Official forecasts in 2017 implied that lower tax rates for the self-employed and company owner managers relative to employees will cost about 15 billion in 2021-22. Therefore, if there are tax cuts, that cost will rise. Independently, and in parallel, the cost of government borrowing may increase. UK general government gross debt exceeds £2,365.4 billion (Quarter 1 – Jan to Mar 2022), equivalent to 99.6% of gross domestic product (GDP), see my previous blog ‘What is the economic impact of Brexit on the cost of living crisis?’ 

In the UK tax liabilities on income from work depend on legal form.

‘The way different incomes are treated for tax purposes is a problem. The system is unfair, complicated and economically inefficient. These problems are not new and not unforeseen. Researchers have been highlighting the problems and predicting that they would grow, including as a result of changing work patterns that blur the lines between employment and self-employment, for more than two decades. As the problems have grown, so too have the costs, including the revenue cost to the government.
 … [P]art of the reason that the current system persists is a widespread belief that the system is justified – ie, that there are benefits that offset the costs imposed by differentiating tax by legal form. … None of the common arguments holds up. Levying lower taxes on the self-employed cannot be justified by differences in publicly funded benefits (the differences are far smaller than the tax advantages) or by differences in employment rights (which do not act to skew the labour market toward employment). Lower tax rates are also poorly targeted at boosting entrepreneurship. It has long been recognized that there is a great deal of heterogeneity within the small business population and that not all are entrepreneurial. The latest research using HMRC tax records is allowing the population of the self-employed and company owner managers to be described in much more detail. The research highlights that most business owners, while conducting perfectly respectable trades, are not employing others, investing or growing – let alone doing anything that produces positive ‘spill-overs’ to wider society and that will, therefore be under provided by the market. This serves to demonstrate how poorly targeted the tax breaks are.
… Given that the problems with taxing legal forms in very different ways are large, long-running, well-known and growing and that no one seems happy with the current system, it is perhaps surprising that so little progress has been made in fixing the system.’
 (‘Principles and Practice of Taxing Small Business’, by Stuart Adam and Helen Miller, Chapter 5 of ‘The Dynamics of Taxation – Essays in Honour of Judith Freedman’, edited by Glen Loutzenhiser and Rita de la Feria).

£50bn (not taking any account of the £15bn I mentioned) will increase GND by 2.1%. The Observer view on Liz Truss and Rishi Sunak’s tax cut promises (see the link below) states, ‘Truss, … has gone much further, pledging tax cuts she claims will cost £38bn annually, but which economists believe could actually cost more than £50bn a year. She claims this will promote growth, but these kinds of tax cuts will do nothing to address the real reasons for Britain’s dire productivity growth – a lack of investment in infrastructure, skills and other forms of capital – while significantly reducing the resources available for public services at a time when inflation is eroding the real value of budgets in hospitals, schools and care homes. Most of the conversation about the cost of living crisis has, understandably, been framed through the lens of household budgets. But it will have just as damaging an impact on Britain’s public services. … Inflationary pressures, including higher wage bills and energy costs, are predicted to cost the NHS billions this year.’

If this economic analysis proves to be correct, then:

(i) tax cuts will not increase economic growth; and

(ii) the economic cost of cuts will be GND = 101.71% of GDP.

That is an economic tipping point.

See:

The Observer view on Liz Truss and Rishi Sunak’s tax cut promises | Observer editorial | The Guardian

Tory leadership: Do Liz Truss and Rishi Sunak’s tax pledges add up? – BBC News

https://www.bbc.co.uk/news/business-62168489

To refresh and update my technical knowledge of tax law principles and FTT procedure, in July I read ‘Tolley’s Guide to Tax Disputes’ by Adam Craggs, Julian Hickey and Jonathan Levy; and ‘Tax Appeals – Law and Practice at the FTT (5TH Edition) (2022), by Keith Gordon. I am now on page 1000 (Corporation Tax) of ‘Tiley’s Revenue Law’, Tenth Edition, (2022), by Glen Loutzenhiser (Professor of Tax Law at the University of Oxford). Not your typical summer reading, I grant you, but nevertheless highly instructive. For example, I discovered today that for Corporation Tax, ‘The reintroduction of the small profits rate from 2023 means a revival of the associated companies rules.’ The next book on my list is, ‘Tolley’s Estate Planning 2021-2022’. To be followed by ‘Trusts And Related Tax Issues In Offshore Financial Law’ by Rose-Marie-Antoine,  which discusses ‘challenges’ and the ‘conflict of laws’, in relation to the taxation of offshore trusts. So, by 1 September I will have updated my technical knowledge of tax law & litigation. This is timely, because in September I am planning to complete the writing of my next article which is for ‘Trusts & Trustees’ (OUP) entitled, ‘Mediation of Probate Trust & Tax Disputes – Challenges & Tools.’The introduction is set out at the foot of the‘Mediation of Probate & Trust Disputes’ page at www.carlislam.co.uk. If you are a solicitor or CTA and would like to discuss the advocacy services, I can provide in the FTT from September, I am available for a free zoom consultation from Monday 5  September. I have also pre-ordered a copy of the Pump Court Chambers ‘Tax Litigation Handbook’, which is due to be published in September, and of ‘Regulation of Tax Avoidance’ by Hartley Forster, which is due to be published in December. My programme of reading and advanced tax law education will therefore continue into 2023.  I studied tax law as an undergraduate, and my tutor was the late Stephen Brandon QC. My dissertation was about the ‘Taxation of UK resident foreign domiciliaries’. I also wrote five editions of ‘Tax-Efficient Wills Simplified’ after qualifying as a TEP, and earlier in my career, when I was working in-house, I was involved in the tax-efficient structuring of infrastructure projects in the far east. I am therefore looking forward to putting my knowledge of tax law, corporate transactions, trusts, planning, and the conflict of laws, to use in relation to revenue disputes, which is a natural add on to my probate and trust litigation knowledge and expertise as an advocate, Mediator, and author.

Rees-Mogg: “The overwhelming opportunity for Brexit is over the next 50 years.” (interview with Channel 4 News – ‘Jacob Rees-Mogg Says It Could Take 50 Years To Reap The Benefits Of Brexit’).

In the Tacitus Lecture 2017 – ‘The World is Our Oyster? Britain’s Future Trade Relationships’, Sir Simon Fraser argued that the Government had made a political decision to, ‘prioritise other goals over our economic relations with the EU. … This is fine, provided either people are prepared to pay the price in more expensive goods, less inward investment and lower growth, or we can quite rapidly find compensating alternative markets.’

The Peterson Institute for International Economics who analysed how long it took the US to agree 20 bilateral trade deals concluded: (i) one and a half years, on average, and (ii) more than three and a half years to get to the implementation stage. https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/ = 5 years.

In 2016, in my post, ‘The economic dangers of political wishful thinking?’ I pointed out that, ‘In theory 124 trade agreements x 5 years each = 620 years. Hypothetically, all 124 could be negotiated within 5 years (if negotiated in parallel). How many trade negotiators does the UK need to resource this? The EU typically sends 20 commission negotiators to any round of trade talks, backed up by between 25 and 40 technical experts.’ The UK at the time had 40 trade negotiators, compared with the 550-strong trade department in Brussels.

Today the New Statesman featured an article by Will Dunn – ‘Why the housing market is about to crash.’ I commented,
‘Inflation hit 10.1% in July (a 40 year high). It is predicted to reach over 13% in December. If Liz Truss become Prime Minister, cuts taxes and borrows, inflation is likely to rise. If inflation goes up then interest rates may have to be increased. That is likely to impact the mortgage market. As the author of the article states, ‘Everyone considering buying a house will be thinking about this. “This is the most predicted recession ever,” Dorling said. “And as soon as you get hunkering down, and the feeling of ‘wait and don’t buy now’, that’s it. It’s all it takes.” ‘ If Prime Minister Liz Truss (as she has pledged), also passes laws banning members of certain unions from going on strike, there are likely to be a series of general strikes. For inflation, we have already gone back to 1982. Economically are we heading back to 1974 (when Edward Heath was Prime Minister)? While inflation is linked to energy prices, the cost of imports is linked to the cost of doing business, i.e tariffs and administrative costs/logistical delays. The unmentionable ‘Elephant in the room’ is therefore Brexit. What economic impact report has the Government ordered (or Labour demanded) to assess the economic impact of Brexit on the cost of living crisis?’
Therefore, unless ‘people are prepared to pay the price’ or we ‘rapidly find compensating alternative markets’, we will all have to live with the economic impact of Brexit on the cost of living for at least 50 years or more. How can we afford not to recognise the elephant in the room?

We currently have: (i) inflation at a 40 year high (which may rise to 13-15% by January); (ii) a cost of living crisis; (iii) strikes and the risk of general strikes if laws are passed banning members of certain unions from going on strike; (iv) a shortage of NHS staff; (v) a shortage of workers in the hospitality industry (linked to: (a) rising wage demands (b) the cost of living; & (c) inflation); (vi) VAT at 20%; (vii) Corporation Tax set to rise to 25% in 2023 (1st increase in CT in 50 years); (viii) Brexit costs linked to rising inflation – see the links at the end of this post at ‘Carl’s Wealth Planning blog’); (ix) the risk of a property crash if rational buyers decide not to purchase until the rate of inflation has peaked and stabilised, i.e. because if interest rates rise to a point where they cannot make mortgage payments, and their property is sold in a falling market at auction below the original purchase price, they will end up: (a) without a roof over their heads; (b) in negative equity; and (c) with a legal liability to discharge the unpaid balance of the mortgage; & (x) UK general government gross debt in excess of £2,365.4 billion (Quarter 1 – Jan to Mar 2022), equivalent to 99.6% of gross domestic product (GDP).

Therefore, we should also be asking – ‘What impact has Brexit had on inward investment?’

See also my blog on this website (and use the search box at the top to find) ‘What is the European Single Market’ and:

Is Brexit to blame for the UK’s rising inflation? – New Statesman

UK inflation could reach 15% by start of 2023, experts say | Inflation | The Guardian

At least 250,000 UK small businesses set to fold without further help, new study warns | FSB, The Federation of Small Businesses

The 2022 edition of the Chancery Guide came into force from 29 July. This is the first new edition of the guide since 2016, and it contains substantial changes which will be discussed in the 2nd edition of the Contentious Probate Handbook, which I am planning to write next year.
See: The Chancery Guide 2022 | Courts and Tribunals Judiciary

ADR – Note:

‘10.8      The court may also stay the case or adjourn a hearing of its own motion to encourage and enable the parties to use ADR. The stay will be for a specified period and may include a date by which representatives of the parties with authority to settle and their legal advisers are required to meet, or a requirement for parties to exchange lists of neutral individuals who are available to carry out ADR and seek to agree on one. If agreement cannot be reached, the CMC can be restored for the court to facilitate agreement. Although the court may strongly recommend mediation, it cannot order that a mediation takes place and will not recommend an individual or body to facilitate ADR

10.10     Any order staying the case for ADR may (but is not required to) include an order as to the liability of the parties for the costs they incur in using or attempting to use ADR. Such order will usually be (a) costs in the case or (b) each side to bear its own costs.’

The court does have the power to order madatory JENE, see my article about JENE on the publications page at www.carlislam.co.uk.

If the settlor [‘S’] attempted to transfer property [‘P’] to a trust, which legally did not belong to him, any such transfer will render the transfer and the trust invalid, because S had no authority to alienate P. Since preliminary matters such as title to P may need to be determined before the transfer, and ‘these issues are not of trust law, but of property and other law, the question of the law which governs this matter is the lex situs’ (‘Trusts And Related Tax Issues in Offshore Financial Law’, by Rose-Marie Antoine, paragraph 23.07).

Therefore, if the lex situs is England, then arguably, HMRC may challenge the validity of the transfer, and thus of the trust, as a preliminary issue in tax litigation, by seeking a declaration as to whether at the time of the purported transfer, S in fact had title to P under English property law.

A trust cannot come into existence until it has been constituted by an asset. If therefore the trust has been properly constituted and a subsequent transfer is invalid, that does not make the trust invalid.

If the first transfer is invalid, and therefore the trust was not contituted by that transfer, and a second transfer is made, and no other transfers were made, it may be possible to attack the second transfer as a sham, in which case, if the attack is successful, S remains the owner of all property transferred by him to the trustee, and the door is open to the bringing of claims against S and the trustee, for recovery of trust assets, compensation, and legal costs, see paragraph 7.8.3 of my book, the ‘Contentious Trusts Handbook.’

This potentially catastrophic litigation risk may therefore make mediation an attractive alternative to litigation.

If e.g. P is a work of art that S‘s separated wife alleges belongs to her, because S gave it to her, or that P was purchased using some of her money, then this could result in a claim for conversion, see my ‘Art Restitution Litigation in the English Court’ essay on the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.carlislam.co.uk.

A claimant [‘C’] in an action for conversion does not necessarily need to show ownership of the chattel in question. C must establish that they had possession, or an immediate right to possession of P at the time of the conversion.

It therefore appears, that if S‘s separated wife brings a claim in conversion, S will end up being between a rock and hard place, because, if the claim in conversion suceeds, HMRC can apply for a declaration that the trust is invalid since the transfer was invalid. In which case P was never outside the UK tax net. Therefore if P is sold that will give rise to CGT. P may also qualify under the UK tax regime for Heritage Property. If the claim fails, HMRC may make a claim for unpaid tax (with penalties) as a result of the transfer of P to the offshore trust.

As the editors of the 2nd edition of ‘International Trust Disputes’ (2019) state in paragraph 17.27, ‘In trust disputes the structure of a settlement is often as important an issue as the financial terms. For example, is there to be a clean break or an ongoing trust? If an ongoing trust, how is that to be achieved and structured? These considerations are even more complex if the dispute involves a variety of trusts and beneficiaries with differing tax regimes. The advantages and disadvantages of potential routes to settlement are best considered in the calm space of the preparation phase rather than on the day of the mediation. Similarly, complex documents are best prepared subsequently. It may be helpful to have precedents available or even a draft settlement agreement if aspects of the structure can be agreed in advance.’

Where mediation is used as a process for innovative and bespoke lifetime estate and business succession planning, ideally a qualified tax adviser should be appointed to prepare an estate planning report (EPR) and a business succession planning report (BSPR).

These should be prepared after an inventory/schedule of the composition and value of the estate and family business has been prepared and before the mediator proceeds to interview each family member:
1. to confirm their acceptance of the facts set out in the inventory/schedule, so that from the outset all participants in the process are singing off the same song sheet; and
2. about what they each, want, need, prioritise and why.

In the case of an international family, their lawyers and tax advisers – appointed by the Family Office – can then engage with family members through a process of facilitated/mediated discussion to agree a holistic strategy and roadmap for practical implementation that is approved by each family member.

This may result in the drafting of a family constitution, and in the redrafting of the articles and memorandum of association of a family-owned company, a shareholders’ agreement and of an international trust deed which are no longer fit for purpose.

In contrast to the mediation of a dispute which will usually last between one and two days at the most, this process of dialogue, road mapping, and agreement, will take months, and can be accelerated if the mediator is assisted by a co-mediator.( See my article  ‘Back to the future’ – Part 2 – Mediation and Estate/Business Succession Planning. Taxation (Tolley) 08.03.2022 (to which there is a link on the ‘Publications’ page at www.carlislam.co.uk).

Validity is resolved by determination of the proper, i.e. governing law. There is little case law on the choice of law rules for trusts. Determination of the proper law of a trust is an undeveloped subject. The Hague Convention on the Recognition of Trusts simplified the issue. However, there is residual uncertainty about common law rules. The modern view is that the proper law of the trust is the law chosen by the settlor, as expressed or implied in the terms of the trust. Where there is no express choice, the emerging doctrine is that the trust is governed by the law with which it is ‘most closely connected’.
Uncertainty may also surround the question of which particular aspects of a trust the term ‘proper law of the trust’ applies to. For the purposes of determining the choice of law, several distinct trust issues require consideration:
(i)          whether the trust instrument is valid according to the appropriately chosen law;
(ii)        whether the trust itself is valid;
(iii)       the validity of the transfer of the assets;
(iv)       the capacity of the settlor to create a trust; and
(v)        the administration, construction, variation and interpretation of the trust.

The question of the proper law of an offshore trust remains even in the face of an express choice of law clause. Therefore, the validity and effectiveness of a clause drafted in the 1970s, may now become contentious. It is also open to the English court to hold that the choice of offshore law offends public policy because of its hybrid and more flexible trust law features. While the general rule is to give effect to an express choice of law based upon the analogical premise of the ‘freedom to contract’, there are reservations, because it is logical to expect that such limitations for trusts will be on similar principles to those for contracts. On the conflict of law rules governing contracts, limitations are based upon the choice being:
(i)         bona fide;

(ii) legal;
(iii) not contrary to public policy;
(iv)       connected with the contract; and
(v)        meaningful.

Therefore, an offshore trust set up 50 years ago on the cheap, on standard instead of legally robust ‘bespoke’ terms, is potentially a sitting duck for a revenue authority, i.e. if the validity and applicable law of the trust can be challenged as a result of inadequate drafting. This potential line of attack is also connected to unlawful tax avoidance and tax fraud, which I will discuss in my next article for ‘Taxation’ (Tolley), which I am planning to write in 2023 entitled, ‘What is the jurisdiction of the English court where breach of fiduciary duty by a non-resident trustee amounts to unlawful tax avoidance or fraud?’

See also:

The taxation of trusts: a review – summary of responses (publishing.service.gov.uk)

Bermuda’s firewall legislation and its recent trust law reforms. | Carey Olsen

The FTT is not bound by the traditional mantra of statutory and common law principles of admissibility. As a general rule, all evidence is admissible, whether or not it would ordinarily be admissible in a civil court. However, overriding common law principles, e.g. protection of legal professional privilege are not curtailed by FTT r.15(2)(a) because the FT must act within the framework of the Human Rights Act. The same applies in the UT.

A Tax Appeal will often involve questions of evidence, e.g.
(i)         whether a taxpayer was carrying on a trade;
(ii)        the nature of a transaction;
(iii)       valuation of goods and services;
(iv)       whether a non-incorporated UK company was centrally managed and controlled in the UK by its directors and/or shareholders; and
(v)        whether the accounting treatment for an item of expenditure is correct.
FTT Rule 15(2) states:
‘(2) The Tribunal may— (a) admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom; or (b) exclude evidence that would otherwise be admissible where— (i) the evidence was not provided within the time allowed by a direction or a practice direction; (ii) the evidence was otherwise provided in a manner that did not comply with a direction or a practice direction; or (iii) it would otherwise be unfair to admit the evidence.’
The legal test of admissibility is ‘relevance’, and there is a presumption that all relevant evidence should be admitted unless there are compelling reasons to the contrary, Mobile Export 365 Ltd v. Revenue and Customs Commissioners [2007] and Atlantic Electronic v. Revenue and Customs Comrs [2013].
Application of r.15(2) is the subject of guidance in HMRC v. IAC Associates [2013]. Nugee J observed, ‘… one starts with asking the question whether the evidence is admissible. It is admissible if it is relevant. It is relevant if it is potentially probative of one of the issues in the case. One then asks, notwithstanding that it is admissible evidence, whether [there] are good reasons why the court (or tribunal in this case) should nevertheless direct that it be excluded.’
In Revenue and Customs Comrs v. Atlantic Electronics Ltd [2013], one of the issues before the Court of Appeal was whether the admission of the material by the Upper Tribunal was just, fair and proportionate. Ryder LJ (with whom Arden LJ agreed) stated that:
‘HMRC wish to have [a certificate of conviction and the indictment and a note of the prosecution opening] admitted so that they can explain to the FTT the detailed background rather than merely the technical relevance of the convictions to their case. … The UT adopted the correct approach to the admission of the materials in question. It assessed whether the evidence is relevant and applied the presumption that all relevant evidence should be admitted unless there is a compelling reason to the contrary. … The prejudice to the Revenue in not being able to rely on the note of the prosecution opening is clear once the purpose of the admission of the material is analysed i.e. the dishonest and knowing participation of [X] as a contra trader.’ The UT was therefore entitled to decide to admit the disputed evidence.

This is discussed in my evolving essay ‘Art Restitution Litigation in the English Court’ on the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.carlislam.co.uk.

A novel legal theory occurred to me over the weekend when I started to write the essay, which runs as follows.

If P delivers the SA to a dealer [‘D‘] in London for sale, and under their contract D acquired a proprietary interest in the SA, then under the Limitation Act 1980 [‘LA’], could possession of the SA by D constitute a conversion ‘related to the theft’ of the SA which took place in England?

Under the LA, ‘Once … A bona fide purchaser acquired the chattel, and six years has run from the date of his acquisition, the owner cannot sue a person who acquires the chattel after the date of the bona fide purchaser’s acquisition, even if he is not himself a bona fide purchaser … Any conversion which follows the theft before the owner recovers possession is treated as “related to the theft” except a purchase in good faith or any acquisition subject to such a purchase; section 4(2).’ Arden J in De Preval v. Adrian Alan Ltd [1997]. ‘It does seem to be possible to identify, from that legislation, a public policy in England that time is not to run either in favour of the thief nor in favour of any transferee who is not a purchaser in good faith. The law favours the true owner of property which has been stolen, however long the period which has elapsed since the original theft.’ The City of Gotha [1998].

It therefore appears, that unless D can rebut the presumption under s.4(2) of the Limitation Act 1980 that the purchase by P was related to the theft, i.e. by proving that under English Law P had purchased the SA in good faith (for which purpose the court may take into account the factors mentioned by the judge in De Preval) , then the carve-out provided for in s.4(2) (i.e. that ‘if anyone purchases the stolen chattel in good faith neither the purchase nor any conversion following it shall be regarded as related to the theft’) is not engaged.

In other words, unless D can prove that P acquired the stolen painting in good faith in the foreign country where he purchased it, which arguably is a question to be decided by applying English Law to determine ‘good faith’, that D will fail at trial to discharge the burden of proof under s.4(2) of the Limitation Act 1980.

In which case, the first good faith purchase following the theft of the SA in England, took place when the painting was delivered by P into D’s possession in London.

Therefore, if this occurred less than six years ago, time is running under the Limitation Act for the bringing of a claim in conversion against D (who is in possession of the SA in London). 

US law protects the interests of the original owner of art unlike any other system of law. In the case law and statutes of many US jurisdictions, three main approaches to the question of the running of time under limitation legislation may be discerned:
(i)           an ‘actual discovery’ rule (as provided for in California);
(ii)          the ‘demand and refusal’ rule (applied by the New York courts); and
(iii)         the ‘discovery or due diligence’ rule (in most other jurisdictions).
In international property law, which governs the question of the law applicable to in rem relations, the principle of lex rei sitae, is widely recognised. According to this principle, the validity of the transfer of the tangible movable and its effect on the proprietary rights of the parties thereto and those claiming under them in respect thereof, are governed by the law of the country where the movable is at the time of the transfer (lex situs).
If the object is moved from one jurisdiction to another, this leads to a change in jurisdiction with regard to property law, with the consequence that the law of the new situs of the object is decisive concerning existing rights of possession and ownership, as well as other in rem rights. #litigation#art#law In accordance with the situs rule, the law of the new situs, also decides whether, under what conditions and with what effect rights in stolen property can be acquired.
There has been a noticeable change in US conflict laws as applied in cases over the past 15 years, signalling a gradual departure from the perceived stricture of the situs rule and toward a more flexible approach, that of the ’most significant relationship’ test.
When confronted with the possibility of a transfer under civil law, US courts have shown noticeable reluctance to apply foreign law to cases concerning stolen property.
In two cases, the landmark Menzel v. List and the De Weerth saga, the question of the transfer under foreign law was not even raised, facilitating the application of US law and ignoring the fact that both paintings had gone through Parisian galleries and had been kept there for some time prior to their subsequent transfer in New York.
In two other cases, Elicofon and Goldberg a potential transfer of title under civil law had been discussed, yet in both cases the courts in the end chose to apply the ‘most significant relationship’ test instead of the lex situs rule, thus enabling them to apply local state laws in both cases.