tax treatment of these American and Canadian bonds. Should the applications fail the statutory machinery for resolving disputes as to tax liability will be activated. This court is concerned with a different, public law question, which is whether the revenue by its words and conduct had precluded itself from even seeking to tax the indexation uplift element on these American and Canadian bonds as income rather than as a capital gain.
It is convenient first to summarise the general history leading up to these applications, then to give particulars of the five applications, then to summarise the contentions of the parties. I shall then define what I consider to be the correct approach in law and apply it to the facts of these applications.
A. The facts
On 25 June 1982 the revenue issued a press release entitled Deep discounted and indexed stock. The first four paragraphs dealt with deep discounted stock and expressed the revenues view that the premium over the discounted purchase price payable on redemption should be regarded as interest and taxed as such. A warning of forthcoming legislation was given. Paragraph 5 read:
The Inland Revenue also wish to clarify the tax position regarding corporate stock issued on an indexed basis and bearing a reasonable commercial rate of interest. Companies are already free to issue such stock subject to the arrangements described in paragraph 1. Although the precise tax treatment must have regard to the terms of any contract between the parties, in general (a) if the indexation constitutes a capital uplift of the principal on redemption to take account of no more than the fall in real value because of inflation the lender, other than a bank or financial concern, will be liable only to capital gains tax on the uplift (subject to the provisions of the 1982 Finance Act). The borrowing company will not be able to claim a deduction for this uplift against its profits for corporation tax purposes. (b) If the indexation applies to the interest element and additional sums of interest are rolled-up to be paid with the capital on redemption the indexed and the rolled-up interest, when paid, will be given the same tax treatment, both for the borrower and for the lender as non-indexed interest. The legislation described in paragraph 3 above will apply to such stock also.
This statement is certainly consistent with, and may well reflect, the judgment of Lord Greene M.R. in Lomax v. Peter Dixon & Son Ltd.  K.B. 671: both the press release and the judgment make clear [*1551] that the circumstances of a particular contract will determine whether a payment is to be regarded as interest, and therefore income, or capital.
After this press release and after the fiscal changes to which I have already referred, there took place considerable correspondence and two meetings involving banks, solicitors, accountants, underwriting agents investment advisers and certain officials of the Inland Revenue. It was in the course of these exchanges that the statements were made upon which the applications are founded. I think it is possible to discern seven separate series of communications, some much more significant than others. A narrative summary is, however, liable to mislead if it is not remembered that at certain stages several of these series of exchanges were taking place at the same time, although usually with different officials of the revenue. The fact that a series of independent approaches was being made was unknown to the revenue and, save as described below, to the applicants.
On 14 May 1985 a vice-president of Citibank wrote to Mr. Templeman, a principal inspector of taxes in the Technical Division of the Inland Revenue with special responsibility for the affairs of banks, financial concerns and Lloyds underwriters. The caption of the letter referred to Lloyds syndicates and to Lloyds American trust fund investments. The letter made plain that Citibank were considering the issue and marketing of U.S. index-linked stocks, which they believed could be of interest as a trust fund investment provided that the syndicates can be satisfied as to the tax position. Details of the proposed bond were annexed to the letter in draft, from which it appeared that the indexation was to be governed by the U.S. Consumer Price Index (C.P.I.), that a three year maturity was envisaged and that a 4 to 5 per cent. annual coupon rate was to be provided for. No ceiling (or cap) on the overall return of the bond was suggested. Citibanks letter sought confirmation that the gains on disposal, end year revaluation or redemption would be treated as capital gains: It is obviously critical to the calculation of the overall return that there should be certainty on this point . . . Citibanks letter was marked most urgent and asked for a very early response.
In his reply of 24 May 1985 Mr. Templeman confirmed that if the amount payable on redemption were determined by the C.P.I., the security would not be a deep discount security for purposes of the Finance Act 1984. He continued:
3. On the basis of the interest and indexation provisions set out in your example, we would be prepared to accept that any premium paid on redemption was assessable, if at all, to capital gains tax in the hands of an investor. This would not, of course, apply where the investor was a dealer in securities, a bank or a general insurance company where the premium on redemption will be treated as a Case 1 receipt of the financial trade. In general we would take the view that if the interest rate on a security of this kind was significantly below the rate payable on comparable securities with the same indexation terms, then some element of the final amount payable on redemption might be regarded as income. If you intend to proceed with the issue of securities of this kind, we would be prepared to indicate in advance whether on any particular security [*1552] the whole amount payable on redemption will be treated as capital. If the issue of such securities proceeds, I will be grateful for a note of the terms of any securities you issue in which it is believed the Lloyds syndicates are proposing to invest.
After a gap of some months the vice-president wrote to Mr. Templeman again on 10 December 1985. With this letter he enclosed new draft terms, with the same maturity terms as before and with no cap, but with a lower coupon. He reported considerable interest among Lloyds fund managers but little among American investors, to whom he thought that a shorter maturity term, perhaps as low as one year, might be more attractive. He invited comments on the proposed three-year bond and on the proposed shorter term issue, and concluded you will appreciate our main concern is the tax position of U.K. investors, in particular Lloyds syndicates.
It does not appear that this leltter was answered or acknowledged. There was no further correspondence. Citibank did not make the three-year issue discussed in the letters. This corespondence was not circulated in the Lloyds market. It is accordingly not of great significance, but the applicants rely on it as showing the consistency of the revenues response and because it was seen by Mr. Osborne, whose role in these matters I describe below.
(2) Chemical Bank
On 1 November 1985 Price Waterhouse wrote to Mr. Harrup of Chemical Bank to advise on the U.K. tax treatment of an index linked bond which Mr. Harrup had suggested might be suitable for Lloyds names. This was a bond denominated in American dollars with capital and interest linked to an American price index and interest and capital uplifts capped to give a return up to the average U.S. three month Treasury Bill rate, and with a maturity of three to 15 years. Price Waterhouses advice was that if the bond bore a reasonable commercial rate of interest and was issued at a time when the market yielded a positive real return on non-indexed instruments, the indexation uplift should be taxed as a capital gain and the interest as income. The author, however, offered to contact the Inland Revenues Technical Division
to try to get a more unequivocal statement on the tax treatment though we cannot guarantee that they will reply to general questions with no specific instrument to demonstrate the position.
This offer was evidently accepted and on 11 November Price Waterhouse wrote to Mr. Collen of the revenues Technical Division. The letter made no reference to Lloyds but described a three year American dollar bond, capped so that the total actuarial return would be the average U.S. three month Treasury Bill rate plus a small premium. Indexation was to be based on the C.P.I., lagged for eight months. Urgent confirmation was sought that the indexation uplift to the capital value of the bond would not constitute income subject to U.K. tax and that the redemption of the bonds would constitute chargeable disposal for capital gains tax purposes. Two days later, in a handwritten letter. Mr. Collen confirmed Price Waterhouses understanding without qualification.
On 2 December 1985 Mr. Harrup wrote and circulated within Chemical Bank a dicussion paper on the proposed three-year capped [*1553] U.S. bond, intended primarily for Corporation of Lloyds Syndicates. He recorded that taxation advice had been obtained from Price Waterhouse and Slaughter and May, and the proposed bond had been approved by the Inland Revenue. In this last respect he thought Chemical Bank was ahead of its competitors.
Following a telephone conversation on 13 December 1985 Price Waterhouse wrote to Mr. Collen the same day seeking confirmation as a matter of great urgency that the revenues earlier view was unaffected by three additional characteristics of the proposed bond. These were, first, that they would be floating rate notes; secondly, if the average Treasury bill three-month rate were less over a six-month period than the rise in the C.P.I., the effect would be to eliminate the interest payment and restrict the indexation uplift; and, thirdly, the lender (investor) was to have a right, on unattractive terms, to demand repayment at the end of any six-month period.
In replying on 20 December Mr. Collen referred to the difficulty of dealing with urgent requests in depth because of pressure of work. Subject to that he confirmed that the three new elements did not alter the confirmation given in his earlier letter:
provided always that the terms of note 5 of 25 June 1982 Press Release on indexed bonds is met, particularly that the bond continues to bear a reasonable commercial rate of interest.
Clearly where the total return is linked to the average United States three months Treasury Bill rate plus a small premium and the capital indexation is inflation linked only, the revenue can agree that the return is reasonable in that sense. If the total return falls below that level, however, as it may in items 2 of your 13 December letter, the question arises whether the bond bears such a reasonable rate, but this would be a matter of fact in the light of the returns in the market place at that time.
There was a further exchange of correspondence on the question whether the rate of interest had to be reasonably commercial at the time of issue or throughout the term, Price Waterhouse acknowledging the impossibility of dealing in depth with matters requiring urgent replies, but on 10 January 1986 Mr. Collen accepted that in this particular case the revenue could agree that the bonds were issued bearing a reasonable, commercial rate of interest. A further urgent request by Price Waterhouse for confirmation that amalgamation of basic and supplementary coupons would not alter the U.K. treatment of the bonds led Mr. Collen to reply on 28 February 1986:
I confirm your understanding of the position subject to the usual rider that determination of the taxation status of the bonds is a matter for the inspector concerned subject to the events which happen.
On 18 March Price Waterhouse gave Mr. Harrup their advice on the U.K. tax treatment of index-linked U.S. dollar bonds held by U.K. resident individuals. The bonds described were three year, floating rate, capped bonds. Price Waterhouses opinion was that if the bond at issue bore a reasonable commercial rate of interest the indexation uplift in the capital value of the bond would not constitute income subject to U.K. tax. The letter concluded: [*1554]
We have received confirmation from the Technical Division of the Inland Revenue that they agree with our understanding. Attached to this letter is a complete set of copies of the relevant correspondence which we have had with Technical Division. You have our permission to disclose, at your discretion, the contents of this correspondence to interested third parties provided the correspondence is always shown as a complete set and is not taken out of context.
On 10 April 1986 the Student Loan Marketing Association (Sallie Mae) issued, and Chemical Bank as agent placed, $135m. three year, index-linked, capped bonds as described to the revenue. In respect of this issue the revenue has taken the view that whatever the proper tax treatment of the bonds it should regared itself as bound by the terms of the answers which it gave not to seek to tax as income the indexation uplift element in the return on these bonds. This issue is accordingly not itself the subject of any of these applications. Whether the view taken by the revenue in this, and the other cases where the revenue has taken the same stance, is correct in law is a matter not before us for decision.
On the day after this first issue, 11 April 1986, Mr. Harrup wrote to Mr. Collen directly, with reference to a prospective issue of a similar capped U.S. index-linked bond, this time with a maturity of not less than six months and not more than two years. Among other points Mr. Harrup sought confirmation that the indexation uplift would not constitute income but would be chargeable for capitable gains tax purposes. Before this letter could be answered it was overtaken and superseded by a further letter from Mr. Harrup dated 22 April. In this he described an index-linked bond with a maturity as short as six months to as long as 10 years. The indexation provisions were said to be designed to compensate investors for their effective loss of capital due to inflation. The gross return would be capped, within very small margins, to levels available from United States Treasury or Federal Agencies debt for the particular maturity in question. Mr. Harrup expressed Chemical Banks understanding of the tax treatment of such a bond including:
c. the indexation element . . . would not represent income under Schedule D, Case V . . . e. a six-month bond would not have a taxation treatment different from that of longer maturities . . . g. the bonds would bear a reasonable commercial rate of return as set out in note 5 of the 25 June 1982 press release.
Mr. Harrup concluded:
We trust that you agree with our understanding of the tax treatment of these bonds but any thoughts you might have would be gratefully received.
On 6 May 1986 Mr. Collen replied in a letter described as the high water mark of the applicants case:
You will appreciate that since the transaction involved has not yet taken place any revenue comment is entirely without prejudice to the facts. I would also add that given the work situation in the revenue it is unlikely that comments of this nature can be given in the future. I confirm your understanding of the tax treatment of the bonds as set out on page 3 of your letter at items (a)-(g) except [*1555] that whether the bonds bear a reasonable commercial rate of return is a matter of fact dependent on the conditions in the market at the time of issue. I therefore cannot confirm that the terms of a prospective issue bears such a rate. Items (c) and (g) are relevant.
It was not until 19 February 1987 that Chemical Bank placed a further issue of Sallie Mae index-linked bonds, this time with a maturity of six months, but they did so repeatedly thereafter, always with that maturity. The revenue has not considered itself bound by any assurance in respect of these later bonds, which are very much in issue in these proceedings.
There was some later correspondence. On 10 December 1986 Mr. Harrup wrote to the Corporation of Lloyds concerning prospective issues of U.S. dollar bonds with six-month maturity terms based on the U.K. Retail Price Index (R.P.I.). He referred to the earlier correspondence:
. . . Mr. Collens reply would suggest that there are no structural problems except the caveat of a fair and reasonable rate of return. Given that Mr. Collens previous correspondence accepted that a return based on bills was fair and reasonable I assume this would not be a problem for the deal currently under discussion.
On 23 February 1987 Price Waterhouse again advised Chemical Bank, this time on index-linked, U.S. dollar, capped bonds based on the C.P.I. or the R.P.I. with a six-month maturity. They had seen the letters of 22 April and 6 May and expressed the opinion that provided that at the date of issue the bond bears a reasonable commercial rate of interest having regard to all the factors specific to the bond the indexation of the principal would not constitute income subject to U.K. tax.
Price Waterhouse were then asked to consider a bond in which the lender could demand repayment after one month. Price Waterhouse observed in their reply of 12 May 1987:
The capital treatment of uplift of principal will be at risk if the option period is short. This risk is increased if the pricing of the bond reflects its short term nature. It is not possible to say with certainty what is the minimum period for a bond whereby uplift of principal will receive capital treatment. The treatment of index linked paper as set out in the Inland Revenue Press Release of [25 June 1982] derives from Lomax v. Peter Dixon & Son Ltd.  K.B. 671. In this case it was held that a payment of premium on redemption should be treated as capital if it can clearly be identified as being in respect of a risk to, rather than a return on, the principal.
Price Waterhouse then continued:
Apart from periods of hyper inflation, it seems unlikely to me that the courts would accept that there is any significant risk to principal for very short life paper. The shorter the maturity of the paper the greater the certainty from the outset that a known amount (in real and in normal terms) will be paid on redemption. Technical Division of the Inland Revenue, by accepting the concept of six month indexed linked paper have accepted that there is sufficient uncertainty and therefore risk to capital to justify the treatment of [*1556] the uplift as a capital receipt. I believe that a six month maturity is, in the current economic climate, at a very near to the minimum limit for index linked paper to be acceptable to the revenue, and more importantly, the courts. I do not therefore consider that it would be safe to assume that capital treatment would be accorded to the uplift of capital for shorter life paper and indeed, believe that it would be provocative to the revenue to argue that paper structured so that it could be construed as being of a maturity shorter than six months is in fact index linked paper.
There was no further correspondence or exchange between Chemical Bank, Price Waterhouse and the revenue.
Whittingdale Ltd. were investment managers to two Lloyds syndicates. In December 1985 Mr. Bazin of Whittingdale and Mr. Templeman of the Technical Division of the revenue exchanged letters about zero coupon bonds (known as CATS, TIGERS and ZEBRAS). They did not touch on U.S. index-linked bonds. A further letter from Mr. Bazin in April 1986 about the legislation on deep discount bonds appears to have received no answer. It seems that Mr. Bazin wrote again in July, and on 18 August 1986 Mr. Templeman answered, still with reference to deep discount securities and zero coupon bonds.
On 12 November 1986 Mr. Whittingdale and Mr. Bazin met Mr. Templeman at Somerset House. There is a dispute on the affidavits as to what exactly happened at the meeting, and there has been no cross-examination of the deponents. I do not, however, think that the details of the factual dispute greatly matter and the broad outline of events seems to me fairly clear.
It does not appear from the evidence that the meeting was arranged in writing, and certainly Mr. Templeman was given no written notice of any point on which his opinion was sought. I infer that both sides saw the meeting as a continuation of the previous correspondence about zero coupon bonds, deep discount securities and the zoological instruments already mentioned. The meeting began with a detailed discussion of these, and I have no reason to doubt that Mr. Templeman fully expounded his views on them and made plain the revenues intention to scrutinise attempts to circumvent the charge to tax on accrued income. This was a general, and as I think informal, discussion. Mr. Templeman made no note, and was accompanied by no assistant or secretary. Mr. Bazin did keep a note, but it not infrequently happens that a note of a meeting or conference begins well but somewhat peters out as the meeting progresses and the discussion becomes more general. Paragraph 4 of Mr. Bazins note reads:
Most importantly, M.T. admitted that Lomax v. Peter Dixon & Sons Ltd. is the only case that could be used by the Inland Revenue on bonds outside of 1984 legislation, and that it does not/cannot apply to the grey area where some interest is paid, i.e. it only applies to zero coupon bonds (that fall outside of 1984 legislation).
This does not read like a contemporaneous note, and I have some doubt whether it is a very accurate summary of what Mr. Templeman said. It is not, certainly, a very accurate reflection of what Lomax v. Peter [*1557] Dixon & Son Ltd decided. Mr. Templeman himself does not directly challenge the accuracy of this part of the note, however, so perhaps he did say this. I do not think it much matters.
It is common ground that index-linked bonds were raised during the meeting. I see no reason to doubt the general accuracy of the account given by Mr. Whittingdale in paragraphs 25 to 27 of his affidavit:
25. In the course of the meeting, Mr. Templeman indicated that he was very interested to know how Lloyds intended to realise capital gains in the post bond washing era and I therefore raised with him the question of index-linked bonds. I said that there were some index-linked bonds in issue, in respect of which I doubted the tax treatment which was being suggested. Mr. Templeman said that he had not examined all the prospectuses but was familiar with such issues and there were none which he had read which raised particular concerns. I was surprised. In order to test the boundaries of this attitude, I postulated a range of situations in which, I suggested, the revenue, might not be prepared to treat the indexation element of the bond as capital rather than income.
26. I specifically outlined the terms (as I then understood them) of an actual Credit Suisse First Boston SLMA one-year issue in which the inflation factor was calculated by reference to nine months past inflation (which therefore was known at the time of issue) and three months future inflation (which was known at the time of issue) that is, nine months lagging. Mr. Templeman said that he understood the practical necessity for a time lag and he accepted this period of lagging. He said that a bond issued in 1986 tied to the inflation rate of four or five years previously was clearly too long a lag. This reaction was a considerable surprise to me because I regarded the Credit Suisse First Boston issue as an extreme example - certainly the longest lagging I had seen applied to index-linked bonds.
27. I also asked Mr. Templeman about the choice of inflation indices on which the indexation factor might be based. Mr. Templeman said that the choice of index had to be reasonable and he agreed that an indexation factor based on the rate of inflation in Argentina or Israel would not be acceptable. He pointed out that the inflation index had to have some connection with the borrower and lender and confirmed that the U.K. R.P.I. and the U.S. C.P.I. were both acceptable in the context of U.S. dollar denominated bonds marketed to U.K. investors.
This account makes several things clear. Index-linked bonds were mentioned by Mr. Whittingdale in response to a probing inquiry by Mr. Templeman. The discussion centred on the permissible period of lagging and the choice of inflation indices. No document of any kind was produced and no ruling sought on any specific proposal. It was, again, a general discussion of principles. The drift of the discussion is reflected in Mr. Bazins note:
5. On the topic of index linked securities that would not be subject to the 1984 legislation, P.C.W. raised the question as to when an inflation indexed issue becomes a fixed coupon issue? M.T. agreed that that was a very grey area, but that there was a [*1558] legitimate reason for some time lag between the rate of inflation used and the payment of the coupon.
It is common ground that no express reference was made to capping. Mr. Whittingdale and Mr. Bazin no doubt knew that there had been many recent issues of capped bonds, and may well have thought Mr. Templeman knew this too (if, which I doubt, they specifically directed their minds to capping). Mr. Templeman says that he was unaware of any issue of capped bonds, and I see no reason to disbelieve him. Mr. Templeman says that by prospectuses he meant the draft term sheets shown to him by Citibank, which had been for three year uncapped bonds. Again, I see no reason to disbelieve him. I do not, on the evidence as it stands, accept that reference was made during the meeting to the fact that index-linked bonds were being marketed as having written Inland Revenue approval. Had this been said, I find it hard to think Mr. Templeman would not have inquired further.
The evidence is clear, and I accept, that Mr. Whittingdale and Mr. Bazin were encouraged and reassured by Mr. Templemans sympathetic reaction to index-linked bonds. I do not, however, think that they (still less he) believed him to have given a ruling or a considered statement of the revenues position. Had they done so, I am sure his confirmation in writing would have been sought, or at least his approval of paragraph 5 of Mr. Bazins note. Neither of these things was done.
On 8 April 1987, five months after the meeting, Mr. Bazin wrote to Mr. Templeman seeking confirmation of his understanding of the substantive points made at the meeting. The letter broadly followed parts of Mr. Bazins note, to which I have already referred, including the observation attributed to Mr. Templeman, that Lomax v. Peter Dixon & Son Ltd.  K.B. 671 could not be applied where some coupon interest is paid. The letter was directed to zero coupon securities such as CATS and TIGERS, and made no reference to index-linked bonds. It was not answered.
On 7 August 1987 Mr. Whittingdale wrote to Mr. Templeman in these terms:
Last November you were kind enough to give us some of your time to consider the tax treatment of deep discount securities. During our conversation we discussed index-linked securities. At the time we had not purchased any such securities on behalf of our clients. Subsequent to our meeting we have been purchasing increasing amounts of such issues. Although satisfied with the advice we have had and the comfort of the conversation in November that these issues would cause no tax problem, the resulting overall effect might at some stage in the future cause you some concern. I appreciate you might prefer that we should address you with specific questions but also remember your intention to review Lloyds syndicate portfolios from both a detailed and a global perspective. It is difficult to put in writing the details of that which might become known to you through time.
This letter led to a meeting between Mr. Whittingdale, Mr. Bazin and Mr. Templeman at Somerset House on 12 October 1987. At this meeting the scale of investment of Lloyds American trust funds in Sallie Mae and similar index-linked bonds was disclosed. Mr. Templeman himself had not been told before of any maturity date shorter than three [*1559] years nor of any cap on the total return on their bonds, but these features of current issues became clear in the course of the meeting and Mr. Templeman expressed the opinion that these features would or might affect the revenues willingness to regard the indexation uplift element of the total return as a capital gain.
On 13 October, the day after the meeting, Mr. Bazin telephoned Mr. Templeman to resolve the conflict between what Mr. Templeman had said the previous day and what had been said in letters to Mr. Harrup and Price Waterhouse. Mr. Templeman in effect replied that whatever Mr. Collen or the revenue might have thought or said earlier, the revenue did not now regard the indexation uplift on capped six month bonds as a capital gain taxable as such rather than as income. Asked to confirm Mr. Bazins understanding of this telephone call Mr. Templeman on 21 October 1987 stated that the exemption in section 36(2)(b) of the Finance Act 1984 would not apply to a capped bond and that in the case of a six-month bond he would have thought that the initial approach would be that the whole of the return was income unless the taxpayer could demonstrate that any part was capital.
(4) First Boston
On 21 January 1986 Linklater & Paines acting on behalf of the First Boston Corporation wrote to Mr. Parker of the Technical Division of the revenue seeking urgent confirmation that the indexation uplift payable on redemption would be treated as a capital item taxable as such at the time of redemption or prior sale only. The bonds were described as having a 10-year term and no cap was mentioned. Mr. Parker gave the confirmation sought but made clear that he had had little time to consider the matter and was not the Technical Division expert on capital gains. He counched his reply in tentative terms. In a telephone conversation on 24 January 1986 Mr. Parker advised, still in qualified terms, that if the interest rate were that generally prevailing in the U.K., or were variable, it should not affect his earlier conclusion.
On 28 February 1986 Linklaters wrote to Mr. Parker again and enclosed detailed draft terms for issue of an index-linked Sally Mae U.S. dollar bond based on the R.P.I. with a three-year term and a cap. They also enclosed details of the advice they proposed to give their clients First Boston, including the statement that the indexation uplift would not be taxed as income but rather as a capital item taxable as such at the time of redemption or maturity. Mr. Parker was asked to confirm or otherwise comment on this advice as a matter of urgency. On 10 March Mr. Parker confirmed:
the amounts paid to holders of notes by way of principal revaluation will not be charged to U.K. tax as income but rather as a capital item taxable as such at the time of redemption or maturity.
On 4 April 1986 First Boston placed $100m. Sally Mae bonds. These were based on the R.P.I., were capped and had a three-year term. As with the First Chemical Bank issue the revenue has held itself bound by its answers not to seek to tax as income the indexation uplift element in the return on these bonds. This issue is not itself, therefore, the subject of any of these applications.
On 17 April 1986 Linklaters spoke on the telephone to Mr. Parker about a proposed one year bond. They reported the upshot of this [*1560] conversation to First Boston the following day in a letter which was copied to Mr. Parker:
Although the Inland Revenue indicated that the views they expressed over the telephone would not be as considered as views expressed in writing, they confirmed that in principle they had no difficulty with notes issued on the terms set out in the attached summary falling within section 36(2)(b) and hence outside the definition of deep discount security. There is nothing in section 36(2)(b) to require the R.P.I. taken for revaluing the principal to be that of any particular period or periods; nor to require the period chosen to be wholly prospective. The Inland Revenue indicated, therefore that a revaluation of principal as outlined in the attached summary appeared to them to fall within section 36(2)(b).
In my view in giving this indication the Inland Revenue are appling a legitimate interpretaiton of section 36(2)(b) and are not affording concessionary treatment to the issue. I have, as you requested, written to the Inland Revenue asking them to confirm the views expressed over the telephone; and I enclose a copy of my letter. I can see no reason why they should change their views from those they indicated over the telephone.
On 28 April 1986 Mr. Parker in general confirmed his view that the proposed index linked issue would not fall within the deep discount regime because it would come within the definition in section 36(2)(b) of the Finance Act 1984. In the course of his answer Mr. Parker referred back to paragraph 5(a) of the June 1982 press release and observed:
This clearly means that if the lenders gain merely reflects the depreciation of his capital due to inflation between issue and redemption, then capital treatment is appropriate.
In December 1986 First Boston sought Linklaters advice on the tax treatment of three to six month index-linked bonds. In advising, Linklaters referred back to the earlier correspondence with the Inland Revenue and saw no reason why the same tax treatment should not be afforded to amounts payable by way of principal revaluation on notes having a three to six month life. In a further letter to First Boston written on 13 May 1987 Linklaters considered the effect of giving the lender a right to demand repayment before the maturity date. They referred again to the revenues earlier confirmation and recognised that the lenders right might be said for section 36 purposes to reduce the life of the security. They thought the earlier analysis, agreed with the revenue, should apply, but advised that there should be an interest return which could be regarded as a commercial income return and they favoured a floor below which the interest element could not fall.
(5) Slaughter and May
The evidence includes part of a correspondence between Slaughter and May, acting for unidentified clients, and Mr. Parker of the Technical Division.
On 16 May 1986 Slaughter and May sought confirmation that the indexation uplift of a proposed bond would be treated as a capital receipt. The proposed bond appears to have been capped by the return available on a matching U.S. government security, so that the rate of interest would float. A three year term may have been envisaged. Mr. [*1561] Parker sought clarification in July, which he received in September. Mr. Collen answered on 24 November 1986, confirming that on the basis of the information provided and the June 1982 press release the capital uplift payable on redemption would be treated as capital for tax purposes.
This correspondence was not circulated generally in the Lloyds market. The applicants relied on it as showing the consistency of the revenues response.
(b) Coward Chance
On 12 January 1987 Coward Chance wrote to the Technical Division concerning a proposed issue of Canadian dollor index-linked bonds based on the Canadian C.P.I. They supplied a draft of the proposed terms and mentioned sale to the trustees of Lloyds investment funds. I understand these to have been three-year bonds. They sought confirmation that the notes would not be regarded as deep discount securities within section 36(2)(b) of the Finance Act 1984 and that the amount paid to holders on a disposal would not be taxed as income. Mrs. Willetts, for the revenue, gave the confirmation sought subject to immaterial qualifications on 21 January. After another letter from Coward Chance, Mr. Jones for the revenue was on 5 February 1987 willing to accept that the sum described as revalued principal payable on redemption of the security was liable only to capital gains tax, although he thought the revenue would aim to treat as income any accrued return realised other than that attributable to indexation of the principal.
Following the correspondence an issue of Canadian dollar bonds with a maturity of 34 months was made on 23 February 1987. The revenue has accepted that it is bound by its assurances not to seek to tax the indexation uplift element in the return on these bonds as income.
(7) Bear Stearns
On 9 April 1987 Bear Stearns International Ltd. told the Technical Division of a proposed issue of U.S. dollar index-linked bonds and sought confirmation that increments to capital would not constitute income for U.K. tax purposes. A maturity date of between one and five years was mentioned and the bonds were to be capped, but so that the interest payable could never fall below 1.5 per cent. Mr. Pardoe for the revenue, in replying, made certain qualifications which do not appear material and subject to those gave the confirmation asked. It appears that the issue to which this exchange related did not in the event proceed for commercial reasons. That was the end of this exchange.
A meeting was held between Lloyds representatives and Mr. Templeman on 8 March 1988 to discuss the doubts which had arisen following the meeting of 12 October 1987 with Mr. Whittingdale about the tax treatment of the indexation uplift element on these American and Canadian bonds. Mr. Templeman repeated his doubts whether this was properly to be treated as a capital gain on a short-term bond on which the total return was capped. It appears that at first Mr. Templeman may have indicated that the revenue would be willing to make no income tax assessment on this part of the return on bonds already issued and bought, while reconsidering the matter for the future, but by a letter of 30 March 1988 it was made clear that the revenue was also [*1562] examining the tax treatment of bonds already issued and bought. Some of the applicants continued to buy short-term capped bonds even after this date, but no claim is made in respect of them, since it is accepted that the effect of the letter was to withdraw any earlier representations.
After a long investigation Mr. Beighton, Director General of the Inland Revenue, communicated the revenues decision to Lloyds on 27 October 1988. The letter included the following paragraphs:
3. I will deal first with our conclusions in relation to the three bond issues with a three-year maturity period to redemption. One of these was an issue in April 1986 through the agency of Chemical Bank of three-year floating rate inflation indexed notes issued by the Student Loan Marketing Association (Sallie Mae). Another - also in April 1986 - was an issue, through the agency of First Boston, of three-year fixed rate notes issued by Sallie Mae. The third issue of bonds in this category was of bonds with a three-year maturity issued by the Canadian Federal Business Development Bank, issued through Burns Fry in February 1987. As we understand the position, no issues of these bonds have been made on or after 30 March 1988. On this assumption, we do not intend to contend that the purported capital element in the return on these bonds should be taxed as income. After reviewing the correspondence between the revenue and those concerned with the issue of these bonds, we take the view that in each case the terms of our response indicated that if the bonds were issued on the terms stated the capital element would not be charged to tax as income. We take the view that, without prejudice to the proper treatment in tax law of bonds with these characteristics had no statements been given, we should regard ourselves as bound by the assurance given in relation to those particular issues and not seek to impose tax upon a basis conflicting with the views we had expressed.
4. We will be writing to those concerned with the issue of these bonds to inform them of our conclusions.
5. I now turn to the position of the other bonds of which we have details which have been issued to Lloyds members. All of these have maturity periods of redemption of six months or 12 months which, taken together with the other terms of issue, give the bonds significantly different characteristics from the bonds described at paragraph 3 above. We are advised that, taking the effects of the terms of these bonds as a whole, in tax law the purported capital component in the return is income, and should be taxed as such.
6. We have considered the representations that, if this was our view of the tax law, it should not be applied to the six-month Sallie Mae bonds issued through the agency of Chemical Bank before 30 March 1988.
7. As you are aware, we have considered these representations at a high level, and in detail. This has involved a scrutiny of all the correspondence drawn to our attention and discussion separately with Chemical Bank and with Lloyds taxation department. It has also involved a general internal examination of revenue replies to questions about the interpretation and application of the terms of paragraph 4 of the revenues 1982 press release which dealt with the tax position of corporate stock issued on an indexed basis. The range of information and evidence that we have had to assess means [*1563] that it has taken us longer to reach conclusions on this issue than we had originally hoped or expected. It has also, I am afraid, taken us longer to complete our review of these issues than we had hoped when Ian Spence wrote to Ken Goddard on 5 August.
8. Our conclusion, based on the advice we have received, is that no assurances were given which committed the revenue to any particular tax treatment of the six-month Sallie Mae bonds that were issued through Chemical Banks agency, and that we could not justifiably give up tax which we are entitled to charge on the basis of our Solicitors view of the proper application of tax law to these particular bonds.
9. We therefore intend to assess the holders of the six-month Sallie Mae bonds issued through the agency of Chemical Bank on the basis that the purported capital element in the return is taxable as income in respect of bonds issued before 30 March 1988, as well as for bonds issued after that date. We will apply the same treatment to the other indexed bonds which we have seen which have been issued to Lloyds members apart from those referred to in paragraph 3 given that, to the best of our knowledge, nothing has been said by the revenue to those involved in the issue of these bonds which constitutes - or is purported to constitute - an assurance about the tax treatment of these bonds.
A letter in similar terms, but more argumentative vein, was written to Chemical Bank. Assessments were later made on the applicants as foreshadowed in Mr. Beightons letter. It is the Inland Revenues decision contained in Mr. Beightons letter (except that contained in paragraph 3) and the assessments which the applicants move to quash.
B. The application
The first four applicants in this application are Lloyds underwriting agencies; the remaining applicants are members of syndicates which they manage.
Mr. Osborne acted as an investment manager to these agencies from 1986 onwards, having spent 1985 on secondment to Citibank. He was familiar with the revenues June 1982 release. During his secondment he knew of the correspondence referred to in (1) of section A above. During 1986 he was shown the correspondence between Price Waterhouse and Chemical Bank and the revenue detailed in (2) of section A. Early in 1987 he saw the Linklaters correspondence with the revenue in (4) and the Bear Stearns exchange in (7).
Mr. Butler was, to begin with, the investment manager of the first of these applicants but in January 1987 he joined corporate forces with Mr. Osborne and thereafter they worked closely together. He was familiar with the revenues press release. Early in 1987 he saw the April and May 1986 correspondence between Chemical Bank and the revenue and learned of the earlier correspondence between Price Waterhouse and the revenue. He also knew of some of the Linklaters correspondence and of the Bear Stearns correspondence.
The applicant agencies bought various issues of bonds between April 1986 and the end of March 1988. They did so on the advice of Mr. Osborne and Mr. Butler. The evidence is that in giving that advice Mr. Osborne and Mr. Butler were influenced by their understanding of what [*1564] they believed to be the revenues assurance that the indexation uplift would be regarded as capital and taxed, if at all, as such. There is no reason to doubt this evidence.
This applicant acts as managing agent for Lloyds syndicates and manages funds on their behalf. It also engages investment managers, including Whittingdale and Irving Trust and Fischer Francis Trees & Watts Inc. in New York.
Mr. Randall is and was at the material time a director and the deputy chairman of the applicant. He exercised general supervision over the activities of the applicants investment managers, overseeing investment strategy but leaving particular investment decisions to the investment managers. He was aware of previous disputes between Lloyds and the Inland Revenue and wanted to avoid any repetition.
Mr. Randall knew of the revenues press release of June 1982. He saw Mr. Harrups discussion paper (A(2) above) in late 1985 or early 1986 and discussed it with Mr. Harrup in January 1986. Early in 1986 he saw the revenues letter of 10 March 1986 to Linklaters (A(4) above).
He saw the Price Waterhouse and Chemical Bank correspondence with the revenue (A(2) above) in late 1986 or early 1987. Early in 1986 he gave Irving Trust and Fischer Francis the green light to invest in index-linked bonds if they thought fit. They did, and both entered the market early. There is no reason to doubt that Mr. Randall was influenced in his decision by the approval he believed the revenue to have given.
Before investing, Fischer Francis discussed the bonds with Chemical Bank and First Boston, who reported the revenues willingness to treat the indexation uplift as capital not income. This reinforced Fischer Franciss decision to buy. Irving Trust appear to have been similarly influenced by discussions with and documents shown by Mr. Harrup of Chemical Bank.
Mr. Whittingdale was slow to invest in index-linked bonds, partly because he was seeking acceptance of a U.S. short-dated government bond fund of his own, partly because he was actively exploring other possibilities and partly because he was sceptical whether the indexation uplift could escape taxation as income. His approach was cautious and he wanted to avoid confrontation with the revenue. He knew of the June 1982 press release, and during 1986 came under increasing pressure to invest in these bonds as other investment managers were doing. In November he had the meeting with Mr. Templeman which I have already described, and was reassured. It was not, however, until after he saw the Price Waterhouse and Chemical Bank correspondence (A(2) above) in December 1986 that he finally decided to invest. Even then, I think, he was sceptical about the taxation of the indexation uplift as a capital gain, which explains his further approach to Mr. Templeman in August 1987, leading to the meeting in October. After that he bought no more bonds.
There can be no doubt on the evidence that this applicants investment in the bonds was influenced, not wholly but partly, by the approvals the revenue was thought to have given. [*1565]
The applicants here are an underwriting agent, responsible for the management of various syndicates, and two syndicate members applying on their own behalf and as respresentatives of the other members. Mr. Burrage is one of the applicant members. He is also a director of the underwriting agent. He acted as investment manager and had overall responsibility for all investment decisions. He deposes:
It was crucial to the attractiveness of these bonds for U.K. investors that the index-linked element payable on redemption would be regarded as capital, taxable (if at all) only as capital gains and not as income.
It appears that Mr. Burrage had discussions with First Boston and with Chemical Bank before investing in the bond issued in February 1987. At some time during 1986 or 1987 Mr. Burrage acquired copies of the Chemical Bank/Price Waterhouse correspondence with the revenue, and also Linklaters, but he cannot be sure exactly when. He obtained copies of the Bear Stearns correspondence shortly after it took place, but this cannot have affected his purchase on 1 April 1987.
The evidence of reliance in this case is less strong than in some others, but I have no doubt Mr. Burrages investment decisions were influenced by the general understanding of the revenues attitude prevalent in the Lloyds market.
This application is made by a number of underwriting agents and by and on behalf of a number of syndicate members. Their common link is that Whittingdale acted as their investment manager, although in this case (unlike Merrett) there was no other investment manager.
I have considered Whittingdales knowledge (by Mr. Whittingdale and Mr. Bazin) in connection with the Merrett application and need not repeat the facts. I reach substantially the same conclusion on reliance as in that case.
The applicants in this case are a Lloyds underwriting agency and a member of a syndicate for whom the agency acted.
The applicants investment manager was Mr. Butler, whose knowledge of the revenues statements on index-linked bonds has been summarised above in relation to M.F.K., for whom he also acted. From January 1987 Mr. Osbornes expertise also became available to these applicants, who made one investment during 1986 and a number in 1987 and 1988.
The same conclusion on reliance which I have reached in relation to M.F.K. in my view applies in this case also.
C. The contentions of the parties
We have had the benefit of most interesting, able and economical argument on both sides. It is not easy to do justice to them in a summary.
Mr. Sumption, for the applicants, submitted that decisions of the Inland Revenue are subject to judicial review on the same grounds as those of any other public authority. These grounds include abuse or excess of power. The overriding criterion for deciding whether there has [*1566] been an excess or abuse of power is to decide whether the authoritys (here the revenues) conduct has been unfair. The revenues conduct was prima facie unfair if it conflicted with an undertaking or assurance of the revenue which would (were the revenue not a public body) give rise to an estoppel or breach of contract. If a public authority has a policy which it makes known or announces it may not act inconsistently with that policy without sufficient notice, and then not retrospectively. This rule applies even where, in private law, there might be no estoppel. It is a principle or public law that decisions of public bodies may not be internally inconsistent. A public body must recognise and give effect to the legitimate expectations of those who deal with it, in matters both of procedure and decision. For these propositions of law Mr. Sumption relied in particular on Reg. v. Inland Revenue Commissioners, Ex parte National Federation of Self-Employed and Small Businesses Ltd.  A.C. 617 (the Fleet Street Casuals case); Reg. v. Inland Revenue Commissioners, Ex parte Preston  A.C. 835; H.T.V. Ltd. v. Price Commission  I.C.R. 170; Attorney-General of Hong Kong v. Ng Yuen Shiu  2 A.C. 629; Reg. v. Secretary of State for the Home Department, Ex parte Asif Mahmood Khan  1 W.L.R. 1337 and Reg. v. Secretary of State for the Home Department, Ex parte Ruddock  1 W.L.R. 1482.
On the facts Mr. Sumption submitted that the policy of the Inland Revenue before March 1988 plainly was not to challenge as disguised interest the indexation uplift on bonds of this kind provided that the bonds paid a commercial rate of interest in addition to the indexation uplift. This policy was made known to potential investors and their advisers by answering the same sort of questions in the same way. The circumstances in which the answers were given were such that it was highly probable the answers would be passed to investors. On any view of the evidence the revenues statements were an effective inducement to these applicants to buy bonds.
The thrust of the applicants argument was thus very simply. The revenue had repeatedly made known its view of these bonds. It need not have done so, but it did. It would be grossly unfair to these applicants, and so an abuse of the revenues statutory powers, if the revenue were now free to alter its position with retrospective effect to the prejudice of the applicants.
Mr. Beloff for the revenue accepted that his client was not immune from judicial review. The Fleet Street Casuals case  A.C. 617 and Ex parte Preston  A.C. 835, made this concession inevitable, although Mr. Beloff understandably relied on dicta of Lord Wilberforce  A.C. 617, 632E and Lord Scarman  A.C. 835, 852D to submit that collateral challenges to decisions of the revenue would rarely be successful. Mr. Beloff further accepted that unfairness might in principle amount to an abuse of power and that there could be an exceptional case where it would be unfair for the revenue to resile from a representation made or undertaking given, when the making of the representation or giving of the undertaking involved no breach of the revenues statutory duty. Judicial review could not, however, lie to oblige the revenue to act contrary to its statutory duty. Such would be the case if these applications succeeded. It is for Parliament, and Parliament alone, to decide what taxes shall be paid. It is for the Inland Revenue to collect the tax Parliament has ordained. The revenue has no general discretion to remit taxes Parliament has imposed: Vestey v. [*1567] Inland Revenue Commissioners  A.C. 1148. While the revenue has under the Inland Revenue Regulation Act 1890 and the Taxes Management Act 1970:
a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection; per Lord Diplock in the Fleet Street Casuals case  A.C. 617, 636G:
this is a discretion which could only lawfully be exercised for the better, more efficient and more economical collection of tax and not otherwise. The taxing Acts provided for inspectors to make assessments on individual taxpayers year by year. One inspector could not bind another, nor one inspector bind himself from one year to another. When an assessment was disputed, a familiar and well lubricated machinery existed to resolve the dispute. Special or general commissioners, or on questions of law the courts, were the ultimate arbiter. The revenue could not without breach of statutory duty agree or indicate in advance that it would not collect tax which, on a proper construction of the relevant legislation, was lawfully due.
In any event, Mr. Beloff argued, the revenue had here done no such thing. Even if the revenue might in principle be bound by clear and unqualified answers to questions put with reference to specific and fully detailed transactions, it could not be bound by general and qualified statements of its current thinking given in relation to different transactions. Such, he submitted, was the material on which the applicants relied. In contrast with Attorney-General of Hongkong v. Ng Yuen Shiu  2 A.C. 629; Ex parte Khan  1 W.L.R. 1337 and Ex parte Ruddock  1 W.L.R. 1482 the statements relied on fell far short of any statement of official policy.
Mr. Sumption in reply accepted that the revenue could not bind itself to act in conflict with its statutory duty. If its statutory duty left the revenue no choice but to collect taxes then there was no scope for any binding representation. But the representations here were made in pursuance of the revenues duty to collect tax and fell within its reasonable area of managerial discretion. This was the revenues own view as reflected in its evidence. Hence the revenues proper acceptance, in respect of the three bond issues, that it could not properly resile from its representations whatever the taxpayers true liability in law. But the revenue had no tenable basis in law for distinguishing between the cases where it agreed it was bound and those (the subject of these applications) which it disputed. The factual questions here were whether the applicants had expectations that the capital indexation uplift on these bonds would be taxed as capital, if at all; if so, whether those expectations were reasonable; and if so whether they were created by the revenue. All these questions should be answered in favour of the applicants.
D. The correct approach in law
I take as my starting point the following passage from Lord Templemans speech in Ex parte Preston  A.C. 835, 866, expressly adopted by the other members of the House:
However, the H.T.V. case  I.C.R. 170 and the authorities there cited suggest that the commissioners are guilty of unfairness [*1568] amounting to an abuse of power if by taking action under section 460 their conduct would, in the case of an authority other than Crown authority, entitle the appellant to an injunction or damages based on breach of contract or estoppel by representation. In principle I see no reason why the appellant should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the appellant because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation. Such a decision falls within the ambit of an abuse of power for which in the present case judicial review is the sole remedy and an appropriate remedy. There may be cases in which conduct which savours of breach of contract or breach of representation does not constitute an abuse of power; there may be circumstances in which the court in its discretion might not grant relief by judicial review notwithstanding conduct which savours of breach of contract or breach of representation. In the present case, however, I consider that the appellant is entitled to relief by way of judicial review for unfairness amounting to abuse of power if the commissioners have been guilty of conduct equivalent to a breach of contract or breach of representations on their part.
It was not suggested in Ex parte Preston that the bargain allegedly made, if made, would have been a breach of the revenues statutory duty, but the applicants here accept that they must fail if the revenue could not lawfully make the statements or representations which (it is said) it did. So if, in a case involving no breach of statutory duty, the revenue makes an agreement or representation from which it cannot withdraw without substantial unfairness to the taxpayer who has relied on it, that may found a successful application for judicial review.
I cannot for my part accept that the revenues discretion is as limited as Mr. Beloff submitted. In the Fleet Street Casuals case  A.C. 617 the revenue agreed to cut past (irrecoverable) losses in order to facilitate collection of tax in future. In Ex parte Preston  A.C. 835 the revenue cut short an argument with the taxpayer to obtain an immediate payment of tax. In both cases the revenue acted within its managerial discretion. The present case is less obvious. But the revenues judgment on the best way of collecting tax should not lightly be cast aside. The revenue might stick to the letter of its statutory duty, declining to answer any question when not statutorily obliged to do so (as it sometimes is: see, for example, sections 464 and 488(11) of the Income and Corporation Taxes Act 1970) and maintaining a strictly arms length relationship with the taxpayer. It is, however, understandable if the revenue has not in practice found this to be the best way of facilitating collection of the public revenue. That this has been the revenues experience is, I think, made clear by Mr. Beighton who, having described the machinery for assessment and appeal, continues:
6. Notwithstanding this general approach in administering the tax system, the board see it as a proper part of their function and contributing to the achievement of their primary role of assessing and collecting the proper amounts of tax and to detect and deter evasion, that they should when possible advise the public of their rights as well as their duties, and generally encourage co-operation between the Inland Revenue and the public.
[*1569] I do not think that we, sitting in this court, have any reason to dissent from this judgment. It follows that I do not think the assurances the revenue are here said to have given are in themselves inconsistent with the revenues statutory duty.
I am, however, of the opinion that in assessing the meaning, weight and effect reasonably to be given to statements of the revenue the factual context, including the position of the revenue itself, is all-important. Every ordinarily sophisticated taxpayer knows that the revenue is a tax-collecting agency, not a tax-imposing authority. The taxpayers only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law: Reg. v. Attorney-General, Ex parte Imperial Chemical Industries Plc. (1986) 60 T.C.1, 64G, per Lord Oliver of Aylmerton. Such taxpayers would appreciate, if they could not so pithily express, the truth of the aphorism of One should be taxed by law, and not be untaxed by concession: Vestey v. Inland Revenue Commissioners  Ch. 177, 197 per Walton J. No doubt a statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them. But where the approach to the revenue is of a less formal nature a more detailed inquiry is in my view necessary. If it is to be successfully said that as a result of such an approach the revenue has agreed to forgo, or has represented that it will forgo, tax which might arguably be payable on a proper construction of the relevant legislation it would in my judgment be ordinarily necessary for the taxpayer to show that certain conditions had been fulfilled. I say ordinarily to allow for the exceptional case where different rules might be appropriate, but the necessity in my view exists here. First, it is necessary that the taxpayer should have put all his cards face upwards on the table. This means that he must give full details of the specific transaction on which he seeks the revenues ruling, unless it is the same as an earlier transaction on which a ruling has already been given. It means that he must indicate to the revenue the ruling sought. It is one thing to ask an official of the revenue whether he shares the taxpayers view of a legislative provision, quite another to ask whether the revenue will forgo any claim to tax on any other basis. It means that the taxpayer must make plain that a fully considered ruling is sought. It means, I think, that the taxpayer should indicate the use he intends to make of any ruling given. This is not because the revenue would wish to favour one class of taxpayers at the expense of another but because knowledge that a ruling is to be publicised in a large and important market could affect the person by whom and the level at which a problem is considered and, indeed, whether it is appropriate to give a ruling at all. Secondly, it is necessary that the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification.
In so stating these requirements I do not, I hope, diminish or emasculate the valuable, developing doctrine of legitimate expectation. If a public authority so conducts itself as to create a legitimate expectation that a certain course will be followed it would often be unfair if the authority were permitted to follow a different course to the detriment of one who entertained the expectation, particularly if he acted on it. If in private law a body would be in breach of contract in so acting or estopped from so acting a public authority should generally be in no better position. The doctrine of legitimate expectation is rooted in [*1570] fairness. But fairness is not a one-way street. It imports the notion of equitableness, of fair and open dealing, to which the authority is as much entitled as the citizen. The revenues discretion, while it exists, is limited. Fairness requires that its exercise should be on a basis of full disclosure. Mr. Sumption accepted that it would not be reasonable for a representee to rely on an unclear or equivocal representation. Nor, I think, on facts such as the present, would it be fair to hold the revenue bound by anything less than a clear, unambiguous and unqualified representation.
Against that legal background I return to the representations relied on here to consider whether they meet the conditions specified.
The June 1982 press release made plain that the precise tax treatment must have regard to the terms of any contract between the parties. This statement was not enough for the applicants purposes. Had it been, the ensuing correspondence would not have taken place.
The Citibank correspondence (A(1)) was addressed to the appropriate inspector in the Technical Division (Mr. Templeman) and made explicit the Lloyds dimension. The bond described, however, had different characteristics from those now in contention. The terms of Mr. Templemans reply show clearly that he was not at that stage giving advance clearance, although willing to do so if full details of a proposed issue were in future to be given. They never were.
I need not consider the Chemical Bank/Price Waterhouse correspondence up to 10 April 1986, since the revenue has treated itself as bound in respect of the bond issue then in question. It is, however, noteworthy that no reference was made to Lloyds, so that the correspondence did not reach Mr. Templeman, who might otherwise, I infer, have considered it. Mr. Collen made plain his difficulty in giving a considered view under pressure of time. He entered the usual rider that determination of the taxation status of the bonds is a matter for the inspector concerned subject to the events which happen. The bond under consideration had a maturity of three years. Price Waterhouse describe the revenue as agreeing with their understanding, not as giving an undertaking on the future tax treatment of the bonds.
In his letter of 6 May 1986 to Chemical Bank Mr. Collen stated: You will appreciate that since the transaction involved has not yet taken place any revenue comment is entirely without prejudice to the facts. This may not be very well expressed, but I think it makes clear that while Mr. Collen was doing his best to be helpful he was not intending to fetter the revenues freedom of future action. Had the full extent of the assurance sought been made plain to Mr. Collen he would, I feel sure, have declined to give it, particularly if he had had any inkling of the circulation his answers were to receive. Price Waterhouse themselves appreciated that it was the judgment of the courts that really mattered. Both they and Chemical Bank, I need hardly say, acted honourably and professionally throughout. There was no deception or misleading of the revenue. But they faced a familiar problem: while any favourable expression of opinion by the revenue was of value, any request for a commitment by the revenue in more general or explicit terms risked a blank refusal, which would be unhelpful. I do not think this later correspondence, even when read with the earlier exchanges, can be relied on as creating a legitimate expectation that the revenue [*1571] would not tax the later issues of bonds on what they believed, on legal advice, to be the correct principles, whether this accorded with earlier expressions of opinion or not.
In the Whittingdale cases (A(3)) no correspondence assists the applicants. I have already made my findings on the important meeting of 12 November 1986. I am quite satisfied that no assurance or ruling was then sought or given, and although Mr. Whittingdale doubtless regarded this conversation as a source of comfort I do not think he regarded it as any more. It was, I think, his disbelief that the revenue would really tax these bonds in the manner suggested which led him to suggest the meeting which took place in October 1987. No details of any proposed issue were at any stage given to the revenue and no precise and unambiguous representation was at any stage made by it.
In the case of First Boston, Linklaters did not alert Mr. Parker to the proposed Lloyds application, and were dealing with a three-year bond. But they gave Mr. Parker full and precise details of a specific proposed issue and although Mr. Parker was put under considerable pressure of time I am not altogether surprised that the revenue has felt bound by his answers before 4 April 1986.
Thereafter Mr. Parker expressed a tentative view over the telephone and in general confirmed his earlier view in writing. He was not shown the full details of this proposed issue. Although the one year term was made clear the existence of a cap was not. The question he was asked to answer was whether the revenue would regard the proposed bonds as deep discount bonds within section 36(2) of the Finance Act 1984. He was not asked to confirm and did not confirm that any inflation uplift on those bonds would not be assessed to income tax. He had no idea his views were to be circulated in the Lloyds market. According to Mr. Beighton:
The Board consider therefore, that Mr. Parkers letter of 28 April 1986 did not constitute a binding commitment not to raise any further inquiries or assessments treating the uplift as income on the one years S.L.M.A. bonds placed by First Boston.
The revenues own judgment, whole not conclusive, is not irrelevant, since:
the court cannot in the absence of exceptional circumstances decide to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair: per Lord Templeman in Ex parte Preston  A.C. 835, 864.
The Slaughter and May correspondence was relied on as showing the consistency of the revenues response. It does indeed appear that Mr. Collen and Mr. Parker (like Mr. Templeman, initially, Mrs. Willetts, Mr. Jones and Mr. Pardoe) were inclined to take the same view. But I do not think these disjointed responses can be aggregated into an Inland Revenue policy. The contrast with cases such as Attorney-General of Hong Kong v. Ng Yuen Shiu  2 A.C. 629; Ex parte Khan  1 W.L.R. 1337 and Ex parte Ruddock  1 W.L.R. 1482 is striking. Had there been an Inland Revenue policy it would, I think, have been formulated and made known (if at all) as such.
I need not dwell on the Coward Chance correspondence (A6). The draft terms were in this instance disclosed. Sale in the Lloyds market was mentioned, although not an intention to circulate the correspondence [*1572] in the market. A clear assurance was sought that the amount paid to holders on a disposal will not be charged to U.K. taxation as income. There might be room for argument whether this assurance was ever given, but the revenue has concluded that it was. Even if the revenue is right, I do not think that this correspondence can fairly be read as giving a general assurance to the Lloyds market as a whole as to future tax treatment of other issues on different terms.
Had the issue which was the subject of the Bear Stearns correspondence in A(7) ever been made, consistency might, I think, have required the revenue to hold itself bound in respect of it. But the correspondence related to one specific proposed issue. No hint was given that any general assurance for circulation in the Lloyds market was being sought. If Mr. Pardoe had understood himself to be giving clearance for any future bond issue of a similar type I very much doubt if he would have taken it upon himself to give such clearance. As it was, the proposed issue was not made and I do not think any legitimate expectation can be derived from it.
The materials before us in this case make plain how strongly the applicant feel that the revenues conduct, in taxing the indexation uplift on these bonds as income, is unfair. I do not, however, think that in the disputed cases the revenue has promised to follow or indicated that it would follow a certain course so as to render any departure from that course unfair. I do not accordingly find any abuse of power. I would therefore refuse relief. Had I found that there was unfairness, significant enough to be an abuse of power, I would not exercise my discretion to refuse relief.
JUDGE J. The Board of Inland Revenue has a statutory duty to collect taxes which are properly payable in accordance with current legislation: Inland Revenue Regulation Act 1890, sections 1 and 13. This primary statutory duty is not fulfilled in an administrative vacuum. The revenue also has statutory responsibility for the administration care and management of the system of taxation; Taxes Management Act 1970, section 1. It must therefore administer the taxation system in the way which in its judgment is best calculated to achieve the primary statutory duty.
This administrative function is performed in different ways. The revenue may enter into agreements which in theory have the effect of reducing the amount of tax which may be collected. Such agreements could on one view be ultra vires the revenues statutory obligation to collect . . . every part of inland revenue. Nevertheless if the revenue concludes that such arrangements would be likely in practice to result in a greater tax yield overall it is entitled to make them. It does so as part of its administrative function: Reg. v. Inland Revenue Commissioners, Ex parte National Federation of Self-Employed and Small Businesses Ltd.  A.C. 617.
Another example of its administrative function more closely connected with the present application is the long established practice by which the revenue gives advice and guidance to taxpayers. This is something done by public statements of the boards approach to a particular fiscal problem. Sometimes advice is given in answer to a request from an individual taxpayer. The practice exists because the revenue has concluded that it is of assistance to the administration of a complex tax system and ultimately to the benefit of the overall tax yield. [*1573]
There is a detailed procedure for resolving disputes between the revenue and the taxpayer and if necessary for bringing such disputes to the courts for decision. In addition, however, as the revenue is an administrative body with statutory duties (per Lord Wilberforce in Reg. v. Inland Revenue Commissioners, Ex parte National Federation of Self-Employed & Small Businesses Ltd., at p. 632) it is not immune from an order for judicial review. Since the decision in the House of Lords in Reg. v. Inland Revenue Commissioners, Ex parte Preston  A.C. 835 the principle has been established that acts which are an abuse of the revenues powers or acts done outside those powers may be subject to judicial review.
Abuse of power may take the form of unfairness. This is not mere unfairness in the general sense. Even if unfair, efficient performance of the statutory obligations imposed on the revenue will not, of itself, amount to an abuse of power.
In Reg. v. Inland Revenue Commissioners, Ex parte Preston the House of Lords considered the question whether the revenue was entitled to re-open an assessment which it had agreed on the basis of a presumed mutual benefit to the revenue and the taxpayer should not be re-opened. There was therefore an agreement about the taxpayers liability after all the relevant facts were supposed to be known. In fact they were not known. Accordingly it was held that the revenue was not acting unfairly in seeking to re-open the assessment. The principle adopted was that unfairness amounting to an abuse of power may arise if the revenue has conducted itself in such a way that if private law applied it would be liable to the taxpayer for damages or an injunction for breach of contract or breach of representation. It was also accepted that delay could on its own in certain circumstances (which did not obtain) have converted otherwise lawful actions by the revenue into an abuse of power.
It was argued for the applicants in the present case that unfairness amounting to an abuse of power could arise in any circumstances in which the revenue had created a legitimate expectation in the mind of a taxpayer about how his affairs would be approached if, after he acted on that expectation, the revenue resiled from the undertakings it had previously given. Such conduct would be unfair and an abuse of power and subject to estoppel within the principles laid down in Ex parte Preston.
Legitimate expectation has been considered in a number of authorities. These include Attorney-General of Hong Kong v. Ng Yeun Shiu  2 A.C. 629; H.T.V. Ltd. v. Price Commission  I.C.R. 170; Reg. v. Secretary of State for the Home Department, Ex parte Khan  1 W.L.R. 1337; Reg. v. Secretary of State for the Home Department, Ex parte Ruddock  1 W.L.R. 1482 and Council of Civil Service Unions v. Minister for the Civil Service  A.C. 374. The correct approach to legitimate expectation in any particular field of public law depends on the relevant legislation. In Reg. v. Attorney-General, Ex parte Imperial Chemical Industries Plc., 60 T.C. 1 the legitimate expectation of the taxpayer was held to be payment of the taxes actually due. No legitimate expectation could arise from an ultra vires relaxation of the relevant statute by the body responsible for enforcing it. There is in addition the clearest possible authority that the revenue may not dispense with relevant statutory provisions: Vestey v. Inland Revenue Commissioners  A.C. 1148. [*1574]
For the revenue it was accordingly argued that unfairness for present purposes was limited to agreements reached in the context of past events and on the basis that the revenue would receive some benefit. Unfairness could not arise if the revenue had made representations about its future conduct and policy and probable interpretation of fiscal provisions or if there was no benefit to it. Despite the use of the word estoppel in Ex parte Preston it could not as a statutory body be estopped from performing its statutory duty: Brodies Trustees v. Inland Revenue Commissioners (1933) 17 T.C. 432; Gresham Life Assurance Society v. Attorney-General  1 Ch. 228; and Western Fish Products v. Penwith District Council  2 All E.R. 204.
I accept without hesitation that (a) the revenue has no dispensing power and (b) no question of abuse of power can arise merely because the revenue is performing its duty to collect taxes when they are properly due. However neither principle is called into question by recognising that the duty of the revenue to collect taxes cannot be isolated from the functions of administration and management of the taxation system for which it is responsible.
The decision in Ex parte Preston  A.C. 835 was not, in my judgment, confined exclusively to those cases in which there had been an agreement relating to past matters which conferred mutual benefits both on the taxpayer and the revenue. If so, references to breach of representation and estoppel and delay would all have been inappropriate. Estoppel may arise without consideration: it may arise in relation to future conduct. Delay could never have been considered to be a possible ground for judicial review. Moreover the amnesty in Reg. v. Inland Revenue Commissioners, Ex parte National Federation of Self-Employed & Small Businesses Ltd.  A.C. 617 was not – despite the citation of the Vestey case  A.C. 1148 - castigated in the House of Lords as an instance of a pretended dispensing power. It was on the contrary treated as a proper performance of the Inland Revenues administrative functions. If the argument for the Inland Revenue were correct any application for judicial review on the ground of unfair abuse of power would be bound to fail if the revenue were able to show that its actions were dictated by its statutory obligation to collect taxes. However it was clearly recognised in Ex parte Preston  A.C. 835 that in an appropriate case the court could direct the Inland Revenue:
to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that the unfairness of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power. . . .: per Lord Templeman, at p. 864.
Nothing in Reg. v. Attorney-General, Ex parte Imperial Chemical Industries Plc., 60 T.C. 1 conflicts with that statement of principle because, although the Inland Revenue may not indulge in ultra vires relaxation of the relevant statutory fiscal provisions, it is not ultra vires the revenue to administer the tax system fairly.
In the present case the revenue promulgated a number of guidelines and answered questions by or on behalf of taxpayers about the likely approach to a number of given problems. The revenue is not bound to give any guidance at all. If however the taxpayer approaches the revenue with clear and precise proposals about the future conduct of his fiscal [*1575] affairs and receives an unequivocal statement about how they will be treated for tax purposes if implemented, the revenue should in my judgment be subject to judicial review on grounds of unfair abuse of power if it peremptorily decides that it will not be bound by such statements when the taxpayer has relied on them. The same principle should apply to revenue statements of policy. In those cases where the taxpayer has approached the revenue for guidance the court will be unlikely to grant judicial review unless it is satisfied that the taxpayer has treated the revenue with complete frankness about his proposals. Applying private law tests the situation calls for utmost good faith on the part of the taxpayer. He should make full disclosure of all the material facts known to him.
For the reasons given by Bingham L.J. the evidence in the present case does not establish abuse of power by the revenue. Accordingly I agree that these applications should be refused.
If contrary to my conclusion it had been established that the revenue had abused its powers the case for granting judicial review as a matter of discretion would have been clear. In expressing that view I have recognised that it is only in an exceptional case of this kind that the process of judicial review is permitted and the court should be extremely wary of deciding to be unfair actions which the commissioners themselves have determined are fair.
The suggestion that a huge amount of tax would be lost to general funds as a consequence of an order for judicial review is an argument without force. The remedy of judicial review for improper abuse of power - if established - should be available equally to all taxpayers irrespective whether their potential liability is huge or small. If persuaded that judicial review would otherwise have been appropriate I should have exercised my discretion in favour of granting it.
Applications dismissed with costs.