PROVING THINGS 238: TAX AND FILMS: A DANGEROUS MIX – BUT THE CLAIMANTS FAILED TO PROVE THEY HAD LOST ANYTHING

In Upham & Ors v HSBC UK Bank PLC [2024] EWHC 849 (Comm) Mr Justice Bright considered the losses said to be suffered by a number of claimants who had invested in a tax deferment scheme.  Most of the claimants failed to establish that they had suffered any loss.

“Nobody knows anything.”

William Goldman, ‘Adventures in the Screen Trade’ (1982)

“… nothing can be said to be certain, except death and taxes.”

Benjamin Franklin, letter to Jean-Baptiste Le Roy (1789)

  1. William Goldman’s acidic summary of the movie business, and the exception to it required by Benjamin Franklin’s ageless quip, are at the heart of this litigation.

 

THE CASE

The claimants had all invested in a scheme known as “Eclipse”. This involved investing in the film industry and the subsequent deferment of tax liability for many years.  However the tax deferment scheme was found to be unlawful and did not work. The claimants brought an action for damages against the firm that had set the scheme up.  The court heard a case brought be a sample group of the claimants.  The cases failed for a number of reasons. However the claimants, with one exception, failed to prove the quantum of their loss.

CONSIDERATION OF THE LOSSES

The judge found that, in all but one case, the claimants had failed to establish a loss.  They deferred tax for a period, and had to pay interest on that tax when the scheme was found to be invalid.  However a key question was what did they do with the money the retained during the period of deferment?  If they had made a profit from this then that had to be taken into account.  There was no evidence on this issue.

XL(i): The losses suffered by the Claimants’ Sample Witnesses

  1. Details of the losses asserted by each of the Claimants’ Sample Witnesses, and my conclusions in relation to each, are (again) set out in Appendix 6.
  2. These conclusions are subject to credit for profits made.

XL(ii): Whether credit must be given for profits made

  1. I have noted in Section XXV(xi) above that the Claimants said they would give credit for any sums received as a result of their investment in Eclipse.  This was in paragraph 101 of the Re-Re-Re-Amended Particulars of Claim (quoted in paragraph 377 above), which was has remained the Claimants’ pleaded case from the outset.  However, as I also noted, none of the Claimants’ Sample Witnesses (or indeed any of the other Claimants, in their individual Particulars of Claim) set out a case or offered any evidence (documentary or in a witness statement) as to what sum they had in, in fact, received as a result of their investment in Eclipse.
  2. The purpose of investing in Eclipse was tax deferral.  The reason that investors such as the Claimants were interested in tax deferral was so that, during the years over which the liability to make tax payments was deferred, they could invest and earn profits on the sums that would otherwise have been paid to HMRC.  Indeed, it was necessary that they should take advantage of this opportunity to earn profits, because this was how the Claimants must all have been planning to emerge from Eclipse with a net gain.  They must all have anticipated that their investment profits would exceed their Personal Contributions (which, as they knew, they were not going to get back in the absence of Contingent Receipts).
  3. The Stewarts Law Claimants likewise provided no evidence of the sums received as investment profits as a result of their investment in Eclipse.  However, shortly before the commencement of the trial, the Stewarts Law Claimants agreed with HSBC that all issues in relation to what was referred to as “Tax Benefits” would be held over, and a consent order dated 6 February 2024 was made, reflecting this agreement.
  4. On 22 February 2024, I was told by Mr Coppel KC that, overnight, Edwin Coe had written to Norton Rose, seeking to align the position of the Edwin Coe Claimants with that of the Stewarts Law Claimants in this regard.  This was on Day 12 of the trial, shortly after the Claimants had called their final factual witness.  I heard no more about this, but assume that HSBC’s agreement was not forthcoming.  Given the late stage at which Edwin Coe had made this request, I am not surprised.
  5. The result was that, by the time of closing submissions, the Claimants’ case was that they did not have to give credit for any profits made by investing the deferred amounts of tax.
  6. Similar points often occur in the context of mitigation, where the victim of a breach has made a profit from an opportunity that would not otherwise have arisen.  In such cases, a distinction is drawn between (a) a course of action which arose directly out of the consequences of breach (within the classic test in British Westinghouse Electric And Manufacturing Co. Ltd. v Underground Electric Railways Company of London Ltd. [1912] AC 673) and (b) “an independent decision, independent of the breach, made by the buyer on his assessment of the market”: Koch Marine Inc v D’Amica Società di Navigatione, The Elena d’Amico [1980] 1 Lloyd’s Rep 75, per Robert Goff J at p. 89 lhc.  Mr Coppel KC said that the Claimants were under no obligation to invest the deferred amounts of tax.  In so far as they did so, this was in each case an independent decision by the individual investor.  They might have done other things with the money, rather than investing it.
  7. I do not accept this.  The whole purpose of taking part in Eclipse was to defer tax payments, and then to invest the deferred amounts of tax.  Otherwise, there was simply no point taking part.  Mr Coppel KC suggested in oral submissions that some people might have done so because they needed the deferment because they could not pay their tax liabilities immediately.  However, not only did none of the Claimants’ Sample Witnesses give evidence to this effect (on the contrary, they all appeared to be both reasonably wealthy and solvent), the suggestion in any event misses the mark.  Even the kind of hypothetical Eclipse Member posited by Mr Coppel KC would, by investing in Eclipse, have the benefit of being able to use the amounts of deferred tax for the time being.
  8. This was integral to Eclipse and was the purpose of tax deferral.  This seemed to me to be understood, in principle, by all the Claimants’ Sample Witnesses.  They all knew that they would have to pay the tax in the end (hence the insistence of some that Eclipse was not a tax avoidance scheme).  They planned on benefiting from the use of the money in the meantime.
  9. It follows that the Claimants must give credit for the profits made.

XL(iii): There is no evidence as to the quantum of this credit

  1. Although none of the Claimants’ Sample Witnesses volunteered evidence about how they had used the deferred amounts of tax, some light was shed on this in cross-examination.  Mr Best used it to invest in property, and said that their profits achieved was sufficiently significant that he was unable to say that made a net overall loss.  Mr Goodwin also invested in property; it was unclear how much profit he made, but it was substantial.  Mr Burke thought he had properly used the money to build a barn on his farm; he did not put any figure on how this had enhanced the value of his estate.  Others were unable to say precisely how they had invested; this does not surprise me, because the reality is that the amounts of deferred tax will have been used as part of their overall holdings, rather than handled and accounted for specifically.
  2. Mr Margolis is in a slightly special category.  As well as deferring his tax payments, he benefited from Eclipse in a different way.  His interest in Future Films meant that he directly received 40% of all Future Films’ profits, to which Eclipse will have contributed substantially.  He was unable to put a figure on this, but it will have been substantial.
  3. When they joined Eclipse, the Claimants will all have expected to be able to defer their tax liabilities for the intended duration of the relevant LLP – i.e., from 8 to 21 years.  In the event, the HMRC challenge meant both that they had to pay the relevant amounts much earlier following HRMC’s demands, and also that they had to pay interest.  In effect, this means that the period that they were able to use the relevant amounts was shorter than expected, and that some of the profits made during that period will have been eroded by the late payment interest that each of them paid to HMRC.
  4. However, I have already noted that several of the Claimants’ Sample Witnesses gave evidence as to the general performance of their investments – in general, they expected a return of at least 7% and ideally close to 10%.  That evidence was significant for this point, because I was told that the rates charged by HMRC for late payment were as follows:
From Late payment % From Late payment %
22.8.2023 7.75 30.3.2020 2.75
11.7.2023 7.50 21.8.2018 3.25
31.5.2023 7.00 21.11.2017 3.00
13.4.2023 6.75 23.8.2016 2.75
21.2.2023 6.50 29.9.2009 3.00
6.1.2023 6.00 24.3.2009 2.50
22.11.2022 5.50 27.1.2009 3.50
11.10.2022 4.75 6.1.2009 4.50
23.8.2022 4.25 6.12.2008 5.50
5.7.2022 3.75 6.11.2008 6.50
24.5.2022 3.50 6.1.2008 7.50
5.4.2022 3.25 6.8.2007 8.50
21.2.2022 3.00 6.9.2006 7.50
7.1.2022 2.75 6.9.2005 6.50
7.4.2020 2.60
  1. I do not know over what period(s) each of the Claimants’ Sample Witnesses had the use of how much deferred tax (their evidence did not include this information).  However, in general terms, it seems likely that they were able to earn more from their money than they ultimately had to pay HMRC in late payment interest.
  2. This means that quantifying their precise profit made by each of them is important.  Indeed, it is necessary, if any of to prove on the balance of probabilities that they made a net overall loss; and to quantify that net overall loss.  The fact that (despite paragraph 101 of the Re-Re-Re-Amended Particulars of Claim) the Claimants have not provided any evidence of this is, therefore, fatal to their claims.
  3. There is one exception: Mr Pickard.  I accept his evidence that the failure of Eclipse and the HMRC demands that ensued were responsible for his bankruptcy, in the sense that it would not otherwise have occurred.  Whatever profits he may have from investing deferred tax amounts over the period prior to HMRC’s demands to be paid, they were clearly wiped out.

 

SUMMARY OF THE FINDINGS

621.         The claims of all the Claimants fail, essentially for the following reasons:

(1)   The Claimants have failed to analyse properly the legal significance of the statements made to them before they invested in Eclipse.

(2)   Properly analysed, the statements that related to the advice of Mr Peacock QC did not constitute misrepresentations. Future Films and Mr Bowman had reasonable grounds for believing that the scheme as implemented was consistent with the basis on which Mr Peacock QC had advised.

(3)   Neither Future Films nor Mr Bowman was dishonest.

(4)   The Claimants’ Sample Witnesses have failed to prove the quantum of their loss (with the exception of Mr Pickard).

(5)   Their claims are time-barred.

THE IMPORTANT END NOTE

 

622.         I have great sympathy for the Claimants.  Their losses are significant, their suffering has been real (even for those who did not claim for distress) and they have every right to feel aggrieved.  When all is said and done, they were badly let down.

623.         However, this is not enough for them to have a good claim against HSBC.  I also have some sympathy for HSBC and, specifically, for Mr Bowman, who should not have had to deal with proceedings or the allegations of dishonesty that were central to them.

624.         It is important, both for those in the position of the Claimants and for those in HSBC’s/Mr Bowman’s position, that proceedings alleging dishonesty are not launched unless there are proper grounds.  This obviously matters to prospective defendants, who are entitled not to have their reputations unfairly traduced.  However, it also matters to the prospective claimants, who should not be given false hope.

625.         Having made those comments, it is all the more important that I emphasise how impressed and grateful I have been throughout the trial for the manner in which it was conducted by everyone involved – counsel, solicitors and witnesses.  They all acted with exemplary professionalism, courtesy and good humour, in their dealings with me and with each other.

626.         Giving judgment inevitably involves expressing disagreement with the submissions made by some or other of the protagonists; sometimes, repeatedly.  This never implies criticism of any individual involved in advancing such submissions.   The outcome in this case means that Mr Coppel KC has borne the brunt on this particular occasion, so it is only right to single him out for the skill, clarity, charm and good judgment with which he advanced even the less attractive elements of the Claimants’ case.  He found himself having to do so, no doubt, not because of his own spontaneous decisions while on his feet, but because of a host of earlier strategic and tactical decisions.  What those decisions were, and when, by whom and in what circumstances they were made, is all beyond my ken.  However, I have noticed that Mr Coppel KC’s name does not appear on the Claimants’ pleadings, from which I infer that he is a relative newcomer to the case.

627.         I should also note my delight that all the leading counsel involved delegated significant portions of the oral advocacy to their respective juniors. Those junior counsel rose to the challenge with flair.  It was a real source of joy to see the pleasure with which they went about their allotted tasks, and to note that this pleasure appeared undimmed even when each of them, in turn, had to fend off a series of chest-high bouncers hurled down from the bench.  They returned to the pavilion bruised but exhilarated, and with the scorecard in each case reading “Not Out”.  They may or may not be grateful to me for the experience, but I know that it will have made all of them even better advocates than they were before the trial commenced.